How Are Fuel Surcharges Calculated?
There are multiple regulations that oversee the LTL and FTL shipping industry, however, fuel surcharges have no official guidelines or government oversight – for now. The truth is that many logistics companies have used fuel surcharges as a hidden profit margin that shippers simply factor into the overall cost of transporting commodities. And this fact is often a public relations nightmare for logistics carriers.
However, there are a few general rules that ethical carriers factor into their fuel surcharges in order to increase transparency with their customers while still proposing fair compensation for transporting their goods.
What is a Fuel Surcharge?
Fuel for trucks and other equipment used in the supply chain is never a consistent price. In fact, across the US, the average price per gallon will fluctuate approximately $0.10 per gallon every week. Fuel surcharge fees are intended to provide an average cost of fuel, to ensure the carrier does not incur losses due to the always-changing fuel costs. Fuel surcharges were initially established because agreements to ship materials is a contractual agreement between the shipper and the carrier. In most cases, the contract is an annual or long-term contract.
The problem is since fuel prices can and always change based on multiple uncontrollable elements, a fuel surcharge is needed to protect the carrier against loss in case fuel prices rise during the terms of the contract.
How is a Fuel Surcharge Calculated?
This is a trick question – because fuel surcharges are calculated differently due to each carrier’s fuel surcharge policy. An honest and upfront carrier will always tell you how they determine the fuel surcharge, and it is a consumer’s right to ask a carrier who does not disclose this information to the shipper.
However, there are a few general criteria for calculating fuel surcharges that most professional carriers follow. To begin with, all fuel surcharges are typically calculated as a percentage of the base fuel rate and are dependent on three variables:
The Base Fuel Rate
The base fuel rate is a price that determines when the fuel surcharge will be activated. For example, if the base fuel rate is $1.50 per gallon, and the fuel cost rises above that base fuel rate, the fuel surcharge is then activated and applied to the cost of shipment.
Base Fuel Mileage
This variable factors in the fuel economy or miles per gallon that the truck averages. Since most professional carriers spend millions of dollars on research and development to improve their fleet’s MPG by a few tenths of a mile, you can feel confident that they have accurate data to support their base fuel mileage claims. Most 18-wheel trucks with a full load average of about 6.0 miles per gallon.
The Source and Interval of the Average Fuel Price
This is the only area of a fuel surcharge that is regulated. The US Department of Energy determines the interval and source of the current average fuel price. They are published on a weekly basis.
Need a Real-World Example?
Here is a real-world example of how a fuel surcharge is typically calculated. For the sake of argument, let’s assume that the base fuel price that is noted in the shipping contract is set at $1.50 per gallon, the base fuel mileage is 6.0 miles per gallon, and the natural average price for fuel is $3.00 per gallon. The distance of the shipment is 1,000 miles.
- The first calculation is taking the current fuel price ($3.00 per gallon) minus the base fuel price ($1.50 per gallon) which equals a difference of +$1.50 per gallon. The second calculation is to divide the difference by the base fuel mileage – or $1.50 / 6.0 mpg = $0.25 per mile.
- The final calculation will determine the overall fuel surcharge. This multiple the surcharge per mile times the total miles drive – or $0.25 x 1,000 miles = $250.00 fuel surcharge.
Obviously, the goal of any shipper and carrier is to negotiate a fuel surcharge that is fair to both parties. There are a few items that shippers should consider when deciding on a carrier to ship their goods.
- Make sure the carrier fully explains their fuel surcharge formula. This is a consumer’s right, as in the end – the shipper determines who they will use as their carriers. Smart carriers will understand the value of being ethical and fair with customers, as opposed to hiding fuel surcharges.
- Don’t assume that a high fuel base rate is bad. As you can see in the example above, when the base fuel rate is higher, the fuel surcharges tend to be lower.
Fuel surcharges do not have to be a huge secret, for the carrier or the shipper. By openly discussing the fuel surcharge, both parties will develop a strong relationship that is based on truth and trust.
Need to find the best prices for moving your freight? Let Redwood Logistics help you get the process started.