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 2015.
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 2014 (for publication on January 1st 2015).
The present Update reflects the impact of current fuel prices on the Travel and Commuting Rates' 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 2015). 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 2015 fuel expenses represent 21.9% of the total cost of vehicle operation or a Canadian average of 11.1 cents per kilometre. The present Update identified increases in average gasoline prices across Canada, which had a slight impact on the reimbursement rates. As a result, reimbursement rates for the ten Provinces increased between 0.5 and 1.5 cents relative to the previous Fuel Update (May 2015), with the greatest change being an increase of 1.5 cents in the Travel rate in Manitoba and Saskatchewan and an increase of 1.5 cents in the Commuting rate in Alberta. For the Territories, the Yukon and the Northwest Territories saw increases for both rates of 1.0 cent and 2.0 cents respectively, while rates in Nunavut remained constant.
2 Fuel Prices
2.1 Energy market context
During the past three months, crude oil prices have been on a downward slope, while gasoline prices have exhibited a moderate increase up to the end of July and have been slowly decreasing ever since. This period of the year is the peak driving season and gasoline prices usually increase. However, different factors have been affecting both crude and gasoline prices and this has created a divergent situation; crude oil prices have been sliding downwards, while gasoline prices have been rising and only recently started to decline.
Driving these divergent trends have been two primary factors: an over-supply of crude, keeping crude prices down and driving inventories to record high levels, as well as a strong demand for gasoline that kept gasoline prices relatively high. There have also been other factors in the world economy that have contributed to these divergent trends and to mixed projections for the future of crude oil markets.
According to the World Economic Outlook report released by the International Monetary Fund on July 9th, 2015, global growth is projected at 3.3% in 2015, which is a reduction from the 3.5% from April's forecast. The global economic growth projections have been reduced due to lower-than-expected performance in the first quarter of this year in the US (down by 0.6% to 2.5%) and Canada (down by 0.7% to 1.5%) as well as a number of Emerging Markets (e.g. China, Brazil, Mexico, Saudi Arabia and Nigeria). China, the world's second largest economy after the US, has experienced a significant slowdown of their economy this year, resulting in a growth prognosis of 6.8% in 2015 as compared to 7.7% and 7.4% in 2013 and 2014 respectively. In the meantime, Russia is expected to move out of the recession in 2016, as their economic results in the first quarter of 2015 have been strong. Even though the economic outlook for 2015 has not been as strong as projected, the global economy is expected to grow in 2016 by 3.8%, leading to a possible increase in demand for crude oil.
Crude oil had started to regain its value in the first quarter of 2015, but has been on a downward slope since late May. The OPEC reference basket saw a decrease of 10% in average crude prices in July as compared to June 2015, averaging at $54.19 USD per barrel in July. The steep downward trend has continued in August and the West Texas Intermediate (WTI) spot price hit its lowest point at $38.24 USD per barrel, while the Brent reached $42.69 USD per barrel on August 24th. As a result the WTI and Brent prices have recorded a drop of about 33% since the last Fuel Update (prepared in May 2015 for publication on 1st of July, 2015).
The continued decline in crude oil prices appears to be largely driven by ongoing record high inventory levels and increased supply of crude as well as the economic difficulties experienced by China and the EU. According to the OPEC Monthly Oil Market Report from August 2015, the world oil demand in 2015 is projected to increase by 1.38 million barrels per day or about 1.5%. At the same time, the increased supply has been pushing already high inventory levels to their limits. Non-OPEC supply is expected to increase by 1.7% this year, mainly driven by China, Colombia, Russia and the US. Meanwhile, OPEC member countries have exceeded their production quotas by as much as 7% in the month of June 2015. The agreement reached with Iran lifting the crude oil trading ban has also contributed to the declining prices on the account of increased world oil supply in the future.
There is an inverse relationship between the value of the US dollar (USD) and the price of crude, which is a US dollar-denominated commodity. As the USD appreciates, the global demand for oil outside of the US reduces, resulting in an immediate downward pressure on its price. The instability caused by the Greek financial crisis has caused the exchange rate of the USD to Euro to be highly volatile during the past three months, which in turn has affected prices of global crude. Similarly, the difficulties experienced by China's economy and the subsequent growth slowdown, as well as the weakening of the Chinese Yuan, have reduced overall global demand.
In the North American context, the global oil price drop has had an especially significant impact on oil sand extraction in Western Canada, where rig counts have continued to decrease over the past year and, as a result, the exports to the US have suffered significantly. The number of active oil and natural gas rigs in Western Canada in the first six months of 2015 fell by half as compared to the same time period last year. In June, the available rig utilization was 14% in Alberta, approximately 28% in Saskatchewan and only 3% in Manitoba. As a consequence, Canadian oil exports posted their largest monthly decline on record, averaging less than 2.8 million barrels per day in May – a 360,000 barrel per day reduction (11.4%) from April 2015.
At the beginning of August, British Petroleum closed three crude distillation units at Whiting Refinery for unscheduled repair work. This refinery is the sixth largest in the US with a capacity of 240,000 barrels per day, refining mostly Albertan heavy crude. This caused a backlog of Canadian crude, affecting not only the price of the Canadian crude (which fell more than $20 USD below the North American Benchmark), but also having a significant impact (alongside the recent market events in China) on the WTI itself, which reached its six-year low of $38.24 per barrel on August 24th. The plant restarted its operations the following day, thus stabilizing the situation.
2.2 Gasoline prices across Canada
Despite the sharp decline in the oil price, gasoline prices in North America saw a moderate increase during the months of June and July 2015, followed by a slight decrease in August. This fluctuation has been primarily influenced by seasonal demand, among other factors. This year's peak summer demand for gasoline has been significantly higher than previous years, despite relatively high wholesale gasoline prices.
As compared to last year, gasoline prices have been lower this summer, leading to a strengthened demand. For example, the average Canadian price for gasoline was $1.196 in the summer of 2015 as compared to $1.341 in the summer of 2014. The US Energy Information Administration reported that the demand for gasoline has increased by nearly 7% from last summer.
To meet the increased demand, North American refineries processed crude at exceptionally high rates, pushing facilities to their limits. The average utilization rates reached 95% by the end of June,marking a 10-year high. This, however, led to more frequent disruptions and unplanned maintenance shutdowns of facilities, which resulted in temporary reductions of the gasoline supply, and thus kept prices high. The closing of the Whiting Refinery in August (described in the previous section) led to a decreased supply of gasoline in the Canadian market, spiking gasoline prices across Western Canada. This is one of the reasons why, during the summer of 2015, gasoline prices in Western Canada increased by a higher percentage than in Central and Eastern Canada.
In addition to increased demand, wholesale gasoline pricing (i.e. rack price) has remained relatively high, throughout North America, exhibiting quite an opposite trend as compared to crude oil. In recent years, the price of crude accounted for over two thirds of the gasoline retail costs, while refining costs along with marketing and taxes represented only 10 percent. Strong demand along with declining oil prices have led to a considerably different cost structure, where oil accounts for only half of the retail price, while refining operations reached 25%. As a result, both Canadian and US refining margins have been at seven-year highs this summer. It was reported that in June, the refining margin in Canada was 27.7 cents per liter. Since many of the leading oil extraction companies (e.g. British Petroleum, Chevron, ExxonMobil, Shell) have refining divisions, such high margins have been at least partially offsetting the losses from oil production.
Since a large part of the gasoline consumed in Canada is supplied from the US, thus purchased in US dollars, the exchange rate has had a direct impact on the gas price across the country. A weakening Canadian dollar has decreased by approximately seven cents since beginning of June 2015, from $1.25 to $1.32 for one US dollar, contributing to increasing gasoline prices across the country.
Overall, the sharp decline in crude prices has had a significant economic impact on Western Canada, which was and is felt throughout the country. The Canadian oil industry is likely to go through a period of readjustment which can have an impact on many other sectors of the Canadian economy.
The trend of future prices at the pump is extremely difficult to predict with any degree of confidence. The current energy market still displays signs of volatility that adds to the seasonal effects of summer-grade gasoline, as well as the impact of record inventories of fuel. These factors will probably display a mixed effect and make future prices at the pump hard to project.
In Canada, prices of gasoline at the pump include all applicable taxes. Prices vary significantly across the country, mainly due to the difference in the types and amounts of taxes being charged in different Provinces and Territories. The present Update calculated the average prices of regular gasoline charged at the pump during the past three months. 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 Statistics Canada as well as 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 Report, when determining average gasoline prices per Province or Territory, the present Update 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 average price compared to 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 - July 2015:
|
Province/Territory |
Current fuel |
July 1st 2015 |
Price difference |
|---|---|---|---|
|
Alberta |
$1.074 |
$0.937 |
$0.137 |
|
British Columbia |
$1.321 |
$1.244 |
$0.077 |
|
Manitoba |
$1.077 |
$0.953 |
$0.124 |
|
New Brunswick |
$1.151 |
$1.080 |
$0.071 |
|
Newfoundland and Labrador |
$1.218 |
$1.150 |
$0.068 |
|
Nova Scotia |
$1.164 |
$1.117 |
$0.047 |
|
Ontario |
$1.171 |
$1.072 |
$0.099 |
|
Prince Edward Island |
$1.173 |
$1.086 |
$0.087 |
|
Quebec |
$1.241 |
$1.188 |
$0.053 |
|
Saskatchewan |
$1.111 |
$0.979 |
$0.132 |
|
Northwest Territories |
$1.314 |
$1.153 |
$0.161 |
|
Nunavut |
$1.269 |
$1.269 |
$0.000 |
|
Yukon |
$1.157 |
$1.072 |
$0.085 |
Fuel price data was extracted for a period of three months (June 2nd to August 25th 2015) 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 litre and per Province or Territory were found to vary between $1.074 in Alberta to $1.321 in British Columbia, with a Canadian average of $1.196, an increase of 9.1 cents from the previous Fuel Update (for publication on July 1st, 2015). The lowest price was recorded in Winnipeg at 98.9 cents per litre and the highest in Vancouver at 139.6 cents per litre.
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 of the date of this Update, no changes were observed in sales taxes anywhere in Canada. Moreover, no changes are foreseen at this time in 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 Report was strictly adhered to. Fuel consumption for every vehicle model in the study 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
For comparison, the following table provides updated evaluations for both the Travel and Commuting rates, as well as rates previously calculated for the July 1st 2015 Fuel Update, the April 1st 2015 Fuel Update and the January 1st 2015 Annual Report:
August 2015 Fuel Update Reimbursement Schedule (in dollars per kilometre)
|
Travel Rate |
Commuting Rate |
|||||||
|---|---|---|---|---|---|---|---|---|
|
Province/ |
Current Fuel Update |
Jul 1st |
Apr |
Jan 1st 2015 Annual Report |
Current Fuel Update |
Jul 1st |
Apr 1st 2015 Fuel Update |
Jan 1st 2015 Annual Report |
|
Alberta |
$0.445 |
$0.435 |
$0.425 |
$0.450 |
$0.185 |
$0.170 |
$0.160 |
$0.185 |
|
British Columbia |
$0.485 |
$0.480 |
$0.465 |
$0.485 |
$0.215 |
$0.210 |
$0.195 |
$0.215 |
|
Manitoba |
$0.470 |
$0.455 |
$0.450 |
$0.475 |
$0.190 |
$0.180 |
$0.170 |
$0.200 |
|
New Brunswick |
$0.490 |
$0.480 |
$0.470 |
$0.495 |
$0.200 |
$0.190 |
$0.180 |
$0.205 |
|
Newfoundland |
$0.520 |
$0.510 |
$0.500 |
$0.525 |
$0.205 |
$0.200 |
$0.190 |
$0.210 |
|
Nova Scotia |
$0.495 |
$0.490 |
$0.480 |
$0.505 |
$0.200 |
$0.195 |
$0.185 |
$0.210 |
|
Ontario |
$0.550 |
$0.540 |
$0.535 |
$0.555 |
$0.200 |
$0.190 |
$0.180 |
$0.205 |
|
Prince Edward |
$0.485 |
$0.475 |
$0.470 |
$0.495 |
$0.200 |
$0.190 |
$0.185 |
$0.210 |
|
Quebec |
$0.505 |
$0.500 |
$0.490 |
$0.510 |
$0.215 |
$0.210 |
$0.200 |
$0.220 |
|
Saskatchewan |
$0.465 |
$0.450 |
$0.445 |
$0.470 |
$0.190 |
$0.180 |
$0.175 |
$0.200 |
|
Northwest |
$0.615 |
$0.595 |
$0.595 |
$0.625 |
$0.275 |
$0.255 |
$0.255 |
$0.285 |
|
Nunavut |
$0.610 |
$0.610 |
$0.610 |
$0.610 |
$0.270 |
$0.270 |
$0.270 |
$0.270 |
|
Yukon |
$0.605 |
$0.595 |
$0.600 |
$0.625 |
$0.255 |
$0.245 |
$0.250 |
$0.280 |
Note: All figures were rounded up to the nearest half-cent.
The impact of gasoline prices on the reimbursement rates was relatively moderate for the present Fuel Update versus the July 1st 2015 Fuel Update. The reimbursement rates displayed increases between 0.5 cents and 1.5 cents per kilometre for the Provinces. For the Territories, both the Travel and Commuting rates have remained constant in Nunavut, increased by 1.0 cent in the Yukon and by 2.0 cents in the Northwest Territories. Canadian weighted averages have increased by 1.0 cent for both the Travel and the Commuting rate and are now at 51.0 cents per kilometre and 20.5 cents per kilometre respectively.
Fuel contributes on average 11.1 cents per kilometre to total operating costs, ranging from 10.0 cents in Alberta to 16.8 cents in the Northwest Territories. With the continued volatility of the energy markets, determined by global factors that are difficult to forecast, it is difficult to make any prediction regarding gasoline prices for the next three-month period. However, any future changes will be reflected in the next Annual Report.