For businesses that transport their products within North America and carriers, protecting their bottom line from volatile fuel prices is an ongoing concern. One way to garner some protection from a fluctuating fuel price is the fuel surcharge.
What is Fuel Surcharge?
The fuel surcharge is the total cost for fuel usage. It is a contract between the shipper and another party that sets a standard rate for the fuel and how much will be paid above the base rate, and what fuel price triggers the surcharge, or no surcharge at all.
How is it Calculated?
There is no regulatory body governing the calculations for a fuel surcharge. The surcharge started in the 1970s in response to the OPEC fuel price spikes. The US government wanted to protect the transportation industry from fuel price volatility, and remain profitable, so the fuel charge system was developed.
In Canada many shippers rely on the Freight Carriers Association of Canada (FCA), which provides the industry surcharges for less than truckload (LTL) and truckload (TL) estimates. The surcharge is set as a percentage: 8.8% for LTL, and 20.7% for TL.
Many Canadian shippers use the FCA percentages to index their own surcharge, which matches an increase in the price to the surcharge to each increase in fuel prices over the baseline price. They use three variables for the fuel surcharge calculation: the baseline fuel price, the current price for fuel, and fuel costs as a share of operating costs.
Fuel surcharge contracts all use a base fuel price. The base fuel price for diesel fuel will be set at price per gallon in the United States, while in Canada, the price will be per litre. The base fuel price is the fuel price used when determining cost of operation.The second part of fuel surcharges is the base for the fuel mileage. Like the base fuel price, the base fuel mileage is an agreed upon amount that estimates the mile miles per gallon that the carrier will achieve.
Agreement on how to determine the current fuel price that leads to the surcharge is the third part of fuel surcharges. Both parties must agree ahead of time what prices will be used, and at what interval those prices are taken. The best source for average diesel fuel prices are government’s weekly fuel price calculations based on national averages.
In Canada and the United States, government agencies provide the average cost for diesel across the country. Every Monday, Canada’s National Traffic Services revises and updates the Fuel Surcharge (FSC). In the United States, every week the US National Average On-Highway Diesel Fuel Prices is released by the Department of Energy.
Fuel surcharges are not the only cost in a freight rate, but they are significant especially since they are based on fuel prices that will likely fluctuate. As long as fuel prices do remain volatile, fuel surcharges are likely to continue.