CFS Report - Fuel Price Update - August 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' per year. The present document represents the Update for August 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. Two subsequent updates were performed in February and May 2014 respectively, 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 June, July and August 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 June-August 2014 fuel expenses represent 24.5% of the total cost of vehicle operation or a Canadian average of 12.8 cents per kilometre, exactly the same as in the May 2014 Update. The present update identified only minimal variations in average gasoline prices across Canada, which only negligibly affect the reimbursement rates. As a result, most reimbursement rates remain the same as in the previous Update, with the greatest change being an increase of 1 cent in both the Travel and Commuting rates in the Yukon.

2       Fuel Prices

2.1     Energy market context

Globally, crude-oil prices have fluctuated since the beginning of the year due to a number of factors, mainly geopolitical in nature. Tensions and production disruptions in Libya and Iraq as well as the conflict in Eastern Ukraine contributed to an increase in crude-oil prices. The market responded very quickly to some of these economic triggers, especially toward the end of June. All types of crude (Brent, WTI as well as Crude Western Canadian Select, Syncrude Sweet and Edmonton Par) have peaked towards the end of June, only to decrease towards the end of August to January-February levels, on account of production being restored in some of the affected areas.

North American crude oil inventories mostly decreased during the last three months which is mainly due to higher demand and lower supply. For instance, crude oil inventory at the Oklahoma Storage Hub has decreased by half from January 24^th to June 27^th, contributing to an increase in crude oil prices during this period.

World economic growth is expected to attain 3.1% by the last quarter of 2014 and increase to 3.4% in 2015, according to the OPEC Monthly Oil Market Report from August 2014. World oil demand is also forecasted to increase and, in response, the oil supply is expected to grow to meet the demand.

On June 18^th, the Canadian Government approved the construction of the Enbridge's Northern gateway pipeline. This would enable Alberta's oil sands crude to be transported to British Columbia at an estimated rate of 525,000 barrels a day, at the same time allowing Canadian crude oil to engage the Asian market. This may have a direct impact on Canadian crude oil prices in the upcoming decade.

2.2     Gasoline prices across Canada

For the most part, gasoline prices at the pump have followed the fluctuations in the crude-oil market, reacting fairly quickly to any occurring changes. At the same time, gasoline price fluctuations across Canada were marked by numerous regional and seasonal variations that, nevertheless, have not been significant on average in the period June-August 2014.

From April to June, Canadian refineries have switched from winter-blend fuel to the summer-blend fuel which had an overall effect of increasing retail gasoline prices due to higher production costs. Prices stayed high but fluctuated a lot during the months of June and July, decreasing slightly in August to spring levels.

Depending on the location in Canada, prices have fluctuated at different periods in time. However, since prices have decreased on average across Canada in August to spring levels, the last three-months average prices did not display a significant change from the previous Update (May 2014). The Western provinces have shown a minimal variation of below half percent (0.5%) while the Atlantic Provinces have shown decreases between 0.5 and 2%. Ontario and Quebec as well as Nunavut and the Northwest Territories displayed only minimal variations (below 1%). The only exception to this otherwise flat trend is the Yukon, where average gasoline prices increased by 3.5%.

Overall, during the period June-August 2014 gasoline prices seem to have followed, for the most part, the trends in crude-oil prices, with regional and seasonal variations accounting for differences between provinces. Gasoline prices have varied on average between a decrease of 3 cents per litre in New Brunswick and Nova Scotia and an increase of 1.5 cents per litre in Ontario. The only exception is the Yukon where average prices have increased by 5 cents per litre. This can be explained by the small size of the fuel market in the Yukon Territory which responds differently to seasonal variations in supply and demand than other more populous areas. All this resulted in an overall constant trend which only minimally affected the rates published in the previous Update (May 2014).

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 June-August 2014:

Fuel price data was extracted for a period of three months (June 3^rd to August 26^th 2014) in order to reflect current gasoline price trends. Subsequent 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 $1.203 in Alberta to $1.439 in British Columbia, with a Canadian average of $1.341, a decrease of only 0.1 cents from the May 2014 Fuel Update.

2.3     Sales taxes

For the current Update research was performed to see 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 May Fuel Update, for comparison:

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

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

The impact of gasoline prices on the reimbursement rates was minimal for the present Fuel Update versus the May Update. The reimbursement rates only saw variations of maximum 0.5 cents per kilometre for the Provinces and 1 cent per kilometre for the Territories. Canadian weighted averages have stayed constant for both the Travel and Commuting rates at 53 cents per kilometre and 22 cents per kilometre respectively.

Fuel contributes on average 12.8 cents per kilometre to total operating costs, ranging from 11.4 in Alberta to 18.7 in the Yukon. With the end of the summer driving season, notwithstanding global factors that are difficult to forecast, gasoline prices are not expected to increase significantly over the next three-month period. However, due to the volatility of the fuel market, predictions are hard to make, but any future changes will be reflected in the next report.