CFS Report - Fuel Price Update - May 2014

Reimbursement for Business Use of Personal Vehicles

Study prepared for The Treasury Board of Canada Secretariat

by Corporate Fleet Services

1       Fuel Price Update Synopsis

Corporate Fleet Services (CFS) has been mandated by the Treasury Board of Canada Secretariat to perform the Annual evaluation of per-kilometre reimbursement rates for government employees required to use their personal vehicles while performing government business. Furthermore, the periodic impact of varying fuel prices was to be evaluated quarterly by producing three additional ‘Fuel Price Updates'. The present document represents the Update for May 2014.

The Annual study established reimbursement rates for each Canadian Province and Territory after performing a comprehensive analysis of all vehicle operating expenses. These rates were presented in the ‘Reimbursement for Business Use of Personal Vehicles Report', dated November 2013. A subsequent update was performed in February 2014 to adjust the rates in relation to fluctuations in fuel prices.

The present Update reflects the impact of current fuel prices on the recommendations made in the Annual report with a focus on average pump prices of gasoline by Province or Territory. The prices were averaged for each Province or Territory for the three months prior to the release of the current Update (the months of March, April and May 2014). All prices are given in dollars per litre.

This Update also presents up-to-date recommended rates of reimbursement for consideration by the Treasury Board Secretariat in dollars per kilometre. Federal and provincial sales taxes were also researched to determine if there were any recent changes that could have had an immediate impact on the total costs of vehicle ownership and operation.

For the period March-May 2014 fuel expenses represent 24.5% of the total cost of vehicle operation or a Canadian average of 12.8 cents per kilometre. The present update identified low to moderate increases in average gasoline prices across Canada, which in turn led to increases in the reimbursement rates. This ranged from no increase in Nunavut and the North-West Territories to an increase of 1.5 cents per kilometre for Manitoba, Alberta and British Columbia.

2       Fuel Prices

2.1     Energy market context

Globally, crude-oil prices have increased since the beginning of the year due to a number of factors. Geopolitical tensions in Ukraine and Russia contributed to higher prices in the crude-oil market since Russia is the third largest producer of liquid fuels and the second biggest exporter of crude-oil in the world. These tensions led to market uncertainty which increased the risk premium and therefore the price of crude-oil. Reduced crude-oil supply from some Middle-Eastern countries also contributed to the global price rise.

World economic growth is expected to be higher in 2014 than in 2013, according to the OPEC Monthly Oil Market Report from May 2014. This trend has already been noted in the first quarter of 2014. In 2013, the world economic growth was approximately 2.9% but it is expected to be 3.4% in 2014. Oil demand is expected to increase globally in 2014 by approximately 1.14 million barrels/day or 1.267%.

The United States kept increasing oil production as well as ramping up imports of Canadian crude-oil, in attempt to reduce the dependence from the OPEC countries. As a result, the US crude-oil import structure has changed significantly. In January 2014, 41.7 % of US imports were from OPEC countries compared to 57.9% in January 2008, while oil imports from Canada to the US have increased from 18.3% in January 2006 to 37.6% in January 2014. This trend is expected to continue in the future.

As a result, the production of crude-oil in Canada was increased to meet the rising demand from the US. The opening of an expansion to the Keystone XL pipeline in the US in January 2014 (Keystone Gulf Coast Pipeline, Phase 3) has further facilitated Canadian crude-oil movement and it is expected to more than double its throughput by the end of the year. For example, in order to adjust to an increase in Canadian crude oil imports, a key refinery in Indiana (the BP Whiting) finished modifying its plant to refine mostly Canadian crude-oil.

2.2     Gasoline prices across Canada

The combined effect of the increase of the price of crude oil (by approximately 5% this year) and a 3% drop in the Canadian dollar led to an average increase of 8% in oil prices, according to the chief economist at the Bank of Montreal, as quoted in a CBC article published in May 2014.

The period March-May 2014 saw an average increase of 6% in gasoline prices at the pump across Canada over the period December 2013-February 2014. This difference was more pronounced in the four Western provinces, with an average of 11%, with only a 4% average increase for the other six Eastern provinces. With the arrival of the warm seasons in Canada, there is an expectation for an increased demand for gasoline. This trend typically lasts until September and can lead to a further increase in prices at the pump in the upcoming months.

In North America, refineries also undertook seasonal maintenance which led to short-term closures of some refineries and a slight disruption of the gasoline supply. As an example, Suncor undertook maintenance at their Edmonton and Montreal refineries which lasted from April 7 to May 26 for Edmonton and from April 21 to May 20 for the Montreal refinery. This caused the gasoline supply to be significantly reduced. Events such as these led to increased gasoline wholesale prices, widening the difference between the gasoline wholesale and the crude-oil price. Furthermore, the production of summer-grade gasoline is costlier for refiners, because it has a different chemical composition than the winter-grade in order to achieve lower evaporation rates, thus sustaining higher gasoline prices.

In Canada, gasoline prices have increased to various degrees in most of the provinces and territories due to the reasons described above. Furthermore, the Canadian dollar depreciated against the US dollar which had an effect of increasing overall commodity prices and therefore gasoline prices. Crude-oil price is the most significant component of the retail price of gasoline at the pump.

Although prices of gasoline at the pump increased throughout Canada, the four Western provinces registered more significant increases then the other provinces. The main reason for this is that Canadian-crude oil is traded at the WTI (West Texas Intermediate), Western Canadian Select, Syncrude Sweet or Edmonton Par price depending on the type of crude oil. They all approximately follow the North-American Benchmark which is the WTI. The WTI increased from $92 USD per barrel in January to $102 USD per barrel in May, a 10% increase, while European and Middle Eastern oil is traded at Brent price, which increased from $104 USD per barrel in January to $109 USD per barrel in May, only a 4.5% increase. Since the Western provinces such as British Columbia, Manitoba, Alberta and Saskatchewan use mostly Canadian crude-oil derived gasoline, the gasoline price increase has been more pronounced, sometimes by as much as 16 cents per litre on average as compared to the period December 2013 - February 2014. The Eastern provinces, on the other hand, mostly import oil from Europe, the Middle-East and Africa which is traded at the Brent price, which has shown a smaller increase, resulting in a more moderate price rise. Since Canada is highly dependent on refineries in the US for producing gasoline, this also contributed to a further increase in prices at the pump, predominantly in the Western provinces.

Overall, higher crude oil prices in Western Canada led to higher gasoline prices for the period March-May 2014 in comparison with the period December 2013-February 2014. This was most evident in Manitoba and British Columbia (with increases of 16 cents per litre), but also significant in Alberta and Saskatchewan (with increases of 13 cents per litre on average).

Throughout Eastern Canada gasoline prices have also increased on average for the past three months, but by a lower amount than in the West. This trend was consistent across Ontario and Quebec as well as the Atlantic provinces, with increases in gasoline prices at the pump of between 4.5 to 7.5 cents per litre.

As for the Territories, Nunavut and the Northwest Territories saw almost no change in gasoline prices while the Yukon registered an average increase of 7 cents per litre.

Prices of gasoline at the pump, in Canada, include all applicable taxes. Prices vary significantly across the country, mainly due to the difference in the types and amounts of taxes being charged on fuel in different Provinces and Territories. The present Update extracted the average prices of regular gasoline charged at the pump. The fuel price data was primarily obtained from Natural Resources Canada, based on weekly published fuel prices for 60 locations across Canada. This data was verified against an additional database made available by MJ Ervin and Associates that similarly tracks fuel prices all across Canada. Additionally, the data was spot-checked by using information available through other popular gasoline price reporting websites such as www.GasBuddy.com, www.GlobalPetrolPrices.com and www.TomorrowsGasPriceToday.com.

Consistent with the methodology of the Annual study, when determining average gasoline prices per Province or Territory, we have used weighted averages according to population in order to better conform to reality. In this manner, metropolitan population centers account for a greater portion of the total than smaller towns.

The following is a table with average regular gasoline prices for all Canadian Provinces and Territories, in dollars per litre, for the period March-May 2014:

Province/ Territory	May 2014 update gasoline prices ($/litre)	February 2014 update gasoline prices ($/litre)	Pump price change from February to May updates	November 2013 annual report gasoline prices ($/litre)	Pump price change from November 2013 to May 2014 updates
Alberta	1.198	1.066	0.132	1.104	0.093
British Columbia	1.432	1.273	0.160	1.320	0.112
Manitoba	1.259	1.096	0.163	1.182	0.077
New Brunswick	1.352	1.278	0.074	1.263	0.088
Newfoundland and Labrador	1.387	1.326	0.062	1.314	0.073
Nova Scotia	1.391	1.328	0.063	1.299	0.092
Ontario	1.339	1.276	0.063	1.269	0.070
Prince Edward Island	1.382	1.321	0.061	1.309	0.073
Quebec	1.420	1.375	0.046	1.359	0.062
Saskatchewan	1.279	1.148	0.131	1.179	0.100
Northwest Territories	1.389	1.386	0.003	1.347	0.043
Nunavut	1.269	1.269	0.000	1.350	(0.081)
Yukon	1.350	1.279	0.071	1.373	(0.023)

Fuel price data was extracted for a period of three months (March 4^th to May 27^th 2014) in order to reflect current gasoline price trends. Subsequent fuel update reports will focus on three-month periods following the period covered in the present study. Average gasoline prices per Province or Territory were found to vary between $1.198 in Alberta to $1.432 in British Columbia, with a Canadian average of $1.342, an increase of approximately 8 cents from the February 2014 Fuel Update.

2.3     Sales taxes

For the current Update research was performed to determine if there were any relevant changes to federal and provincial sales taxes that could have an immediate impact on the reimbursement rates. As to the date of this Update, no changes were observed in sales taxes anywhere in Canada. Moreover, no changes are foreseen at this time for the immediate future.

3       Impact of Fuel Prices on reimbursement rates

3.1     Fuel consumption

In calculating the fuel costs contribution to the total vehicle operating costs, the methodology employed in the Annual study was strictly adhered to. Fuel consumption for every vehicle model studied was thus combined with average prices per Province or Territory to determine the fuel portion of operating costs, based on an average of 20,000 kilometres per year.

3.2     Updated reimbursement rates

The following table provides updated evaluations for both the Travel and Commuting rates, as well as rates previously calculated for the February 2014 Fuel Update and the November 2013 Annual Report, for comparison:

2014 May Fuel Update Reimbursement Schedule (in dollars per kilometre)

Province/ Territory	May Update (2014) Travel Rate	February Update (2014) Travel Rate	November Annual Report (2013) Travel Rate	May Update (2014) Commuting Rate	February Update (2014) Commuting Rate	November Annual Report (2013) Commuting Rate
Alberta	$0.455	$0.440	$0.445	$0.195	$0.185	$0.185
British Columbia	$0.495	$0.480	$0.485	$0.225	$0.210	$0.215
Manitoba	$0.485	$0.470	$0.480	$0.205	$0.190	$0.200
New Brunswick	$0.510	$0.505	$0.505	$0.215	$0.210	$0.210
Newfoundland and Labrador	$0.535	$0.530	$0.530	$0.220	$0.215	$0.215
Nova Scotia	$0.515	$0.510	$0.510	$0.220	$0.215	$0.215
Ontario	$0.575	$0.570	$0.570	$0.215	$0.210	$0.210
Prince Edward Island	$0.510	$0.505	$0.500	$0.220	$0.215	$0.215
Quebec	$0.520	$0.515	$0.515	$0.230	$0.225	$0.225
Saskatchewan	$0.475	$0.465	$0.465	$0.205	$0.195	$0.200
Northwest Territories	$0.630	$0.630	$0.625	$0.290	$0.290	$0.285
Nunavut	$0.610	$0.610	$0.625	$0.275	$0.275	$0.285
Yukon	$0.630	$0.625	$0.635	$0.285	$0.275	$0.290

Note: All figures were rounded up to the nearest half-cent.

The impact of gasoline prices on the reimbursement rates was moderate for the present Fuel Update versus the February Update. The reimbursement rates only saw increases of maximum of 1.5 cents per kilometre for the Provinces and 1 cent per kilometre for the Territories. Canadian weighted averages have increased by 1 cent per kilometre for both the Travel and Commuting rates and are now at 53 cents per kilometre and 22 cents per kilometre respectively.

Fuel contributes on average of 12.8 cents per kilometre to total operating costs, ranging from 11.3 in Alberta to 18.5 in the Northwest Territories. With the start of the summer driving season, most indicators point towards a potential increase in gasoline prices across Canada for the following three-month period. However, due to the volatility of the fuel market, predictions are difficult to make. Any future changes will be reported in the next Fuel Update report.