In The News

The Rookie Expediter’s Guide to Fuel Surcharge

In a recent EO piece, “The State of Fuel Prices: What Expediters Should Know,” I wrote about some of the key trends that are driving up fuel prices.

And, in that article, I mentioned how, for expediters, “higher prices at the pump mean lower profit in your pocket.”

But then I received an email from long-time expedite owner-operator, Linda Caffee, who kindly corrected me.

She said that higher fuel prices actually “make us more money.”

So, I called her to dig deeper into what she meant.

The key takeaway from our conversation: I had overlooked the impact of a fuel surcharge on your “effective” fuel cost.

According to Linda, when you run the numbers that factor in a fuel surcharge, higher prices at the pump can actually put more money in your pocket.

How?

That’s why I’ve put this article together - to serve as a beginner’s guide for understanding the fuel surcharge, where I also explore how higher fuel prices can lead to effectively lower fuel costs for expediters.

As you think about fuel surcharge and the impact on your business, here are four questions to consider.

1. Does the carrier pass along the fuel surcharge to the owner-operator?
The fuel surcharge was developed to help carriers and shippers cope with fluctuating fuel prices. But there is no law requiring a carrier to pay a fuel surcharge to owner-operators. So, confirm with your carrier that it’s included in your compensation plan before signing with that company.

2. If so, how is the fuel surcharge calculated?
There’s no standard across-the-board formula. So, check with your carrier for how they calculate it.

But the most commonly used formula is based on these three things.

(Here is a helpful fuel surcharge calculator from OOIDA: https://www.ooida.com/trucking-tools/fuel-surcharge-calculator/.)

Base fuel price.
Any time fuel is above the base price, the surcharge would be calculated and applied.

But what exactly is the base fuel price?

It depends on your carrier. But a typical number used in the industry is $1.25.

Base fuel mileage.
The base fuel mileage is determined by the type of vehicle you drive - whether it’s a tractor-trailer, straight truck, or cargo van. And the carrier sets what the “fleet-wide average” miles per gallon should be for each vehicle type.

Here are the commonly used base fuel mileage numbers per vehicle type:

• Tractor-trailer: 6 mpg
• Straight truck: 9 mpg
• Cargo van: 12 mpg

Keep in mind that base fuel mileage has nothing to do with your truck’s actual mileage; it’s a number that reflects what the mpg should, on average, be able to achieve.

Current fuel price.
The source of the current fuel price is typically the U.S. Department of Energy, which publishes the latest national and regional average prices every Monday.

See https://www.eia.gov/petroleum/gasdiesel/.

For example, as of press time, the current national average price for diesel fuel is $3.255.

Some trucking companies use the national average; others use a regional average. Find out which number your company uses.

Putting It All Together
So, let’s put it all together to calculate the latest fuel surcharge.

If you drive a straight truck, here’s what the fuel surcharge would look like, assuming we use the typical numbers.

Start with the current diesel price of $3.26. Then subtract the base fuel price of $1.25. And the difference is $2.01.

Divide $2.01 by 9 miles per gallon (base fuel mileage for straight trucks), and the fuel surcharge is $0.22 per mile.

3. How can improving fuel economy boost your profit with a fuel surcharge?
Let’s say that instead of 9 mpg, your new straight truck with the latest, most fuel-efficient powertrain and aerodynamic skirting gets 12 mpg.

What’s the impact on your bottom line as it relates to fuel surcharge?

Refer to the fuel surcharge number we calculated above: $0.22 per mile. And let’s compare the fuel cost at 9 mpg and 12 mpg.

Suppose it’s a 1,000-mile trip.

If the truck gets the standard 9 mpg, here’s what the numbers would look like.

• Divide 1,000 miles by 9 mpg. The answer 111.1 gallons of fuel consumed for the trip.
• Multiply 111.1 gallons by the fuel price - let’s use $3.26 per gallon for this example - and that gives you a fuel cost of $362.19.
• Then multiply 1,000 miles by a $0.22 per mile fuel surcharge. The answer is $220 - the amount of fuel surcharge you would be paid to help defray your fuel costs.
• Subtract the fuel surcharge total of $220 from the amount you paid at the pump of $362.19, and you get $142.19.

This means that your effective fuel cost - after you factor in the fuel surcharge - is $142.19.

Now, let’s see what the numbers look like for that 1,000-mile trip if your truck gets 12 mpg.

• Divide 1,000 miles by 12 mpg. The answer 83.33 gallons of fuel consumed for the trip.
• Multiply 83.33 gallons by $3.26 per gallon - and that gives you a fuel cost of $271.65.
• Then multiply 1,000 miles by a $0.22 per mile fuel surcharge. You get $220.
• Subtract the fuel surcharge total of $220 from the amount you paid at the pump of $271.65, and you get $51.65.

See the difference?

By improving fuel economy from 9 mpg to 12 mpg, your effective fuel cost for the 1,000-mile run would be only $51.65 versus $142.19 - a savings of $90.84.

When you think about it, that’s not a small number. Consider the impact of what that fuel cost savings could look like over, say, 80,000 miles in a year.

To get an idea, simply multiply $90.84 by 80. That’s an annualized savings of $7,243.20 going straight to your bottom line.

So, it pays to drive a fuel-efficient truck and to develop fuel-saving driving habits.

4. How can higher fuel prices PLUS improved fuel economy boost your profit with a fuel surcharge?
Suppose the current average diesel price surges to $4.25 per gallon, and your straight truck’s average fuel economy is 12 mpg.

What would the numbers look like?

Let’s calculate the fuel surcharge using the new current average fuel price number.

Start with the new diesel price of $4.25. Then subtract the base fuel price of $1.25. And the difference is $3.00.

Divide $3.00 by 9 miles per gallon (the average base fuel mileage for straight trucks), and the fuel surcharge is $0.33 per mile.

Go back to the 1,000-mile trip example and apply the new fuel surcharge amount.

• Divide 1,000 miles by 12 mpg. The answer 83.33 gallons of fuel consumed for the trip.
• Multiply 83.33 gallons by $4.25 per gallon - and that gives you a fuel cost of $354.15.
• Then multiply 1,000 miles by a $0.33 per mile fuel surcharge. You get $330.
• Subtract the fuel surcharge total of $330 from the amount you paid at the pump of $354.15, and you get $24.15.

See the difference?

When you paid $3.26 per gallon, your effective fuel cost for the 1,000-mile run - after factoring in fuel surcharge - was $51.65.

But when the diesel price jumps from $3.26 to $4.25 per gallon, your effective fuel cost for the 1,000-mile run actually drops by over 50% to $24.15.

The Bottom Line
When you understand how a fuel surcharge works in your situation, you’ll gain greater insight into leveraging higher fuel prices and improving your vehicle’s fuel economy to save money and increase profit.