A Shipper’s Guide to Fuel Surcharges
Climbing gas prices at the station have become all too familiar for anyone behind the wheel. For businesses that depend on shipping, gaining a comprehensive understanding of fuel surcharges and how they are calculated can bring valuable insights and benefits. But what exactly are fuel surcharges and how might they affect your business in the long run? Is there a way to reduce them?
Here are some of the most common questions we are asked about fuel surcharges, along with our best guidance on how to navigate the challenges that come along with them.
Fuel Surcharge FAQs
What Is a Fuel Surcharge?
The adoption of fuel surcharges as an integral part of transportation pricing gained widespread acceptance in transportation during the early 1970s in response to the Arab oil embargo. It was intended to provide fair compensation to carriers affected by fuel price fluctuations. Although surcharges were temporarily discontinued when prices stabilized, they resurfaced in the late ’90s due to another surge in diesel prices and have since remained a contributing factor to overall shipping costs.
A fuel surcharge continues to serve as an essential component in total shipping expenses, providing a fair and predictable way to account for the fluctuating cost of fuel.
How Are Fuel Surcharges Calculated?
Despite the lack of an industry standard for calculating fuel surcharges, most carriers use a straightforward formula. They determine the change in diesel costs, divide it by the truck’s miles per gallon to establish a fuel cost per mile and then multiply that figure by the distance traveled. Although fuel surcharges remain an unavoidable component of shipping expenses, businesses that rely on shipping can proactively implement strategies to help offset these costs.
Base Fuel Price – Reflects fuel costs at the time of booking. Carriers have the option to determine rates based on either the national averages from the U.S. On-Highway Diesel Fuel Prices update or regional fuel prices in the Petroleum Administration for Defense Districts (PADD), both sourced from the U.S. Energy Information Administration (EIA), reflecting the prevailing fuel costs at the time of booking.
Truck Fuel Economy – Utilizes the miles per gallon fuel consumption and varies based on trucks, shipping load and a variety of driving conditions.
Fuel Price Change – Represents the current diesel costs at the time of shipment.
Fuel Surcharge Calculation:
Original Fuel Price – Updated Fuel Price = Difference in Fuel Cost
Difference in Fuel Cost / Miles Per Gallon = Cost Per Mile
Cost Per Mile x Distance Travelled = Surcharge
How Does OSM Calculate Fuel Surcharges?
OSM Worldwide employs an index-based surcharge system, which undergoes monthly adjustments based on the National U.S. Average On Highway Diesel Fuel Price. The U.S. Energy Information Administration (EIA) provides the fuel price data for the month that is two months prior to the adjustment. This data is rounded to the nearest cent, ensuring accuracy and transparency in determining the surcharge amount.
Are Fuel Surcharges Regulated?
Policies are not currently regulated by any federal governing body, meaning shippers and carriers independently negotiate and establish these policies through contractual agreements. Because there is no legal requirement, rule or regulation mandating the implementation of a fuel surcharge, specific calculations are typically not mandated or enforced.
How Do Fuel Surcharges Affect My Shipments?
Fuel surcharges can have a direct impact on your shipments, affecting the overall cost of transportation. The specific rates for fuel surcharges are typically outlined in your carrier contract, serving as an additional line item on your invoice. These charges account for the fluctuating cost of fuel and can influence the total expenses associated with your shipments.
Tips for Handling Costs
In this complex and unregulated landscape of shipping processes and fees, it’s critical that you understand your shipper’s charges. By staying informed, you can avoid surprises and ensure more accurate pricing for your customers without letting your bottom line take the fall. Here are a few valuable tips for creating a surcharge strategy:
Factor Fees into Product Cost
Integrating a shipping surcharge into the product cost can address ongoing challenges in maintaining revenue neutrality in shipping. By integrating the surcharge directly into the product cost or overall pricing structure, it enhances customer understanding and acceptance. However, there may be repeat customers who notice an increase in pricing. To mitigate those potential frustrations and show that your business is fully transparent about pricing, be sure to provide clear and comprehensive explanations for the fees. You can do this relatively easily by creating a shipping policy line item during checkout or a dedicated FAQ page that details all additional fees. Customers will better understand how the surcharge process affects what they pay and clearly see that it’s separate from the cost of your product or service.
Collaborating with carriers that prioritize environmental efficiency not only helps mitigate the impact of escalating fuel costs but also showcases your commitment to sustainable shipping practices. By partnering with a shipping carrier that prioritizes sustainability, such as OSM, you gain access to their extensive experience in optimizing fuel performance and reducing empty miles. At OSM, we’ve already integrated sustainable practices such as committing to carbon neutrality, reducing energy use and recycling into our daily operations. With the right shipping partner, you can make sustainability part of your own brand while reducing costs for your customers.
Pick Efficient Packaging
It’s important to use adequate packaging to protect goods while in transit, but too much of a good thing can cost you. Right-sized packaging involves using appropriate materials that adequately protect the product while minimizing weight. Small changes in packaging can have a big impact, such as using boxes, padded mailers or poly bags that better fit your products, require fewer insulating materials and fit more shipments onto a single truckload. Making even slight reductions in packaging weight can significantly lower shipping costs by decreasing package weight with lighter materials without compromising product safety. Understanding how carriers calculate pricing based on dimensional weight (DIM) can help reduce shipping costs and absorb costs you may have less control over – like surcharges.
Optimize Shipping Processes
Maximize efficiency in your shipping process by partnering with a logistics provider who can evaluate your shipping data to identify consolidation opportunities. Collaborating with them will enable you to reduce overall mileage, improve packaging, utilize space and leverage their network for cost-effective deliveries. By leveraging the expertise of a logistics partner, you can manage the impact of surcharges while streamlining your shipping operations.
Contact us to learn more about how OSM Worldwide’s business shipping services can help you ship smarter and offset the fuel surcharge.