Each week the Department of Energy releases a national average retail price for diesel fuel (DOE Index), which is typically used to determine the cost of fuel reimbursements between shippers and carriers in the transportation industry. The weekly number is an average calculated using fuel price data from roughly 400 stations. The DOE’s survey uses a state distribution that is supposed to closely align to total diesel gallons sold by state, however the exact stations utilized are not disclosed.
Today the Department of Energy released its average retail price for diesel fuel at $3.028 per gallon. This is the first time the DOE index has breached the $3.00 mark in 3 years.
The industry is spending a lot of time discussing the implications of a $3.00 DOE index price for diesel fuel, its impact on the diesel fuel market, and more importantly its impact on the cost of moving shippers’ goods to market.
The reality is, however, that a $3.00 benchmark is no more or less significant than prices at $2.99 and does little to accurately illustrate the diesel fuel landscape in North America. A market-based approach is the only way to ensure that you are paying for fuel intuitively, based on actual cost build-up and consumption within your transportation network.
Why Distortion Matters
While the national average for diesel fuel may be $3.028, pricing distribution across the country is far more nuanced than one, clean number. Diesel fuel cost-build ups contain multiple components, each of which can fluctuate individually. This puts diesel fuel prices throughout North America on a wide spectrum. On January 16th, 2018—the same day the $3.00 benchmark was released—state-level wholesale prices ranged from $2.51 to $3.34 per gallon!
Several key distortions exist influencing diesel fuel prices:
State level taxes currently range from $0.14 to $0.77 per gallon across the United States. That $0.63 variation from state to state indicates that under an average retail price fuel reimbursement plan, shippers are grossly overpaying for fuel in some states, while under-reimbursing in others.
Drive past any fueling station on a regular basis and it is easy to see that fuel prices change daily. Relying on a pricing mechanism that only updates weekly misses nuance on a daily basis and can result in highly distorted reimbursement metrics.
Besides taxation, the pure cost of diesel fuel itself can vary by region. Disruptions to refineries and product transportation can cause significant price volatility in specific markets. Even shifts in product demand can move prices, as recently displayed in the Northeastern US during the recent cold snap. In this region, heating oil is a primary energy source and price volatility is typical during colder months as this reliance creates direct demand competition with the Ultra-Low Sulfur diesel used in heavy duty transportation.
A Market-Based Approach
Eliminate distortion in fuel reimbursements by utilizing a market-based approach instead of a national retail average. Using expert industry insights, accurate pricing data across 5,000+ fueling stations across the country, and shipment-level data, shippers can determine the exact cost of the fuel used in their transportation network.
With the right data and strategy in place, the impact of the DOE Index’s published retail price point is rendered irrelevant.