Information updated from the original post date of 3/6/2018.
Shippers using the Department of Energy’s (DOE) Diesel Fuel Price Index are vastly overpaying for their fuel reimbursements.
Shippers have an economic responsibility to pay for the fuel that moves their goods to market. Most shippers have varying fuel surcharge schedules handed down by generations of transportation professionals without question. Though each schedule may be slightly different, most of them use the DOE’s weekly price as an input to calculate the average cost of fuel.
This practice is outdated and inaccurate.
The reality is the DOE Diesel Fuel Price Index does not reflect the true cost of the diesel fuel used to move goods to market.
For more than 30 years, the transportation industry has used the DOE Index to calculate fuel reimbursements between shippers and carriers, despite its antiquated beginnings and irrelevance in today’s market. Delving into the history of the Index and its use in transportation sheds light on its limitations in today’s supply chain environment and calls shippers to seek more accurate fuel reimbursement solutions.
So, why does the transportation industry rely so heavily on the DOE Index’s use if it provides an inaccurate accounting of fuel costs across shippers? The story begins with the misguided use of the index in the 1980s that endured for decades as the industry failed to provide viable new solutions.
The Era of Trucking Regulation
Before 1980, trucking was a heavily regulated industry in the United States. Established in 1887, the now-defunct Interstate Commerce Commission (ICC) allocated a limited number of lanes to carriers that petitioned to use them. When carriers wanted to move goods along a new route, they had to file a request with a proposed price along that lane with the ICC. If approved, the carrier would be given a near-monopoly on that freight lane. Shippers were charged a predetermined price by their carrier. By the same token, if a carrier wanted to adjust its rates on that lane, they would need the ICC to approve the change.
The regulatory environment during the ICC’s governance created a more stagnant rate environment than is typical in today’s rapidly changing transportation industry.
Recurring Oil Shocks Led to Diesel Fuel Surcharges
In the 1970s, two international incidents altered the way the trucking industry charged shippers for fuel.
In the fall of 1973, Arab members of OPEC launched a six-month oil embargo against the United States and several other countries. The embargo halted oil exports to the US to gain economic leverage in the face of the falling price of the dollar—a trend sparked by US monetary policy under President Nixon. Nixon’s move away from the gold standard sent the price of the dollar into a decline which ultimately decreased revenue for OPEC’s 12 member-countries—whose contracts were priced in US dollars.
OPEC also used the embargo to penalize the US for backing Israel during the Arab-Israeli war, resulting in a constricted oil supply and a fourfold increase in oil price. This created a profitability crisis for carriers and individual drivers because under the existing system they weren’t being reimbursed enough for the cost of fuel. In response to the price increase, the ICC granted emergency authority to carriers to instill temporary fuel surcharges at up to 6 percent of maximum revenue in 1974.
After the OPEC embargo ended, oil prices remained stable for five years. Then reduced production from the Iranian Revolution in 1979, followed by the Iran-Iraq war in 1980, created another oil shock. The ICC responded by allowing carriers to adjust their fuel pricing through a percentage-based surcharge, and a process that allowed for the more rapid filing of new rates.
Trucking Deregulation and Permanent Surcharge Systems
The Motor Carrier Act was passed in 1980, deregulating the trucking industry, and eventually disbanding the ICC.
Around this same time, carrier competition boomed, and the number of trucking companies nearly doubled. With this new competition and a need to differentiate in the marketplace, new mileage-based rules for fuel surcharges were established when the price of diesel exceeded a base rate of $1.189 – which coincided with the price per gallon of diesel fuel at that time. This is why many shippers have a base rate of $1.20/gallon.
Most carriers and shippers may not realize that this arbitrary benchmark is based on a historical price from 1981 and has no correlation to current fuel markets. In 1981, the ICC also began using the most readily available source of fuel price data at the time—the newly-established Department of Energy’s (DOE) On-Highway Retail Diesel Index—as its source for pricing.
Today, the DOE Diesel Fuel Price Index collects retail pricing information on a weekly basis from a sample of diesel fueling stations throughout the United States. This number is averaged in two ways: nationally, and geographically with the Petroleum Area for Defense Districts (PADDs).
The national average combines fuel prices from Maine to California, North Dakota to Texas, and everywhere in between to produce one weekly price utilized for the entire country. This is the least intuitive fuel price to use when calculating fuel reimbursements. OR This methodology for fuel reimbursement can be archaic when considering modern best practices for Transportation and Supply Chain.
The use of PADD regions is marginally more granular. PADDs were created during World War Two to help allocate fuel for consumer and business uses because a large portion of the U.S. supply was allocated to the war effort overseas. These geographies remain the same, though supply/demand dynamics across regions have shifted and evolved greatly over time.
As a result, fuel surcharges today are being calculated by carriers based on rates that correlate to regions, prices, and practices that are arbitrary in today’s marketplace and have little correlation to the actual price of fuel purchased along a freight lane.
20+ Years of Fuel Reimbursement Pricing Stagnation
Despite today’s rapidly evolving economy—with volatile fuel prices, revolutionary technology, faster speed to value, and proliferate data to enhance operational transportation practices—fuel reimbursements have yet to shift since the 1980s. In few other industries are the use of antiquated methodologies tolerated, yet transportation seldom questions the use of base rates and fuel surcharges.
Fuel surcharge schedules used by carriers can sometimes be handed down through generations of logistics managers with little-to-no revision. Some industry consultants attempted to create new guidelines for diesel pricing, but none of them had staying power.
Today, data is not only accessible but proliferate throughout the transportation supply chain. Rather than relying on an arbitrary and averaged index—like the DOE’s Diesel Fuel Price Index or PADD—shippers need to strive for accurate, shipment level data processed in near-real-time.
That’s why Breakthrough developed Fuel Recovery—the industry’s only market-based fuel reimbursement program. Some of the world’s largest shippers eliminated their fuel surcharges by leveraging accurate, lane-level data that fluctuates daily with market prices. Fuel Recovery saves these shippers millions of dollars every year by paying the exact amount of diesel fuel consumed on every load.
The concept for Fuel Recovery came about after Breakthrough’s future founder experienced both sides of the shipper-carrier relationship. He recognized the need for a better way of managing this volatile cost. Not only did it need to be more accurate, but fair. Fuel enables the movement of goods but does not add value to the service provided by the carrier, therefore it should be a passthrough cost. Depending on the market, reimbursement practices are unfair for one party or the other.
It took a team with the drive to innovate and the boldness to challenge the status quo to bring diesel fuel price transparency and accuracy to the transportation industry.
Time to Ditch the DOE and Adopt Market-Based Fuel Management
Breakthrough creates transparency and visibility into the true cost of fuel so that the amount shippers reimburse is reflective of what carriers actually incur at the pump. Compared to The DOE Diesel Fuel Price Index, Fuel Recovery calculations are:
- Based on wholesale pricing, not retail
- Updated in real time, not weekly
- Specific to the actual fuel consumed along a freight lane, not a regional or national average
- Representative of tax exposure by state
The resulting accuracy reduces fuel costs for shippers, ensuring they never overpay for the fuel that moves their goods to market. Carriers are made whole on fuel reducing the risks associated with fuel price estimates, making it a true pass-through expense.
A Better Future with Breakthrough
As of 2019, Fuel Recovery manages over a billion gallons of diesel fuel spanning more than 16 million shipments across some of the world’s most recognizable brands. Breakthrough clients increase their use of intermodal lanes at a rate twice the industry average, and benefit from exclusive industry insights to help optimize their supply chain operations even further.
Breakthrough greatly changed to the transportation industry and continues to innovate every year. If your organization still uses the DOE Diesel Fuel Price Index to reimburse carriers for fuel, it’s time to take advantage of better data and industry best practices to bring your fuel management strategy into the 21st century.