Your Strategic Transportation Partner

Join the Breakthrough team to explore how to “Adapt Your Freight Network to Win in a Volatile Market” with the FELIX platform on Monday, October 25th at 12:10 CT. FELIX analyzes the network data of both shippers and carriers and serves smart recommendations to help shippers identify fair-market rates, partner with optimal carriers, reduce cost, and improve service levels.

In this demo, Chief Product & Marketing Officer at Breakthrough, Heather Mueller, will provide a look at how shippers are using modules within the FELIX platform to adapt their networks according to market conditions in real-time.

Join the conversation!

Interested in attending the conference? Learn more about registering here. Or, you can explore the agenda to learn more about Breakthrough’s speaking session and other solutions featured at Gartner’s 2021 Supply Chain Symposium. Already registered? Say hello to the Breakthrough team by scheduling a 1:1 meeting.

Implications for supply and price are expected to be greater for refined products, however, because the hurricane was much weaker near offshore oil platforms prior to its New Orleans arrival. Colonial Pipeline Company also announced it was closing its two main gasoline and diesel lines that pump products up the eastern seaboard to North Carolina as a precautionary measure. This should add to the supply disruption and could create a fuel price response similar to what we saw during the Colonial’s outage in May.

Ida's Impact on Prices

Diesel price pressures are expected to extend beyond Louisiana in the coming days as local power outages and flooding persists. The state’s large footprint on refined product production and distribution means neighboring states could see some supply shortages that draw down inventories during the restart period.

Diesel, gasoline, and crude oil inventories in the U.S. are all presently below the five-year average, meaning the offline refining and crude oil production this week should further deplete inventories and support prices. While a lack of clarity around refinery and pipeline operations is currently insulating prices, we think refinery and pipeline downtime may create minor regional diesel price premiums in coming days.

Freight Market Update

Hurricane Ida disrupted transportation infrastructure around the New Orleans market across multiple modes of transportation. This will likely cause delays and tight capacity in the region as the area recovers from the storm.

Truckload shipments typically ramp up ahead of storms making landfall, but this was not necessarily the case this go around. It may be because the storm was not anticipated to reach a Category 4 level until a day before it hit the U.S. Gulf Coast. It is expected, however, that the recovery will call for a larger spike in freight demand into Louisiana, with the already-tight capacity potentially resulting in climbing spot rates.

From an intermodal perspective, all Class I railways have announced they had to shut down terminals and interchange facilities due to flooding. This will add to intermodal congestion that has been occurring throughout the pandemic. Below are a few of the closures that were announced. Shippers should expect delays in freight moving to or through New Orleans.

• Norfolk Southern (NS) closed their New Orleans terminal Monday but is expected to resume operations on Tuesday. NS told its customers to expect delays of 48 to 72 hours for all shipments arriving or departing from the terminal.

• Kansas City Southern (KCS) suspended mainline operations and interchanges from New Orleans to Baton Rouge and Gulfport & Hattiesburg, MS. There is currently not an estimated time to reopen because they are waiting for the flooding to recede.

• BNSF shut down all operations between Lafayette, LA and New Orleans ahead of the storm’s arrival starting Saturday, August 28.

• Union Pacific (UP) suspended operations at its Avondale, LA terminal ahead of the storm’s arrival starting Friday, August 27.

• Some additional U.S. ports in the Gulf of Mexico closed Monday, including the Port of New Orleans and the Port of Mobile. These are expected to be short-term closures, potentially opening back up as soon as Tuesday, August 31.

We will continue monitoring the storm’s fuel and freight market impacts in the days ahead and provide further updates should any major developments follow Ida’s regression.

Interested in learning more about the history of the DOE diesel fuel price index and its applications in commercial transportation? Read about it on our blog.

Why Are Fuel Surcharges Are Distorted?

Fuel surcharge rates that use a diesel index are an inherently incorrect way to calculate your fuel consumption because they are simply not intuitive enough to capture the complexities of a shipper’s unique transportation network. 

First and foremost, the DOE diesel fuel index price is based on a sample set of less than 10% of all diesel fueling stations across the U.S. and is published weekly. This places the burden of a dynamically changing and variable cost in the hands of a stagnant calculation and incomplete dataset. This single price point provided via the index is then used as an input for rate-per-mile reimbursement costs that result in a surcharge. 

The result? The cost differential between a traditional index-based fuel surcharge and the market price for diesel fuel on a shipment can sit around 40 cents per gallon – and in 2020 hit a high of over $1.14 cents per gallon. This price per gallon “spread” adds up as it accrues over millions of miles and thousands of shipments. 

How to Take Control of Your Trucking Fuel Surcharge Rates:

Managing your fuel spend is one of the most immediately impactful strategies shippers can take to reduce costs. Return on investment starts on the first shipment on your first day on the program, and savings continue in perpetuity with the ebbs and flows of the market. In 2020, when the fuel market was reached historically volatile levels, Shippers on Fuel Recovery decreased their over-the-road fuel cost exposure by over 46%. This is made possible by addressing 4 key distortions present in the current index-based fuel surcharge from your strategy.  

4 Elements of a Market-Based Fuel Reimbursement with Fuel Recovery

Not only does national fuel surcharge distortion originate in four key areas, but it can also be solved by addressing the following elements in your fuel calculations with Fuel Recovery: 

• Time: Wholesale diesel prices can fluctuate abruptly. Breakthrough Fuel Recovery clients capture daily fuel price changes, ensuring they always pay the right price from the day of their shipment.

• Price: Well-managed carriers procure fuel at wholesale prices, but the DOE provides a retail index for diesel fuel. Fuel Recovery calculates reimbursements according to the price your carriers incur at the pump.

• Tax: Over-the-road fuel taxes vary dramatically by state and make up a large portion of total diesel costs. Fuel Recovery accounts for taxes by state, the way carriers pay fuel taxes.

• Geography: Diesel commodity costs vary substantially from one market to the next, creating regional variance. Fuel Recovery accounts for the differences in regional pricing by calculating fuel prices specific to each lane your goods travel on.

Breakthrough Fuel Recovery calculations consider the price, tax, time, and geography of every individual freight movement. Fuel Recovery pinpoints where and when your freight travels and uses parameters specific to your network, like fuel efficiency, to calculate the cost of diesel on individual movement. We tap into a more complete dataset, including thousands of fueling locations across the United States and look at the costs your carriers encounter along each route.

Using Wholesale Diesel Fuel Costs

The DOE Index is reflective of retail fuel costs; however, most well-managed carriers procure fuel at a discount, often near the wholesale diesel fuel level. Diesel enables the service that carriers provide, so it should, therefore, be a pass-through expense. Shippers should reimburse their carriers based on the same price information their carriers experience on a shipment.

Prices Fluctuate Daily

From global geopolitical uncertainty to traumatic weather events, and everything in between, prices can shift at a moment’s notice. These variables drive market fluctuations in the price of fuel seven days per week, 365 days a year. Using a weekly update overlooks this volatility resulting in fuel price risk for both shippers and carriers.

If prices dip following a significant event, like the coronavirus pandemic or the crude oil price crash in 2020, shippers’ cost of diesel fuel should follow. Conversely, when prices spike following a hurricane or crude oil production decision from OPEC, their strategy should fairly reimburse their carriers for those elevated costs.

Accounting For State Taxes

Carriers pay diesel fuel taxes according to where fuel is consumed, and taxes can account for anywhere between 5 and 30 percent of the price of a gallon of diesel. States like California and Pennsylvania have significantly higher state taxes than states like Oklahoma and Missouri—a difference of as much as 65 cents per gallon. Paying a national average fuel price means you are disregarding the specific tax structures that affect your network. 

Geographic Variability in Prices

Your fuel reimbursements should follow varying diesel fuel prices by state and from station to station. A gallon of highway diesel in Los Angeles, CA is priced differently than a gallon purchased in Houston, TX, or in Fargo, ND. To accurately account for geographic variance, Breakthrough Fuel Recovery uses shipment origin and destination data to ensure fuel reimbursements are only calculated from truck stop data along your individual shipment’s route.

If you are shipping freight through Oklahoma, why include New York or Florida pricing in your reimbursement calculation?

Its Time to Ditch the DOE and Use Market-Based Fuel Prices for Reimbursements

Industry best practices are shifting, and shippers from every industry vertical, and of every size are taking control of their transportation fuel spend.