What Are those "Fuel Surcharges" that Appear on Freight Bills?

Crude Oil Price Volatility, 2001–09

Note: Year-on-year quarterly changes in the price of West Texas Intermediate (WTI).

Source: IHS Global Insight, U.S. Macro Service.

Fuel is a large part of the costs of moving a truck over the road. Truck fuel efficiency averages between five and seven miles per gallon depending on engine age, design, and the skills of the driver. A fuel surcharge can thus be expressed in terms of per gallon of diesel. In 1999, fuel costs rose to what was then an astronomical level, to around 120 cents per gallon. (As a dramatic demonstration of the recent rise in fuel prices, consider that in 1999, fuel amounted to costs of around 20 cents per mile; now it is over 70 cents per mile.) It was around the same time that fuel surcharges became commonplace. Since Truck Load (TL) motor carriers make small margins—usually only cents per dollar of revenue—even a small jump in the price of diesel can tip the scales to a loss. A motor carrier remains profitable with fuel surcharges.

In the case of TL motor carriers, basic rates are usually expressed as a "flat charge" or in cents-per-mile. These "line-haul rates" are the basic point-to-point rate charge. These base rates reflect both the carrier's actual costs to deliver a load, as well as the market rates being charged by competitors. The fuel surcharge is then added to the base rate.

There are two models for calculating the fuel surcharge added to base TL freight rates:

1.) A "cents per mile" amount is added to the total of line-haul rates. As the price of diesel fuel per gallon ebbs and flows, an increase is calculated typically from a fuel element embedded in the base rate per mile, which customarily ranges from 120-150 cents. As fuel costs rise or fall, a formula adjusts the fuel surcharge upward or downward. Using the lower price figure of 120 cents per gallon, as the price of diesel fuel rises 6 cents per gallon, the fuel surcharge rises about 1 cent per mile. Typically, shorter haul movements or operators of specialized equipment may use a 5-cent ratio, raising the fuel surcharge 1 cent per mile when diesel fuel rises 5 cents per gallon.

For both carriers and shippers alike, the cents-per-mile calculation more closely relates to the actual cost of fuel to the trucker. The formula dictating the price per gallon and the attendant surcharge are often negotiated between the shipper and carrier.

2.) Another method of fuel surcharge calculation is as a percentage of the base rate. Customarily used by less-than- truck load (LTL) carriers, the fuel surcharge may increase by one-tenth of a percent for each one-cent increase in the price of diesel fuel. With a base rate of 120 cents in the formula, and fuel selling at $2.80 per gallon, the fuel surcharge would equal 16%. This formula finds lower priced lanes undercompensated for fuel price increases, while higher priced lanes are overcompensated when this formula is used.

A standard, common source for determining the cost of fuel must first be chosen. Many carries and shippers use the weekly Department of Energy (DOE) fuel costs as posted on the agency's Web site. Each Monday, the DOE updates the costs of fuel and provides a history of past fuel prices. There are, however, other acceptable methods of arriving at weekly fuel costs. Regional carriers will often use the Petroleum Administration for Defense Districts (PADD) figures from DOE's Energy Information Administration, which provide diesel prices for seven U.S. districts and sub-districts. These multiple regional calculations are cumbersome and in close scrutiny tend to closely track the national fuel index anyway.

The phenomenon of fuel surcharges will likely continue as long as the global price of crude oil fluctuates. The most dramatic fluctuation in recent times came in the summer of 2008, when in many areas diesel fuel neared $5 per gallon. The driving force was crude prices reaching $140+ per barrel.

Although shipping costs rose dramatically, many motor carriers were nonetheless unable to adjust their rates and operations quickly enough to compensate for the significant increase. Shock waves are still rattling the industry and owner-operators as well. The price of crude is apparently more important than ever before in deciding the fate of motor carriers. As such, fuel surcharges will continue to impact the cost of moving goods across any company’s supply chain.

Charles W. Clowdis, Jr.

Managing Director-Transportation

Natasha Horowitz