The cost of fuel is on the minds of just about everyone these days, even more so for truck owner-operators, carriers, and drivers. Their livelihoods depend on fuel. And when prices fluctuate from region to region, state to state, and city to city, it can be as challenging to navigate through the fuel world as it is to navigate along an icy road. Knowing when or where the price is right can be one of the most frustrating parts of completing a long haul. A fuel surcharge can help compensate for that fluctuation and be a necessary part of shipping transactions. So let’s dive into the world of fuel surcharges by looking at what they are, how they are calculated, why they are used, and what owner-operators can do to benefit from a fuel surcharge.
What Is Fuel Surcharge in Shipping?
In a trucking industry worth hundreds of billions of dollars, there can sometimes be a fine line between success or hanging on. Without fuel surcharges, many more trucking would be scraping by. So what is this device that helps keep so many truck owner-operators, carriers, and drivers in the business and on the road each day? A fuel surcharge is a fee assessed by a carrier to account for regional or seasonal variations in fuel costs. It intends to help protect the carrier from the volatility of fuel prices. It originated in 1973 when the Arab oil embargo caused a fuel crisis. The Department of Energy (DOE) began computing a National Retail Diesel Average to compensate transportation carriers for the fluctuation of fuel prices created by the crisis. Various events over the following years affected whether surcharges were used and to what extent. At the start of the 2000s, surcharges began to appear more frequently in shipping. Then, in 2005, after the devastation of Hurricane Katrina, fuel reached $4.00 a gallon. That’s when surcharges were implemented to help avoid the possible collapse of the trucking industry. Since then, fuel surcharges have become widely accepted.
How Is a Fuel Surcharge Calculated?
At first glance, calculating a fuel surcharge can seem a little perplexing, and many businesses use different methods. But let’s take a couple of minutes to unravel the complexity. There are three variables involved in fuel surcharge calculations:
- The base fuel price: This is the price of fuel at the time the truck is booked. Carriers customarily use one of two options — the national averages from the U.S. On-Highway Diesel Fuel Prices Petroleum or the rates from the Petroleum Administration for Defense Districts, both of which come from the U.S. Energy Information Administration.
- Truck fuel economy: After getting a base price, carriers determine the truck's fuel economy to transport the shipment. They factor in miles per gallon of fuel consumed. For most 18-wheelers carrying a full load, the average is between 5 and 6 miles per gallon. Other factors include driving conditions, the weight of the shipment, and the truck itself.
- Fuel price change: This represents the fuel price change when the goods are shipped. This figure is constantly in flux, much like the changing prices of a gallon of fuel.
The Fuel Surcharge Calculation Method
There is no regulatory group that forces carriers to determine surcharges uniformly. Many carriers, however, have a simple formula to calculate the surcharge. The formula often looks like this:
- Take the original fuel price and subtract the updated fuel price to get the difference in fuel cost.
- The difference in fuel cost is divided by miles per gallon to get the cost per mile.
- Cost per mile multiplied by the distance traveled determines the fuel surcharge.
Using some arbitrary numbers, here’s an example of how the calculations work and what the final surcharge would be:
- Original fuel price: $4.00.
- Updated fuel price: $4.30
- The difference in fuel cost: $0.30
- Miles per gallon: 5 MPG
- Cost per mile: $0.06
- Distance traveled: 600 miles
- Fuel surcharge: $36.00
It needs to be remembered that this isn’t the only way that surcharges can be determined. For example, some trucking companies will use a ratio- or percentage-based system.
How Does Fuel Surcharge Work For Owner-Operators?
With truck owner-operators, fuel surcharges often work the same way as the big carriers. Most owner-operators will use the calculation method mentioned above, but others use different methods. Owner-operators usually set a rate per mile based on a fixed fuel cost. That rate will be adjusted accordingly with the rise or fall in fuel costs. Depending on the fuel economy, owner-operators can often make more money off their fuel surcharge than their delivery payment.
Is There a Fuel Surcharge that Owner-Operators Can Assess?
Owner-operators are entitled to assess their fuel surcharge as bigger carriers do. The surcharge amount is also up to the owner-operator, although most use the same formula as bigger carriers to come up with the fuel surcharge.
Why Would Owner-Operators Charge a Fuel Surcharge?
A fuel surcharge helps owner-operators compensate for the No. 1 expense — fuel cost. The fluctuations in fuel prices can be devastating if an owner-operator doesn’t consider fuel cost. An owner-operator can ensure that their profit margin is enough to cover business and personal expenses in volatile times by instituting a fuel surcharge. That surcharge can also help them purchase new equipment and technologies to benefit their business.
Essential Facts About Fuel Surcharges
- You have fuel economy flexibility. With the ability to set their average fuel economy, a carrier can be far more competitive by raising their base mileage to 7 miles per gallon or higher. In addition, offering a lower fuel surcharge can make the shipper a much happier partner and pull in more business with lower prices.
- You can set your fuel price. Some government agencies say a fuel price is a specific number, but that doesn’t mean you have to go along. The price in your fuel surcharge calculations can be altered to match the price you pay.
- Fuel surcharges do not cover empty miles. Those miles, also called deadhead miles, are just part of the cost of running a truck owner-operator business. Research says somewhere between 15 percent and 35 percent of the trucks on the road driving empty means a lot of miles without surcharges.
- The security from short-term fuel price fluctuations can sometimes turn into a benefit. For example, if some trucking companies offer 100 percent fuel surcharges, the driver gets the entirety of the surcharge.
What Can Owner-Operators Do to Benefit from a Fuel Surcharge?
As expected, efficiency is the key to opening the door to benefits from a fuel surcharge. Being fuel efficient can be like money in your pocket. Here are ways owner-operators can unearth some advantages:
- Locating areas where your trucking operations can be more fuel efficient. With trucks, you can limit idling, optimize cruise control, perform preventive maintenance, adjust the axle configuration, and select the right tires.
- Cutting down on backhauls and empty miles. Finding a load on your return trip, whether in part or in full, can help turn the empty miles into extra money when you are heading home, and the fuel you are using will have more of an impact on your profit margin.
- Capitalizing on load-out opportunities. When an empty trailer needs to be relocated by packing a full or partial load, you can save on the empty miles that would have been incurred on a return leg if you had to have the truck make a roundtrip.
- Cooperating with brokers and shippers. Working together, communicating, and sharing knowledge with all the shipping industry parties can benefit all when it comes to fuel surcharges.
ComFreight Can Help Fuel Your Next Step
Over the last few decades, fuel surcharges have kept many truck owner-operators from being swallowed up by fluctuating fuel prices. While it might take a while to calculate them and find out what numbers work best for you, knowing fuel surcharges and using ways to make them work even more for you can significantly improve your financial outlook. Another excellent way to add to your profit margin is to partner up with ComFreight, a superb digital payment, and finance solution for your transportation business. Innovative factoring and payment financing are embedded into ComFreight’s software and can be integrated into a client’s existing systems. To fuel a new financial phase in your business, reach out to us on our website.
