CFS Report - Fuel Price Update - August 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 August 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). Two subsequent Fuel Updates were produced for February 2018 and May 2018 respectively.

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 June, July and August 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 June - August 2018 fuel expenses represent 22.9% of the total cost of vehicle operation (reflected in the Travel and Commuting Rates) or a Canadian weighted average of 12.4 cents per kilometre. The present Update identified overall increases in average gasoline prices across Canada, which had a moderate impact on the reimbursement rates. As a result, the reimbursement rates for the ten Provinces either stayed constant or increased by a maximum of 1.0 cent relative to the previous Fuel Update (May 2018 for publication on July 1^st, 2018), with the greatest change being an increase of 1.0 cent for the Travel Rate in Alberta. For the Territories, both the Yukon and Northwest Territories saw increases of 2.0 cents for both rates, while Nunavut remained constant.

2         Fuel Prices

2.1       Energy market context

Over the past three months, the volatility of global crude oil prices (measured as the speed and magnitude at which the market reacts to events) has increased considerably. The markets have been highly sensitive to any news that has a potential to affect prices resulting in sharp movements, sometimes as steep as 5% in a single day. The two main reasons for this volatility have been a tightening of the global supply as well as an increased market uncertainty.

In addition to volatility, oil prices have also exhibited certain anomalies – price movements that are in contrast to fundamental market principles. Generally speaking, the price of crude is determined by supply and demand, but the short-term price movements are largely based on traders’ expectations of certain events. For example, in June, there was a sharp upward price adjustment right after the OPEC announced that it would increase oil production. In theory, the price of crude should have dropped since the supply was rising, but since the market had been anticipating the announcement and making price adjustments in advance of it, there had to be a price correction after the “anticipation” became a “fact”.

Gasoline prices exhibited much lower volatility as compared to crude and, somehow atypically for a summer season, only slightly increased on average. As a result, the Canadian average fuel price for the three-month period rose by 3.0 cents per litre or 2% as compared to the previous Fuel Report. In a year-to-year perspective, however, the average gasoline price was 22.6% or 25.1 cents higher than that of last summer.

Global Crude Oil Demand

The cyclical upswing of the global economy appears to have been shorter than previously anticipated. As reported in the previous Fuel Update (May 2018 for publication on July 1^st, 2018), the World Economic Outlook (WEO) from April 2018, published by the International Monetary Fund (IMF), projected the economic growth to only slow down in 2020. However, the current WEO update from July 2018 indicates that the growth rates in a number of countries appear to have already peaked. While the overall global growth rate projections for 2018 and 2019 remain unchanged at 3.9% for both years, the IMF indicates that the rates across the globe are becoming more uneven – with some economies strengthening further while others slowing down.

Although there has been only a slight downward adjustment of 0.1% in the growth rate projection for advanced economies, now estimated at 2.4% for 2018, divergence is growing between the United States that continues to display robust economic growth and many European countries, as well as Japan that appear to be slowing down. In the US, the projected growth rates remain at 2.9% and 2.7% for 2018 and 2019 respectively. In contrast, the growth in most other major economies has seemingly peaked in the first half of the year, which has led to a downward revision of 0.2% for the Euro Area, Japan and the United Kingdom, now projected at 2.2%, 1.0% and 1.4% in 2018 respectively.

A similar pattern of uneven growth is observed among emerging markets and developing economies. The overall growth rate for these countries remains unchanged from the previous report at 4.9% for 2018 and 5.1% for 2019, hiding the fact that the economic outlook for some countries has strengthened (particularly oil exporters like Saudi Arabia and Nigeria), while the growth for others has remained unchanged (China and Russia) or even slowed down (e.g. India and Brazil).

Canada’s economy is projected to grow by 2.1% in 2018 and 2.0% in 2019, projections that have remained unchanged from the last WEO in April 2018. The Monetary Policy Report issued by the Bank of Canada in July, 2018 indicates that the Canadian economy in the second quarter of the year has been strong as investments and exports continued to increase. As previously anticipated, the growth of household credit has been slowing down as well as the overall consumption has been moderate, particularly for product classes sensitive to interest rates such as vehicle purchases, food as well as dwelling maintenance. The US tariffs imposed on steel and aluminum imports have had a certain affect on Canadian exports as well. There remains a high uncertainty over broadening of similar tariffs and their duration. In addition, the renegotiations of the North American Free Trade Agreement (NAFTA) are expected to take place in the next few months and their outcome can have a significant effect on the Canadian economy.

As the IMF indicates, the main risk to the global economic development remains the escalating trade tensions and the overall level of this risk has increased. Over the past three months the US has imposed additional trade tariffs, particularly on Chinese imports. One such instance occurred on July 5^th, when the U.S. imposed a 25% tariff on $34 billion of Chinese goods including industrial items and components, to which China retaliated implementing equal tariffs on a list of goods, including electric vehicles among others. According to the IMF, these and other similar trade actions have a potential “to derail the [economic] recovery and depress medium-term growth prospects”.

Another important factor to global growth is the value of the US dollar. The strong economic activity in the US accompanied by the rising interest rates has led to the appreciation of the US dollar. Since crude is traded in USD, this adds an upward pressure on oil prices. In general, the effect of a high American dollar can have important implications for countries that import oil and petroleum products as they become more expensive. This in turn can slow down their economic activity as well as reduce the overall exports from the US.

The latest OPEC Monthly Oil Market Report published in August 2018 indicates that the global demand for oil remains robust and is currently projected to be 98.83 million barrels per day (mb/d) in 2018. The demand is projected to increase further by 1.45% in 2019, averaging 100.26 mb/d. The OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) averaged $73.27 USD per barrel in July, an increase of 7.1% from $68.43 USD per barrel in April 2018. In a year-to-year perspective, the reference basket value is 56% higher than that of last year, when the price was $46.93 USD per barrel in July.

Global Crude Oil Supply

Over the last three months, a multitude of factors have had an effect on global crude prices, often in different directions. In general, crude prices have been highly volatile due to the tightening of the global supply. As the oil prices reached the $70-$80 USD range per barrel in May, discussions were begun to increase the supply in order to avoid the prices from unraveling. The OPEC agreement signed in the fall of 2016 had a target to remove 1.8 million barrels per day (mb/d) from the supply side of the market in order to tighten the supply, reduce global excess inventory and stabilize prices. However, in the end, up to 2.88 mb/d were removed from the market, which further pushed crude prices up. On June 23^rd, OPEC agreed to end the over-compliance with the production cuts, which had reached up to 160% of the original target. It was estimated that the total output increase would be about 1.0 mb/d. Most of this production rise would have to come from Saudi Arabia and its allies in the Middle East as well as Russia, all countries with the largest unused crude oil production capacity. It must be noted, however, that as the production rises, the unused crude capacity will decline, adding to the price volatility, as the risk of regional oil shortages would increase.

The OPEC production increase announcement should have pushed the crude oil prices down, however, immediately following the meeting, the prices actually increased by as much as $3 USD per barrel or 4.6% in the case of the West Texas Intermediate (WTI). This was due to the fact that a downward price adjustment had been occurring for nearly a month before the meeting, based solely on the expectations of a production boost. As a result, the market had overestimated the impact and thus needed a price correction. In addition, two unforeseen events coincided around the same time, pushing oil prices in an opposite direction even further. Libya’s production fell by nearly 0.85 mb/d or 85% at the end of June as a result of its eastern oil ports being taken over by militant groups. This event coincided with the Suncore’s Syncrude plant going offline. The two events essentially removed over a million barrels of crude oil per day from the market due to unforeseen shortages. These events, along with the continuously deteriorating situation in Venezuela, led to a spike in crude prices in the first part of July.

Suncore’s Syncrude near Fort McMurray in Alberta is a major Canadian facility upgrading thick bitumen to light oil which is then transported to US refineries. On June 20^th, the facility went offline, removing about 360,000 barrels per day from the market. This outage led to a significant increase in price for Canadian crude, which was selling at a discount of $25 below WTI in June, but increased to $15/bbl below WTI as a result of the outage. The impact was mostly felt in refineries in the Midwest, including Chicago, which in turn led to increased gasoline prices in the regions they serve, including Manitoba, Saskatchewan and Alberta. The operation of the Syncrude facility has been partially restored and is expected to return to full capacity sometimes in September.

The first set of sanctions in regards to the US withdrawing from the Iran Nuclear Deal were imposed on August 6^th targeting Iran’s financial industry, manufacturing sectors, but stopping short of the oil industry. The full sanctions are to be implemented by November 4^th. Analysts estimate that, as a result, about 1 mb/d or about 1% of the global oil supply will come off the market, making the global oil supply even tighter and pushing the prices further up. Despite the US sanctions, a number of countries, including China, India, the United Kingdom and France, have agreed to maintain their trade relations with Iran, in exchange for Iran continuing to comply with the Nuclear Deal.

Since 2016, the US has been continuously increasing its crude production and in mid-July the US Energy Information Agency (EIA) reported that the US output officially hit 11 mb/d - a new record level of production. The latest EIA data indicates that the U.S. crude oil production is forecast to average 10.7 mb/d in 2018, an increase of 13.8% from 9.4 mb/d in 2017. A further production growth of 9.35% is expected in 2019. Although the production has been rising, many producers are facing challenges moving their products due to the transportation system limitations, which in turn led to a slowdown in the rig count.

Canada became the fourth-largest oil producer in the world in 2015 and is currently the premier crude supplier to the US, accounting for 49% of total imports. According to the OPEC report from August 2018, Canada’s oil supply is expected to grow by 5.36% to average 5.11 mb/d in 2018. Furthermore, the count of Canada’s active oil rigs has been considerably higher this summer than the previous year. While the maximum active rig count last year was 129, most time hovering between 100 and 125, this year the range has been between 140 and 154 throughout the summer.

The latest OPEC Monthly Oil Market Report published in August 2018 indicates that the non-OPEC oil supply in 2018 is estimated to be 59.6 mb/d, an increase of 3.65% over the previous year. The supply is forecast to increase by a further 3.52% in 2019, mainly driven by the production growth in the US and Canada. The EIA Short-Term Economic Outlook published in August 2018 reports that, despite the decision to increase production, the total OPEC crude oil output is expected to be reduced by 1% in 2018 as compared to the previous year. A similar pattern is expected to continue in 2019.

Over the past three months, the West Texas Intermediate (WTI) fluctuated from about $65 USD per barrel in early June to $74 USD in early July. The price then slid back to about $65 USD in mid-August and has been slowly recovering back to about $69 USD per barrel at the end of August. Brent followed a very similar pattern albeit on a slightly different timeframe and with more moderate fluctuations. The Brent price rose from about $73 USD in mid-June to $79 USD per barrel at the end of June. It then readjusted downwards, reaching the period’s lowest point in mid-August at about $71 USD per barrel. The price then recovered to about $77 USD per barrel at the end of August.

2.2       Gasoline prices across Canada

Ordinarily, summer months come with a gasoline price increase that lasts until early September due to a strengthening of demand as well as the more expensive summer-grade fuel production. This year, however, the trend was not nearly as evident as in other years. The demand was on a rise, accompanied by significantly increasing gas prices in April and May, but largely subsided starting in June.

As a result, the average fuel prices in Canada saw only a slight increase as compared to the previous Fuel Update (May 2018 for publication on July 1^st, 2018). The largest price changes were observed in Alberta, Saskatchewan, Yukon and the Northwest Territories, where fuel prices rose significantly due to the outage of Suncor’s Syncrude facility, leading to a reduced gasoline supply in the region.

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 78 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.

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 June - August 2018:

Province/Territory	Current fuel price ($/litre)	July 1st 2018 Fuel Update fuel price ($/litre)	Price difference ($/litre)
Alberta	$1.286	$1.215	$0.071
British Columbia	$1.508	$1.508	$0.000
Manitoba	$1.226	$1.170	$0.056
New Brunswick	$1.269	$1.213	$0.056
Newfoundland and Labrador	$1.359	$1.309	$0.050
Nova Scotia	$1.260	$1.225	$0.035
Ontario	$1.334	$1.311	$0.023
Prince Edward Island	$1.289	$1.232	$0.057
Quebec	$1.365	$1.343	$0.022
Saskatchewan	$1.234	$1.160	$0.074
Northwest Territories	$1.436	$1.290	$0.146
Nunavut	$1.080	$1.080	$0.000
Yukon	$1.449	$1.307	$0.142

 

Fuel price data was extracted for a period of three months (May 29^th, 2018 to August 28^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 $1.080 in Nunavut to $1.508 in British Columbia, with a Canadian average of $1.362, an increase of 3.0 cents from the previous Fuel Update (May 2018 for publication on July 1^st, 2018). The lowest price was recorded in Brandon, Manitoba at 106.1 cents per litre and the highest in Vancouver, British Columbia at 159.9 cents per litre.

Gas prices in Nunavut are typically set for a full calendar year and rarely exhibit any changes. There were no price changes for the current Fuel Update as compared to the previous one.

2.3       Sales taxes

For the current Update, research was performed to determine if there were any relevant changes to Federal and Provincial sales taxes that could have an immediate impact on reimbursement rates. As of the date of this Fuel Update, no changes were observed in sales taxes anywhere in Canada. Moreover, no additional changes are foreseen 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), the February 2018 Fuel Update (for publication on April 1^st, 2018) and the May 2018 Fuel Update (for publication on July 1^st, 2018):

Current Fuel Update Reimbursement Schedule (in dollars per kilometre)

	Travel Rate				Commuting Rate
Province/Territory	Current Fuel Update	July 1st 2018 Fuel Update	April 1st 2018 Fuel Update	January 1st 2018 Annual Report	Current Fuel Update	July 1st 2018 Fuel Update	April 1st 2018 Fuel Update	January 1st 2018 Annual Report
Alberta	$0.485	$0.475	$0.465	$0.460	$0.205	$0.200	$0.185	$0.185
British Columbia	$0.530	$0.530	$0.515	$0.515	$0.235	$0.235	$0.220	$0.220
Manitoba	$0.505	$0.500	$0.490	$0.485	$0.205	$0.200	$0.190	$0.190
New Brunswick	$0.535	$0.530	$0.520	$0.520	$0.210	$0.205	$0.200	$0.200
Newfoundland and Labrador	$0.575	$0.570	$0.560	$0.565	$0.220	$0.215	$0.210	$0.210
Nova Scotia	$0.525	$0.525	$0.515	$0.515	$0.210	$0.210	$0.200	$0.200
Ontario	$0.585	$0.580	$0.575	$0.570	$0.215	$0.215	$0.205	$0.200
Prince Edward Island	$0.520	$0.515	$0.505	$0.505	$0.215	$0.210	$0.200	$0.200
Quebec	$0.530	$0.530	$0.520	$0.520	$0.225	$0.225	$0.215	$0.215
Saskatchewan	$0.500	$0.495	$0.485	$0.485	$0.205	$0.200	$0.190	$0.185
Northwest Territories	$0.635	$0.615	$0.610	$0.600	$0.290	$0.270	$0.265	$0.255
Nunavut	$0.590	$0.590	$0.590	$0.590	$0.245	$0.245	$0.245	$0.245
Yukon	$0.650	$0.630	$0.620	$0.615	$0.290	$0.270	$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 moderate for the present Fuel Update. In comparison with the May 2018 Fuel Update (for publication on July 1^st, 2018), the Travel reimbursement rates displayed a maximum of 1.0 cent per kilometre increase for the Provinces, while the Commuting rates a maximum increase of 0.5 cents. For the Territories, both rates have seen a maximum increase of 2.0 cents in the Yukon and the Northwest Territories while Nunavut rates remained constant.  Canadian weighted averages have increased by 0.5 cents for both the Travel Rate and the Commuting Rate. They are now at 54.5 cents per kilometre and 22.0 cents per kilometre respectively.

Fuel contributes on average 12.4 cents per kilometre to total operating costs, ranging from 11.3 cents in Manitoba to 17.9 cents in the Yukon. With the continued volatility of the energy markets, determined by global factors that are hard to forecast, it is difficult to make any prediction regarding gasoline prices for the next three-month period.