Fuel remains among the largest costs for both carriers and shippers but based on the current practice of using a fuel surcharge to mitigate volatility in pricing, both parties remain at risk of ending up on the losing end of the deal. In a FreightWaves’ webinar Thursday afternoon, Heather Mueller, vice president of new client experience for Breakthrough Fuel, said that fuel costs should be a pass-through cost to shippers, but that transparency and accuracy remain elusive.
“Historically, there was this notion that fuel was a commodity and prices rise and fall and there wasn’t much we could do about that,” Mueller remarked. “But things can be done to more actively manage it as part of supply chain [costs].”
In 2016, Mueller said that fuel accounted for 22% of the transportation spend to move a truckload of freight. That cost has remained relatively stable in the past few years – as have fuel prices - but over the past 16, it has fluctuated between 18% and 40% and has averaged 30% during that period.
“The goal of Breakthrough Fuel is to control that expense and do a better job managing it,” she said. “The price of fuel changes every single day; if you are looking at an average that is only updated once a week, that leads to a lot of distortion.”
Mueller was referencing the fuel surcharge most carriers use. The surcharge is typically based on the Department of Energy’s (DOE) Index, which is a weekly sampling of retail locations across the country. The problem with it, she said, is that it is neither transparent nor timely.
“The difference between what the DOE is publishing and the straight retail prices in the United States is noticeable,” Mueller said, noting that is the price spread. The spread varies by day, but because the surcharge is based on a weekly average, it could result in a carrier undercharging or overcharging a shipper for fuel cost. “Fuel should be a pass-through expense and [we need to] make sure it is fair and accurate based on what region it is being consumed in.”
To hear a replay of the webinar, click here
The DOE doesn’t disclose which retail sites it samples for the Index, and that also leads to concerns about over or underspending.
“Those prices might be totally appropriate in the Chicago market, but not in the California market,” Mueller pointed out.
Breakthrough Fuel argues that a “market-based” approach is the most accurate – and fair – way to manage fuel spend. Mueller explained their approach, which relies on collecting data state-by-state and managing it by lane, giving carriers and shippers a more transparent look at the actual cost of fuel along a shipment’s route. It is updated daily and uses real fuel costs along a lane that take into consideration tax exposure in each state and how much fuel is actually burned in moving the load. The goal is transparency.
This approach also takes into consideration regional effects on fuel prices that can hamper accurate pricing. As an example, Mueller pointed to Hurricane Harvey last September that resulted in a spike in fuel prices in the southeast due to a pipeline disruption. There was also a refinery fire in the Midwest that resulted in a fuel price spike in Utah and Idaho for a while.
“It’s very important that those costs get captured,” she said. “A national average simply doesn’t capture the nuance of everything that can happen in the fuel supply chain.”
In June, Mueller noted the average price of diesel fuel, according to DOE, was $3.26 a gallon. At that same time, it was $3.58 in California and $2.64 in Texas. So, a shipper moving freight through California would have been underpaying on the fuel surcharge while the shipper moving freight in Texas would be overpaying. The carriers would see the exact opposite situation. It is this type of situation Breakthrough Fuel is trying to prevent.
Another example the lack of fuel price transparency highlights revolves around state fuel taxes. Because carriers pay fuel taxes based on the miles they drive in a state not where they fueled up, Mueller noted, the wide disparity between state fuel taxes increases the potential spread between what shippers are being charged for fuel and what the fleet is actually paying.
State fuel taxes comprise between 5% and 30% of the price of a gallon of fuel, depending on the state.
While the Breakthrough Fuel approach is geared to helping shippers better understand and manage fuel spend, it can also be beneficial to the overall relationship between shippers and carriers, Mueller hinted at.
“You can see how distortion is baked into something that uses an index to reimburse for fuel,” she said. “Perhaps having that [transparent] data allows shippers and carriers to talk about where national gas makes sense in their networks, or it could lead to them discussing where a distribution center move might make sense.”
These are operational decisions that impact carriers but can also lead to more efficient carrier operations. Having distribution centers in lower-cost areas, or closer to end destinations, can result in different equipment choices or improved driver environment due to shorter routes that get them home more often to name just two possibilities.
“The [price] spread can change dramatically on a daily basis but the average doesn’t capture that,” Mueller said. “Instead of thinking how fuel becomes an evil cost to move freight, think about how it can be used as an advantage.”
Mueller suggested shippers and their carrier partners can look at alternative fuels as an option if you operate a closed-loop system, such as around the ports or near a distribution facility, and shippers should consider intermodal as an option, which can reduce fuel costs as much as 40% compared to moving the freight via truckload.
Fuel hedging is another option for both carriers and shippers if there is concern about price volatility. This can be especially true for fleets that operate in the southeast during hurricane season or those that operation in cold-weather areas such as the northeast in the winter as diesel fuel is also used for home heating fuel.
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