CFS Report - Fuel Price Update - February 2018

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 2018.

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 2017 (for publication on January 1^st, 2018).

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 2017, January and February 2018). 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 2017 - February 2018 fuel expenses represent 21.1% of the total cost of vehicle operation (reflected in the Travel and Commuting Rates) or a Canadian weighted average of 11.1 cents per kilometre. The present Update identified small overall variations in average gasoline prices across Canada, which only 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 2017 for publication on January 1^st, 2018), the only exception being Newfoundland and Labrador where the Travel Rate decreased by 0.5 cents. For the Territories all rates increased by a maximum of 1.0 cent, with the exception of Nunavut where both Rates remained constant.

2      Fuel Prices

2.1     Energy market context

Steadily rising oil prices accompanied by a reduced volatility that had started in August 2017, continued up until end of January 2018. At the beginning of February, a significant decline in the U.S. equity markets had a negative effect on global crude prices. While substantial, the decline was short-lived, thus since mid-February the financial markets as well as the crude prices have been on an upward trend once again. Overall a strong global growth outlook, the extension of the OPEC agreement to limit oil production as well as geopolitical tensions in the Middle East have all supported the continued rise of crude oil prices.

Similarly to crude oil, gasoline prices have also been increasing slightly, however displaying significantly more variation. The average price of gasoline in Canada during the period between December 2017 and February 2018 rose by 2.94% compared to the previous three-month period. While on average fairly stable, the daily price movements in a number of locations across the country were considerable, ranging from 15% to 20% during the same time period.

Global Crude Oil Demand

According to the World Economic Outlook (WEO) Update published by the International Monetary Fund (IMF) in January 2018, global economic activity continues to strengthen. The world growth rate estimate for 2017 has been increased by 0.1% as compared to the previous WEO report from October 2017, reaching 3.7%. In 2018, the growth rate is expected to rise even higher, projected at 3.9%.

Most advanced economies have been exhibiting stronger-than-expected economic results. Therefore, the IMF has increased the growth rate estimates by 0.1% and 0.3% for 2017 and 2018 respectively, both now projected to be 2.3% per year. A number of Euro Area economies, including Germany, Italy and the Netherlands, have reported strong domestic demand, improved labour market indicators as well as an increased external demand. Advanced Asian economies, which are especially sensitive to the outlook for global trade and investment, have also experienced a strong economic activity. Japan’s growth rate for 2017 is now at 1.8%, twice that of the previous year. For 2018, the growth is projected to be 1.2%, an increase of 0.5% from the previous WEO report from October 2017.  Similarly to the advanced economies, a number of emerging and developing economies, including Brazil, China, and South Africa also posted third-quarter growth stronger than the fall forecasts, leading to updated overall rate projections from 4.6% to 4.7% for 2017.

The U.S. economic activity in 2017 has been strong, with increased household consumption and net exports, falling unemployment rates and a high rate of job creation. At the beginning of 2018, the U.S. approved a tax reform consisting of a fiscal stimulus (particularly the reduction of corporate tax rates and the temporary allowance for full expensing of investments), which is expected to temporarily boost the economic growth mainly through increased business investments. The effect of reduced personal taxes – expected to stimulate household expenditures – is likely to be relatively modest. As a result, the U.S. is expected to grow by 2.3% in 2017 and 2.7% in 2018 (as compared to the previously projected 2.2% and 2.3% respectively). It must be noted, however, that due to the temporary nature of some of the tax reform provisions, the overall effects are only expected to be felt in the short-term (2018-2020).

The latest data indicates that the Canadian market growth in 2017 was robust. The Bank of Canada Monetary Policy Review from January 2018 estimated that the economy grew by 3.0 % in 2017 due to strong household consumption, public infrastructure spending and solid business investments. Accompanied by a tightening of the labour market, this has resulted in the economy’s output to approach its full potential. In the following years the growth is expected to slow to 2.2 per cent in 2018 and to 1.6 per cent in 2019 as the economy shifts towards a more sustainable business investment and export-based path.

The latest OPEC Monthly Oil Market Report published in February 2018 indicates that the global demand for oil remains strong and is currently estimated to have been 97.01 million barrels per day (mb/d) in 2017, a slight upward revision of 0.07 mb/d as compared to the November 2017 report. The demand is projected to continue the upward trend in 2018, increasing by a further 1.64% and averaging 98.60 mb/d.

The OPEC reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) averaged $66.85 USD per barrel in January, as compared to $55.50 USD per barrel in October 2017, posting an increase of average crude price by 20.45% over the three-month period. This marks the highest monthly average since November 2014.

Global Crude Oil Supply

Since January 2017, OPEC countries along with several non-OPEC members including Russia, have been implementing a production cut agreement with a goal to limit crude oil production by about 1.8 million barrels per day (mb/d) below October 2016 levels. The agreement is currently expected to remain in effect until the end of 2018. Compliance to the agreement has been strong overall, reaching 107% in 2017. While initially the OPEC countries of Libya and Nigeria were exempt from participation in the agreement due to domestic issues, during the subsequent negotiations in November 2017 both countries agreed to cap their production at around the targeted 2017 levels.

The resulting increase of crude prices has been a motivating factor for non-participating countries to ramp up their oil production. According to the U.S. Energy Information Agency data, the U.S. crude supply has been rising steadily throughout 2017, averaging 9.3 mb/d as compared to 8.9 mb/d in 2016, an increase of 4.5%. Furthermore, a recent hike in drilling activity suggests that the production is likely to increase at an even faster pace in the near future. As a result, the projection of U.S. production in 2018 has been increased by a sizable 0.7 mb/d, reaching an estimated 10.6 mb/d as compared to the projection of 9.9 mb/d from the October 2017 report.

Similarly to the U.S., Canada’s oil sector has also continued its recovery. According to the OPEC Report from February 2018, Canadian oil supply is estimated to average 4.82 mb/d, an increase of 7.2% as compared to 2016 and possibly adding another 5.2% in 2018. Nevertheless, the crude transportation constraints faced by Canadian producers have lately held down the price of the Western Canadian Select (WCS), leaving it just below October 2017 levels, while the price of the West Texas Intermediate (WTI) has continued to climb. As a result, the spread between WTI and WCS has more than doubled from about $15 CAD per barrel to over $30 CAD per barrel.

Overall, as reported by the U.S. Energy Information Agency, the global oil supply in 2017 is expected to be at 97.98 mb/d and projected to further increase in 2018, averaging 100.43 mb/d.

While most of the economic conditions have been supporting the rise of crude prices, a significant price drop was observed in early February. As mentioned earlier, this was caused by a steep decline in the U.S. equity markets. The Dow Jones Average index fell by 8.9% between February 1^st and 8^th. The exact reasons for the drop are hard to pinpoint, but were likely based on the strengthening of the U.S. economy which increases the likelihood of high inflation and a potential rise of borrowing rates both of which have a negative effect on the economic growth rate. The decline of equity prices along with reports of higher-than-expected U.S. crude supply as well as a buildup of inventories at the same time led to a significant drop of global crude prices.

During the last three months, the WTI increased by about 10% from $60 USD per barrel at the beginning of December 2017 to $66 USD per barrel at the end of January 2018, and then dipped back to $59 USD per barrel in mid-February. It has since regained some momentum, ending the month at around $63 USD per barrel. During the same time period, the Brent price grew from approximately $65 USD to over $70 USD per barrel but then slid back to $63 USD per barrel in mid-February. At the end of the month the price of the Brent increased again to just over $66 USD per barrel.

2.2     Gasoline prices across Canada

Over the past three months, gasoline prices across Canada have exhibited a considerable degree of volatility, displaying an average slight upward trend led by the increase in the price of crude. Other factors, including scheduled refinery maintenance have reduced the gasoline supply in the market, driving the prices up. The equity markets’ drop in early February also impacted the price of gasoline, adding to the overall volatility.

Over the three-month period, the lowest price of gasoline was recorded in Edmonton at 94.9 cents per litre while the highest was in Vancouver where the price reached 148.7 cents per litre. The Vancouver Metro area has one of the highest fuel prices in North America due to several factors. Firstly, the pipeline between Alberta and British Columbia is operating at capacity, limiting the supply of crude to the only refinery located in B.C. (Parkland Fuel). Secondly, the scheduled maintenance that started in early February and is expected to last up to 40 days and possibly up to 60 days further limited the gasoline supply and pushed prices up. Lastly, the combined taxes imposed on gasoline in British Columbia, which round up to about $0.50 a litre, further add to the elevated prices in the Province.

To increase the capacity of the pipeline between Alberta and British Columbia, the federal government has approved a $7.4-billion expansion of the Trans Mountain pipeline. However, in early February, British Columbia’s government announced a series of provincial restrictions, which can have the potential of blocking its construction. This has lead to some tension between the two provinces resulting in the possibility of a complete pipeline shutdown. If this happens, the effect on gasoline prices in Vancouver would be significant. Expert opinions on the magnitude of the impact of such a possible shutdown vary considerably, ranging from an estimated 20 cents increase per litre to as much as 70 cents or even more.

Prices of gasoline, in Canada, include all applicable taxes. Prices vary significantly across Canada, mainly due to the difference in the types and amounts of taxes being charged on fuel in different Provinces and Territories. The present Update calculated the average prices of regular gasoline charged at the pump. The fuel price data was primarily obtained from Natural Resources Canada via Kent Marketing, based on daily published fuel prices for 78 locations across Canada. This data was verified against additional databases that similarly track fuel prices all across Canada.

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 2017 - February 2018:

Province/Territory	Current fuel price ($/litre)	January 1 2018 Annual Report fuel price ($/litre)	Price difference ($/litre)
Alberta	$1.075	$1.041	$0.034
British Columbia	$1.364	$1.350	$0.014
Manitoba	$1.051	$1.028	$0.023
New Brunswick	$1.138	$1.127	$0.011
Newfoundland and Labrador	$1.221	$1.255	-$0.034
Nova Scotia	$1.141	$1.126	$0.015
Ontario	$1.223	$1.176	$0.047
Prince Edward Island	$1.142	$1.122	$0.020
Quebec	$1.233	$1.215	$0.018
Saskatchewan	$1.050	$1.029	$0.021
Northwest Territories	$1.228	$1.172	$0.056
Nunavut	$1.080	$1.080	$0.000
Yukon	$1.228	$1.183	$0.045

 

Fuel price data was extracted for a period of three months (November 27^th, 2017 to February 27^th, 2018) 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 $1.050 in Saskatchewan to $1.364 in British Columbia, with a Canadian average of $1.222, an increase of 3.5 cents from the previous Annual Report (November 2017 for publication on January 1^st, 2018). The lowest price was recorded in Edmonton, Alberta at 94.9 cents per litre and the highest in Vancouver, British Columbia at 148.7 cents per litre.

Gas prices in Nunavut are typically set for a full calendar year and rarely exhibit any changes throughout the year. The set of prices that came in effect on January 30^th 2017 remained the same for 2018 up to the present 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 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 2017 Annual Report (for publication on January 1^st, 2018):

Current Fuel Update Reimbursement Schedule (in dollars per kilometre)

	Travel Rate		Commuting Rate
Province/Territory	Current Fuel Update	Jan 1 2018 Annual Report	Current Fuel Update	Jan 1 2018 Annual Report
Alberta	$0.465	$0.460	$0.185	$0.185
British Columbia	$0.515	$0.515	$0.220	$0.220
Manitoba	$0.490	$0.485	$0.190	$0.190
New Brunswick	$0.520	$0.520	$0.200	$0.200
Newfoundland and Labrador	$0.560	$0.565	$0.210	$0.210
Nova Scotia	$0.515	$0.515	$0.200	$0.200
Ontario	$0.575	$0.570	$0.205	$0.200
Prince Edward Island	$0.505	$0.505	$0.200	$0.200
Quebec	$0.520	$0.520	$0.215	$0.215
Saskatchewan	$0.485	$0.485	$0.190	$0.185
Northwest Territories	$0.610	$0.600	$0.265	$0.255
Nunavut	$0.590	$0.590	$0.245	$0.245
Yukon	$0.620	$0.615	$0.265	$0.255

 

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. In comparison with the November 2017 Annual Report (for publication on January 1^st, 2018), the Travel and Commuting Reimbursement Rates displayed a maximum of 0.5 cents per kilometre increase for the Provinces, with only Newfoundland and Labrador displaying a 0.5 cents decrease for the Travel Rate while remaining constant for the Commuting Rate. For the Territories, both the Travel and Commuting Rates stayed constant in Nunavut, and increased by a maximum 1.0 cent for the other two Territories. Nonetheless, Canadian weighted averages have stayed constant for both the Travel and Commuting Rates. They are now at 53.0 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 9.7 cents in Saskatchewan to 15.2 cents in the Northwest Territories and the Yukon. Given the complexity of socio-economic factors affecting the global energy market, 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.