CFS Report - Fuel Price Update - May 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 May 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). A subsequent Fuel Update was produced for February 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 March, April and May 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 March - May 2017 fuel expenses represent 20.4% of the total cost of vehicle operation (reflected in the Travel and Commuting Rates) or a Canadian weighted average of 10.5 cents per kilometre. The present Update identified small overall variations in average gasoline prices across Canada, which had only a slight impact on Reimbursement Rates. As a result, the Reimbursement Rates for the ten Provinces varied relative to the previous Fuel Update (February 2017 for publication on April 1^st, 2017)  from an increase of 1.0 cents in British Columbia for the Travel Rate to decreases of only 0.5 cents in Nova Scotia and Prince Edward Island. Similarly, for the Territories, both rates varied between an increase of 0.5 cents for the Travel Rate in the Yukon, to maximum decreases of 0.5 cents in the Northwest Territories and Nunavut.

2 Fuel Prices

2.1 Energy market context

Over the past three months, global oil prices have exhibited significant price variations driven by the implementation of the OPEC production cut agreement reached in November 2016. Increased production in countries that are not part of the agreement and persistent record-high inventory levels have also contributed to this volatility.

Fuel prices in Canada continued on an upward trend that started earlier this year, which was not uniform across the country. Strong demand in the U.S. in April along with a switch to more expensive summer-grade gasoline has led to rising prices across North America. This affected Western Canada more than the rest of the country, mainly due to the fact that much more of its gasoline is refined in the U.S.

Global Crude Oil Demand

According to the quarterly World Economic Outlook (WEO) published by the International Monetary Fund (IMF) in April 2017, the global economy appears to exhibit a cyclical recovery in investment, manufacturing and trade which has led to increased economic activity. In a year-to-year perspective, the world growth rate is expected to rise from 3.1% in 2016 to 3.5% in 2017 and 3.6% in 2018. Continued strong growth in the Euro Area, solid economic output numbers from China and improvements in commodity exporting economies have all contributed to this trend. Over the last three months, the global growth projection for 2017 has increased from the previously estimated 3.4% in January 2017 to 3.5% in the latest WEO report.

In advanced economies, the increase has been mainly driven by an improved projected growth rate in the United States as compared to the last year. Although some weakness was present in the first quarter of 2017, it appears to be temporary based on short-term indicators such as the tightening of the labor market (i.e. low unemployment rates and a number of job opportunities that exceed the number of job seekers) and a productivity loss as companies adjust to new labor market conditions. Thus, the growth rate for the U.S. remains unchanged from the last IMF report and is estimated at 2.3% for 2017 and 2.5% for 2018. For the UK, despite the start of the Brexit negotiations that are expected to last for a prolonged period of time, the economy remains relatively robust, which has led to increased growth projections. The latest estimates suggest that the UK economy will grow by 2.0% in 2017 as compared to the estimated 1.5% in January 2017 report. For the Euro Area, the growth rate is projected at 1.7% for 2017, which is an increase of 0.1% from the report in January 2017.

The IMF report also indicates that emerging markets and developing economies have become increasingly important in the global economy in recent years. With the partial recovery in commodity prices, economic activity is projected to pick up markedly in the near future. After two years of recession, Russia and Brazil are forecasted to rebound back to growth in 2017 with rates of 1.4% and 0.2% respectively. India’s growth rate remains strong at 7.2% in 2017 and 7.7% in 2018 and the economy is forecasted to continue growing at a high rate. Furthermore, there is still room on the upside which will depend on near-term developments in domestic consumption, agricultural output and the success of structural reforms.  Meanwhile, China continues to reap the benefits of its structural reforms – the projected growth rate is at 6.6% in 2017 and 6.2% in 2018. Noteworthy is the fact that IMF projections indicate that the economic growth in India (although already above that of China’s) is expected to grow even further, reaching 8.2% per year in 2022. On the other hand China’s growth prognosis is more moderate and expected to exhibit a slowdown, settling at 5.7% in 2022.

The Canadian market continues to display improvement, although growth projections vary considerably. On one hand, IMF WEO economic growth projections remain unchanged at 1.9% in 2017 and 2.0% for 2018. On the other hand, the Bank of Canada Monetary Policy Review from April 2017 anticipates that the growth rate in 2017 will reach 2.6% as compared to 2.1% in the January 2017 report. A resumption of growth in gas and oil sector investments along with strong consumption and residential investments in the first quarter led to a surge, pushing the rate projections up. At the same time, non-commodity business investments and exports remain weak. As a result, the strong economic growth is likely to be temporary as reflected in the downward revision of the growth rate for 2018 from 2.1% in January 2017 report to 1.9% in April 2017.

Although the overall economic growth signals in the world appear strong, there continues to be a great amount of uncertainty caused by an increased turn toward protectionism, which comes with barriers to trade. As a result, the longer-term growth rate projections remain subdued across the globe compared with past decades, particularly in advanced economies. The global growth rate is estimated at 3.8% in 2022 in contrast to an average growth rate of 4.2% between 1999 and 2008.

In terms of crude oil demand, the latest OPEC Monthly Oil Market Report published in May 2017 indicates that the global demand remains robust and is currently projected to be 96.38 million barrels per day (mb/d) as compared to an estimated 95.81 mb/d in the February 2017 Report.  This is a rise of 1.26 mb/d or 1.3% over the global demand in 2016.

The OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) averaged $51.34 USD per barrel in April, a decrease from $52.40 USD per barrel in January 2017.

Global Crude Oil Supply

Following the OPEC agreement to cut oil production (the OPEC agreement) by nearly 2% back in November 2016, global crude prices had somewhat stabilized in the period from December 2016 to February 2017. However, since March, the prices exhibited higher volatility, mostly fuelled by the news on the OPEC agreement compliance rates as well as a U.S. production hike and inventory levels.

In early March, the implementation of OPEC’s production cut agreement was reported at about 90% compliance or a reduction of approx. 1.1 mb/d for OPEC countries and at about 50% or 0.28 mb/d for participating non-OPEC countries, including Russia. This shortage of anticipated cuts along with news of a larger-than-expected increase in crude oil stocks caused the market prices to recede. The West Texas Intermediate (WTI) and Brent prices both dropped by about 9% in a three-day period from March 7^th to March 10^th. Prices then begun to climb upwards until April 11^th, mostly on account of the approaching summer driving season. The period maximum was reached on April 11^th when the WTI was at $53.40 USD per barrel and the Brent at $56.23 USD per barrel. This was followed by another significant downward slide that continued for almost a month, when crude prices reached period lows for the WTI, settling at $45.52 USD per barrel and the Brent at $48.38 USD per barrel on May 4^th. In May, a number of factors contributed to a more positive outlook including expectations of an extension of the OPEC production cut agreement.

During the meeting in Vienna on May 25^th 2017, OPEC extended the current agreement by another nine months until March 2018 keeping the conditions unchanged – i.e. OPEC is to cut 1.20 mb/d and the non-OPEC participants (including Russia) are to contribute an additional cut of 0.56 mb/d. Based on the results of the initial implementation period, the views on the agreement’s effectiveness have been rather varied. On one hand, a number of analysts agree with OPEC that the extension should suffice to balance the supply and demand as well as to increase the prices in the long-run. On the other hand, other market participants were hoping that OPEC would reach consensus on even deeper cuts or a longer extension, expectations that remained unmet. As a result, despite the fact that the agreement was successfully extended, oil prices dropped by more than 4% that day.

While the OPEC production cut agreement is aimed at reducing the global oil supply in order to increase the price of crude, countries that are not part of the agreement are increasing their oil production and thus tempering its intended effects. According to the Energy Information Administration (EIA), the U.S. crude oil supply is estimated to have reached 9.1 mb/d in April. This is the highest level since March 2016 and has effectively nullified all the U.S. production cut efforts of last year. Furthermore, the numbers of U.S. oil rigs continue to climb. Because of a lag between the deployment of drilling rigs and realized oil production, recent rig increases indicate that U.S. oil production will likely rise further in the coming months. According to Baker Hughes’ last count reported on May 19^th, there have been 18 weeks of increasing rig counts. This is the longest streak of rig additions since 2011. The report states that there were 720 active oil rigs in the U.S., 402 more than a year ago, or an increase of 127%.

As a result, inventory levels remain high. On April 6^th, the U.S. Energy Information Administration (EIA) reported that the total U.S. crude oil inventories reached a record level 535.5 million barrels. Nevertheless, oil inventories have since declined. There was a draw of 7.4 million barrels during April and the trend continued in May, when inventories were reduced by an additional 4.4 million barrels in one week, greatly exceeding industry’s expectations and strengthening the market price.

Canada’s oil industry continues its recovery. The seasonality of rig activity is very pronounced in Canadian oilfields. Every year, the time between January and March is the peak season for new rig drilling and in 2017 the activity was considerably higher than in the previous year. During the peak season this year (2017), the oil rig count was around 200, while a year ago it was only around 150. The latest OPEC Monthly Oil Market Report estimates that Canada’s oil supply averaged 4.50 mb/d in 2016 and is projected to reach 4.72 mb/d in 2017.

Overall, the total global crude oil supply is expected to average 98.47 mb/d in 2017 and will likely exceed the 100 mb/d mark in 2018, according to the EIA report. A continued concern about the oversupply has cast a degree of uncertainty on the market. Libya and Nigeria remain exempt from cuts and have been determined to expand production. There is also a possibility that some of the participating OPEC agreement members might gradually reduce compliance to the agreement. Increasing production in countries that are not part of the agreement, especially the U.S., also add to the uncertainty.

2.2 Gasoline prices across Canada

During the period from March to May 2017, gasoline prices in Canada exhibited a certain degree of volatility. The crude oil market’s events along with the arrival of summer-grade gasoline, maintenance shut-downs at the refineries and some production disruptions in the U.S., have all contributed to this trend. Furthermore, since a large portion of gasoline consumed in Canada (especially in the Western provinces) comes from the refineries in the U.S., the prices were affected by the strong gasoline demand in the U.S. as well as the low Canadian Dollar value. The Canadian Average price increased from $1.101 to $1.136 since the last Fuel Update in February 2017.

The Federal government is continuing to work on the carbon reduction plan as part of the Pan-Canadian Framework on Clean Growth and Climate Change that will affect the provinces that currently do not have any carbon reduction legislation in place. On May 18^th, 2017, Environment and Climate Change Canada released a technical paper on the details of the plan, which could take effect as early as next spring and would begin at $10 per tonne. The price is scheduled to increase by an additional $10 every year, reaching $50 per tonne by 2022. Over the five-year period, this would effectively add 11 cents per litre to the price of gasoline at the pump in the provinces affected by this federal legislation. Nevertheless, due to the number of factors affecting gasoline price, the trend of future prices at the pump is extremely difficult to predict with any degree of confidence.

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 the database made available by the Kent Group Ltd 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 March - May 2017:

Province/Territory	Current fuel price ($/litre)	Apr 1 2017 fuel price ($/litre)	Price increase ($/litre)
Alberta	$0.994	$0.973	$0.021
British Columbia	$1.312	$1.223	$0.089
Manitoba	$0.975	$0.968	$0.007
New Brunswick	$1.076	$1.081	-$0.005
Newfoundland and Labrador	$1.329	$1.341	-$0.012
Nova Scotia	$1.072	$1.080	-$0.008
Ontario	$1.108	$1.078	$0.030
Prince Edward Island	$1.071	$1.082	-$0.011
Quebec	$1.158	$1.138	$0.020
Saskatchewan	$0.975	$0.969	$0.006
Northwest Territories	$1.174	$1.180	-$0.006
Nunavut	$1.080	$1.114	-$0.034
Yukon	$1.180	$1.166	$0.014

 

Fuel price data was extracted for a period of three months (February 24^th to May 26^th, 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 $0.975 in Manitoba and Saskatchewan to $1.329 in Newfoundland and Labrador, with a Canadian average of $1.136, an increase of 3.5 cents from the previous Fuel Update (February 2017 for publication on April 1^st, 2017). The lowest price was recorded in Edmonton, Alberta at 88.6 cents per litre and the highest in Gander, Newfoundland and Labrador at 143.1 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. This directly affected the calculation of the average for both the previous and the current Fuel Updates, hence the decrease of the average. Due to its unique practice of setting gas prices for a full year, Nunavut average prices are expected to stay constant for the next Fuel Update and Annual Report.

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. The only tax change was seen in Saskatchewan, where the provincial sales tax rate was increased. The new tax hike was implemented immediately after the provincial budget was announced, and became effective on March 23^rd, 2017. The combined federal and provincial tax in Saskatchewan was thus increased from 10% to 11%. This was reflected in all calculations of the current Fuel Update.

As of the date of this Update, no other changes were observed in sales taxes anywhere else in Canada as compared to the previous Fuel Update. 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) and the February 2017 Fuel Update (for publication on April 1^st, 2017):

Current Fuel Update Reimbursement Schedule
(in dollars per kilometre)

	Travel Rate			Commuting Rate
Province/Territory	Current  Fuel Update	Apr 1 2017 Fuel Update	Jan 1 2017 Annual Report	Current Fuel Update	Apr 1 2017 Fuel Update	Jan 1 2017 Annual Report
Alberta	$0.455	$0.450	$0.445	$0.180	$0.175	$0.170
British Columbia	$0.505	$0.495	$0.495	$0.215	$0.210	$0.205
Manitoba	$0.475	$0.475	$0.470	$0.185	$0.185	$0.180
New Brunswick	$0.505	$0.505	$0.500	$0.195	$0.195	$0.190
Newfoundland and Labrador	$0.555	$0.555	$0.555	$0.220	$0.220	$0.215
Nova Scotia	$0.500	$0.505	$0.500	$0.195	$0.195	$0.190
Ontario	$0.555	$0.555	$0.545	$0.195	$0.195	$0.185
Prince Edward Island	$0.490	$0.495	$0.490	$0.195	$0.195	$0.190
Quebec	$0.505	$0.505	$0.500	$0.210	$0.205	$0.205
Saskatchewan	$0.465	$0.465	$0.460	$0.180	$0.180	$0.180
Northwest Territories	$0.595	$0.600	$0.595	$0.255	$0.255	$0.255
Nunavut	$0.585	$0.590	$0.590	$0.245	$0.250	$0.250
Yukon	$0.610	$0.605	$0.605	$0.255	$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 slight for the present Fuel Update. In comparison with the February 2017 Fuel Update (for publication on April 1^st, 2017), the Travel and Commuting Reimbursement Rates displayed variations between a 1.0 cent per kilometre increase and a 0.5 cents per kilometre decrease for the Provinces. For the Territories, both the Travel and Commuting Rates have varied between increases and decreases of maximum 0.5 cents per kilometre. Canadian weighted averages have stayed constant for the Travel Rate and increased by 0.5 cents for the Commuting Rate and are now at 51.5 cents per kilometre and 20.0 cents per kilometre respectively.

Fuel contributes on average 10.5 cents per kilometre to total operating costs, ranging from 9.1 cents in Manitoba and Saskatchewan to 14.7 cents in the Northwest Territories and the Yukon. 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.