CFS Report - Fuel Price Update - February 2017

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 that are 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 February 2017.

The latest 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 2016 (for publication on January 1^st, 2017).

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 and 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 December 2016, January and February 2017). All prices are given in dollars per litre.

This Update also presents the latest 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 December 2016 - February 2017 fuel expenses represent 19.9% of the total cost of vehicle operation (reflected in the Travel and Commuting Rates) or a Canadian weighted average of 10.2 cents per kilometre. The present Update identified small overall increases in average gasoline prices across Canada, which had a slight impact on reimbursement rates. As a result, the Reimbursement Rates for the ten Provinces either stayed constant or increased by a maximum of 0.5 cents relative to the previous Annual Report (November 2016 for publication on January 1^st, 2017), the only exception being Ontario where both the Travel and Commuting Rates increased by 1.0 cent. For the Territories all rates remained constant, with the exception of the Travel Rate for the Northwest Territories, which saw an increase of 0.5 cents.

2 Fuel Prices

2.1 Energy market context

Over the past three months, global oil prices have followed a moderate upward slope, while exhibiting significantly reduced volatility as compared to many of the previous periods. In late November and early December, OPEC alongside eleven non-OPEC countries reached an agreement to limit supply in attempts to raise global oil prices. The subsequent production cuts not only resulted in a price increase, but have also led to seemingly more stable energy markets in the past several months. OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) increased by 9.5% from $47.87 USD per barrel in October 2016 to $52.40 per barrel in January 2017.

Fuel prices in Canada have also been on a slight upward slope on average, largely following oil price trends, as well as reflecting the introduction of government initiatives in Alberta and Ontario to limit carbon emissions.

Global Crude Oil Demand

According to the quarterly World Economic Outlook Update published by the International Monetary Fund (IMF) in January 2017, global growth rate estimates and projections remain unchanged from the October 2016 report and are estimated at 3.1% for 2016 and 3.4% for 2017. These figures, however, mask a slight diverging trend between advanced and emerging markets. On one hand, the growth rate estimate in advanced economies remains at 1.6% for 2016, however, for 2017 it has been increased from previous estimates and is now projected at 1.9%. On the other hand, emerging markets projections have been reduced and are now estimated to grow by 4.1% and 4.5% in 2016 and 2017 respectively.

The IMF Update also indicates that in the aftermath of Brexit, domestic demand in the UK held up stronger than expected, which in turn resulted in a shift in the growth prognosis. There was an upward adjustment of 0.4%, reaching a growth rate of 1.5% in 2017, followed by a reduced growth prognosis for the following year which is now estimated at 1.4% (a decline from 1.7% in October report). Overall the Euro Zone has seen an improved growth prognosis and is estimated to grow by 1.6% in 2017.

After an extended period of robust results, the economic growth estimates in India have been revised downward. In November, India withdrew certain currency notes. This led to a cash shortage and payment disruption period in the last few months. A subsequent consumption shock had a negative effect on economic growth projections and the IMF estimate dropped from 7.6% to 7.2% for 2017. Meanwhile, China’s economic restructuring is continuing to show a positive impact, reflected in an improved growth rate of 6.5% for 2017 (from 6.2% in the October report).

The US economy continues to strengthen. The expected growth is estimated to be 2.3% for 2017 and 2.5% for 2018 versus 2.2% and 2.1% respectively. The economy reportedly is reaching full employment and rising wages, while the US dollar continues to appreciate against most other advanced and emerging markets currencies, reaching its highest level in nearly 15 years.

According to the IMF, Canadian economic growth projections remain unchanged for 2017 at 1.9%, and are slightly improved for 2018 (estimated at 2.0%). The Bank of Canada Monetary Policy Review from January 2017 indicates a slightly different prognosis – an improvement for 2017 (2.1% versus 2.0% in the October report), while the 2.1% projection for 2018 remains the same. The Canadian economy’s adjustment to lower commodity prices, in particular crude oil, is still ongoing. Nevertheless, after Alberta’s wildfires and a sharp decline in exports, economic growth has rebounded on account of the resumption of production of oil sands as well as the partial rebound of non-energy exports. The Bank of Canada’s Monetary Policy Review from January 2017 projects the growth rate in 2016 at 1.3%, compared to an estimated 1.1% reported in October. The service sector continues to expand, while the Canadian dollar appreciates alongside the US dollar vis-à-vis most other export-supporting currencies.

In conclusion, the global demand for crude oil remains strong, particularly in the European and Asian markets. The latest OPEC Monthly Oil Market Report published in February 2017 indicates that the crude oil demand is expected to increase by 1.19 million barrels per day (mb/d) or 1.26% in 2017 averaging 95.81 mb/d. This is a further upward revision from the estimated 95.55 mb/d in the Annual Report from November 2016.

Although overall economic growth signals around the world appear strong, particularly in advanced economies, there is still a perceived market uncertainty due to the new US administration’s potential change of policy direction, particularly as it pertains to trade. Changes to trade policies between the US and other countries could have a significant economic impact on the demand and supply balances in various industries, including commodity markets.

Global Crude Oil Supply

Last year, record low oil prices and increasing inventory levels forced several countries to reduce their crude production. The US alongside China was cutting production to stabilize the markets, while OPEC, unable to reach an agreement on production restrictions, was continuously increasing their production levels. In the last few months the situation has changed considerably.

After several months of discussions, OPEC finally reached a production cut agreement in late November and in the following weeks eleven (11) other non-OPEC countries joined the agreement. In total, twenty-four (24) oil producing countries, including Russia and Oman but excluding disruption-ridden Libya and Nigeria, agreed to cut 1.8 mb/d from the market for a six month period. The implementation of the agreement was prompt and the producers reported that by the end of January a cut of 1.5 mb/d day was already reached. The agreement had an immediate effect on the global markets and oil prices rose significantly. For example, the West Texas Intermediate (WTI) increased by 13% from just over $45 USD per barrel on November 29^th to more than $51 USD per barrel on December 1^st, while the Brent price jumped from $46 USD to almost $54 USD per barrel (an increase of more than 16%) in the same three-day period.

As expected, the OPEC agreement has been stimulating the production growth in non-participating countries. In the last few months, the US and Canada have been working towards increasing their supply after the cuts and disruptions of last year. Previously it was anticipated that the US might make further production cuts in 2017 to aid in the stabilization of the oil market. However, this no longer seems to be a priority since US energy independence is among the chief goals of the new US administration. The Short-term Energy Outlook published by the US Energy Information Administration (EIA) on February 7^th indicates that US oil production is now expected to rise by 1.12% in 2017, reaching 9.0 mb/d.

Canada’s oil industry is steadily recovering from both the global price drop as well as the production disruptions. After decreasing to a minimum of 26 rigs during the wildfires in Fort McMurray last May, the number of active rigs in Alberta reached an average of 247 rigs at the beginning of February. Furthermore, OPEC reports that the rig counts are growing across Canada, reaching 310 active rigs at the end of January, which is almost 50% more than the same time last year. The latest OPEC Monthly Oil Market Report estimates that Canada’s oil supply averaged 4.46 mb/d in 2016 and is projected to reach 4.63 mb/d in 2017.

During the past several months it has become more evident that the existing Canadian pipeline network is reaching its capacity and this has led to producers resorting to more expensive transportation modes. The number of oil sand shipments via rail has increased for the first time since the beginning of the oil price crash in 2014. At the end of January 2017 the new US administration took steps to advance the Keystone XL pipeline project that would connect Hardisty, Alberta, and Steele City, Nebraska via a shorter route, allowing for a more efficient oil transport from Canadian production sites to US refineries. The construction is expected to be completed within two to three years. The Canadian Government has expressed a strong support for the project in light of the potential benefits for Canadian oil industry growth, which include increased transportation capacities and reduced costs. At the end of November 2016 the Canadian Government also approved two major pipeline projects in Western Canada – the 1,150-kilometre Kinder Morgan's Trans Mountain pipeline connecting Edmonton, Alberta with Burnaby, British Columbia and the 1,659-kilometre Enbridge Line 3 project that will carry oil from a terminal near Hardisty, Alberta through northern Minnesota to Superior, Wisconsin.

Despite global production cuts, the information reported by EIA indicates that the US oil inventory levels have continued to climb. Estimated at over 518 million barrels on February 10^th, 2017 (an increase of almost 10 million or 1.87% in just one week and 8.16% since the end of December 2016) the inventory has reached the highest levels on record since 1982. However, EIA also reports that a reduction of inventory is expected in 2017 when the demand growth is projected to outpace growth in production.

The long-anticipated OPEC agreement described previously has had measurable effects, resulting in a general stabilization of the global energy market. In the three-month period from December to February, the West Texas Intermediate (WTI) has been hovering between $49 USD and $55 USD per barrel while the Brent price has stayed between $53 USD and $57 USD per barrel. Price variations were even more restrained in February, remaining within a two-to-three dollar range (as of February 24^th 2017 the WTI fluctuated between $52 USD and $54.5 USD per barrel and the Brent price remained between $55 USD and $57 USD per barrel).

2.2 Gasoline prices across Canada

Overall, average gasoline prices in Canada have generally been increasing slightly and stayed fairly constant with only slight fluctuations over the past three months. Alberta’s introduction of a new carbon tax as well as Ontario’s new cap-and-trade program took effect on January 1^st 2017 and as a result both provinces have seen a more significant price increase at the pump compared to the rest of Canada. Alberta’s tax added 4.49 cents per litre for regular gasoline, while Ontario’s cap-and-trade program is estimated to have increased gasoline prices by up to 4.3 cents per litre.

The trend of future prices at the pump is extremely difficult to predict with any degree of confidence. Although the current energy market seems less volatile than in the recent past, there are still factors of uncertainty (e.g. the expiration of the OPEC agreement in the summer of 2017) that add to the seasonal effects of switching to summer-grade gasoline as well as the impact of high inventories of fuel. These factors will probably display a mixed effect and make future prices at the pump hard to predict.

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 the 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 daily published fuel prices for 71 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, 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 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 December 2016 - February 2017:

Province/Territory	Current fuel price($/litre)	January 1 2017 Annual Report fuel price ($/litre)	Price increase($/litre)
Alberta	$0.973	$0.913	$0.060
British Columbia	$1.223	$1.205	$0.018
Manitoba	$0.968	$0.942	$0.026
New Brunswick	$1.081	$1.040	$0.041
Newfoundland and Labrador	$1.341	$1.300	$0.041
Nova Scotia	$1.080	$1.040	$0.040
Ontario	$1.078	$1.018	$0.060
Prince Edward Island	$1.082	$1.033	$0.049
Quebec	$1.138	$1.111	$0.027
Saskatchewan	$0.969	$0.945	$0.024
Northwest Territories	$1.180	$1.160	$0.020
Nunavut	$1.114	$1.128	-$0.014
Yukon	$1.166	$1.159	$0.007

 

Fuel price data was extracted for a period of three months (November 28^th, 2016 to February 23^rd, 2017) 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 $0.968 in Manitoba to $1.341 in Newfoundland and Labrador, with a Canadian average of $1.101, an increase of 4.4 cents from the previous Annual Report (November 2016 for publication on January 1^st, 2017). The lowest price was recorded in Edmonton, Alberta at 78.8 cents per litre and the highest in Gander, Newfoundland and Labrador at 144.1 cents per litre.

Gas prices in Nunavut are typically set for a full calendar year and rarely exhibit any changes throughout the year. A new set of prices came in effect on January 30^th 2017 which marked an overall decrease of approximately 5% across the entire Territory. Due to its unique practice of setting gas prices for a full year, Nunavut is the only Province or Territory that showed an average decrease of prices for the current Fuel Update. These prices are projected to stay constant until January 2018.

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 as compared to the previous Annual Report. 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 Travel and Commuting Rates, as well as rates previously calculated for the November 2016 Annual Report (for publication on January 1^st, 2017):

Current Fuel Update Reimbursement Schedule
(in dollars per kilometre)

	Travel Rate		Commuting Rate
Province/Territory	Current Fuel Update	January 1st 2017 Annual Report	Current Fuel Update	January 1st 2017 Annual Report
Alberta	$0.450	$0.445	$0.175	$0.170
British Columbia	$0.495	$0.495	$0.210	$0.205
Manitoba	$0.475	$0.470	$0.185	$0.180
New Brunswick	$0.505	$0.500	$0.195	$0.190
Newfoundland and Labrador	$0.555	$0.555	$0.220	$0.215
Nova Scotia	$0.505	$0.500	$0.195	$0.190
Ontario	$0.555	$0.545	$0.195	$0.185
Prince Edward Island	$0.495	$0.490	$0.195	$0.190
Quebec	$0.505	$0.500	$0.205	$0.205
Saskatchewan	$0.465	$0.460	$0.180	$0.180
Northwest Territories	$0.600	$0.595	$0.255	$0.255
Nunavut	$0.590	$0.590	$0.250	$0.250
Yukon	$0.605	$0.605	$0.255	$0.255

 

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

The impact of gasoline prices on the Reimbursement Rates was only moderate for the present Fuel Update. In comparison with the November 2017 Annual Report (for publication on January 1^st, 2017), the Travel and Commuting Reimbursement Rates displayed a maximum of 1.0 cent per kilometre increase for the Provinces. For the Territories, both the Travel and Commuting Rates stayed constant, with the exception of the Travel Rate for the Northwest Territories, which saw an increase of 0.5 cents. Canadian weighted averages have increased by 0.5 cents for both the Travel and the Commuting Rates. They are now at 51.5 cents per kilometre and 19.5 cents per kilometre respectively.

Fuel contributes on average 10.2 cents per kilometre to total operating costs, ranging from 9.0 cents in Manitoba to 14.7 cents in the Northwest Territories. Despite a recent tempering of the volatility of oil prices, the socio-economic factors affecting the global energy market are hard to forecast and 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 Fuel Update.