There’s probably not a transportation, shipping, or supply chain manager working today that hasn’t been frustrated at one time or another by fuel surcharges. This frustration happens because fuel surcharges are a fluctuating cost and often vary from carrier to carrier, making them a challenge to calculate. This, in turn, makes it difficult to forecast costs in the transportation logistics component of the supply chain.
What is a Fuel Surcharge?
A fuel surcharge is a fee charged to shippers to cover the fluctuating cost of fuel. The majority of trucks on the road today, transporting our goods and services, are diesel-fueled. In fact, diesel has been the primary fuel for trucks since the 1930s. According to the Diesel Technology Forum,
“Three out of four trucks on the road are powered by diesel, and 98 percent of the large over-the-road Class 8 trucks are diesel.”
The price of diesel fluctuates regularly, but most carrier contracts are locked in months or years. Adding a surcharge allows carriers to maintain profitability on shipments during these fluctuations. The image below illustrates the changes in diesel across the U.S. over the last week.
Before 1980, the trucking industry was heavily regulated. Then in 1980, the Motor Carrier Act was passed, effectively deregulating the trucking industry. Competition boomed, and new price-per-mile fuel surcharge rules were implemented that coincided with the average price of diesel at that time ($1.20).
Fun fact – many shippers today use a base rate of $1.20/gallon when calculating fuel surcharge, likely not realizing that price is based on the cost per gallon of diesel in 1981.
How are Fuel Surcharges Calculated?
Most carriers use the Energy Information Administration (EIA) National Fuel Index Average to calculate fuel surcharges. The formula most often looks like this:
- Base Fuel Price – This is the base rate negotiated and agreed upon in the carrier contract
- Base Mileage – The average 18-wheel semi gets approx. 6 miles per gallon
- Current Fuel Price – Price noted in the National Fuel Index Average
Current price minus base price divided by mpg = fuel surcharge.
For example, let’s say our base rate is $1.20. Using last week’s average cost of diesel, we’ll say the current fuel price is $2.42.
$2.42 – $1.20 = $1.22
We then divide that $1.22 by our base mileage (6)
$1.22/6 = $0.20
If our shipment was traveling, let’s say, 500 miles, we would then multiply that $ .20 cent by 500.
$0.20 x 500 = $100
Using that calculation methodology, we might expect to pay a $100 fuel surcharge for that shipment.
Not all carriers use the same formula to arrive at their surcharge prices, nor are they required to do so. Fuel surcharges are unregulated and can vary from carrier to carrier. The EIA plainly states,
“The U.S. Energy Information Administration (EIA) does not calculate, assess, or regulate diesel fuel surcharges.
- EIA cannot tell you how to calculate a fuel surcharge. Fuel surcharges are negotiated privately by shippers and by transportation companies.
- Each company may have its own method for calculating surcharges. Many major transportation carriers have information on their websites concerning their surcharge methodology. EIA does not endorse a particular method. You can perform an Internet search on fuel surcharges for more information.”
What You Can Do
As a shipping, transportation, or supply chain manager, understanding fuel surcharge rates will undoubtedly allow you to anticipate better what you might be expected to pay, given the current cost of fuel. It can also allow for better, more accurate expense forecasting. Because it’s unregulated, though, what can you do to ensure you’re receiving the best overall rate (including fuel surcharges)?
A 3PL like Amware is a fantastic resource when trying to understand and reign in fuel surcharge costs. While fuel is necessary to move a shipment, it doesn’t add any intrinsic value. The freight shipping experts at Amware can help by auditing and negotiating better rates with a single carrier, or by offering multiple carrier options.
Amrate 7.0, Amware’s flagship TMS software, offers shippers hundreds of LTL, FTL, and partial truckload shipping options right at their fingertips. Contact us today to learn more about how we can help, or request a free trial of Amrate 7.0 below.