Rising pump prices put pressure on city budgets across the country

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Cities don’t buy fuel the same way their residents do – that’s why you don’t see garbage trucks pulling into the local gas station for a top-up. But that doesn’t mean they’re immune to the recent global spike in prices.

Canadian municipalities and transit agencies that negotiated lower prices before the run-up are looking prescient. But those that hedge only part of their fuel purchases, or none, are feeling budgetary pain that could be long-lived.

For the general manager of the City of Toronto’s fleet services, relentless upward pressure on fuel prices is extra impetus to pursue the switch to more sustainable vehicles.

The city buys fuel on long-term but variable-rate contracts, meaning the price is still subject to the market, so when costs started to spike it was another thing keeping David Jollimore on edge.

“We’re obviously concerned about rising fuel prices … and supply-chain impacts,” Mr. Jollimore said. “This motivates the city, it motivates us to move more aggressively to transition the fleet to zero-emission vehicles and reduce our dependency on fossil fuels.”

The city had already been moving in that direction, switching to natural gas in some cases, and was averaging less fuel consumption per vehicle than even a few years ago. But the city still expects to burn through 15 million to 16 million litres of fuel this year.

Toronto’s 2022 budget had assumed a price of $1.08 a litre for fuel. That figure has been overtaken by events. As of mid-March, the city was averaging $1.30 a litre.

Cities usually get a bulk rate on fuel, reflecting the scale of their needs, and typically don’t pay taxes on it. But that doesn’t mean they don’t feel a version of the same pain regular citizens experience when fuel prices climb.

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With large transit and city vehicle fleets, and limited opportunities for switching to other modes of transportation, fuel is a significant part of municipal spending. So, in an attempt to prevent budgetary chaos, cities and their transit agencies try in various ways to minimize the effect of market gyrations.

Montreal’s transit agency, the Société de transport de Montréal (STM) uses financial instruments called swaps (which basically allow one party to substitute its payments for those of another) to keep down the cost of the 45 million litres of fuel it will need this year.

The agency says it is paying an enviable price of approximately 60 cents a litre for diesel in 2022. By contrast, the price at the pump in Montreal for diesel hit a high earlier this month of $1.87, according to the website globalpetrolprices.com.

STM spokeswoman Amélie Régis said the agency has been doing these swaps since 1998, and fuel prices for this year and next were negotiated in 2020, when global oil prices were substantially lower.

In Vancouver, the transit agency, TransLink, enters into long-term contracts for wholesale fuel and structures its budget to allow for price movements.

“Our contracts are typically over five-year periods,” spokesman Dan Mountain said in an e-mail. “Our budgets factor in contingencies to account for fluctuations in price, so short-term price changes do not pose a major risk to our budget.”

At the City of Calgary, staff say they keep watch on price movements and select opportune moments to jump into the market and lock in a price.

“This really has helped us to mitigate this price fluctuation,” said Amit Patil, Calgary’s director of supply management. “Every month we look at it and we decide whether we want to lock in or not. For example, let’s just say, the current price that we have, that has been locked through August, 2022, so we locked it late last year when we saw the prices were favourable.”

Communications staff later forwarded additional information that in 2021, the city paid “approximately 15 to 30 per cent less than the monthly average retail prices for gas and diesel combined,” based on Statistics Canada figures.

The Toronto Transit Commission (TTC) has budgeted approximately $82-million for fuel this year, up about $11-million from 2021. The agency is hedging about 15 per cent of its diesel purchase this year, which moderates swings in its average cost per litre, but still leaves the TTC vulnerable to market fluctuations.

Spokesman Stuart Green said the TTC has reduced its per-kilometre fuel demand by modernizing its fleet, with its budget assuming a 7-per-cent improvement on that metric from last year to this alone. However, the overall effect of the current higher prices remains to be seen.

“Given extreme market volatility, the ultimate impact on the 2022 budget cannot be confirmed at this time,” Mr. Green said in an e-mail. “Impacts will be reported through updates to our board.”

Recent experience suggests there’s no magic solution among various fuel-purchasing approaches. Locking in prices may work well in some cases, but can also add costs if the market moves in unexpected ways.

Mr. Jollimore, the head of Toronto’s fleet services, said the current fuel price rise is not enough to make him consider pursuing more certainty in costs – at least not yet.

“We haven’t chosen to enter into a fixed-pricing model because, historically, it’s been better for the city by not doing so,” he said. “Several budget years we earn a surplus position because of using a variable-pricing model.”

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