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August 25, 2021
How is Breakthrough Fuel Recovery Calculated?
Breakthrough is committed to removing distortion, achieving transparency, and establishing fairness across shippers’ freight strategies. One element, among others, is key to realize these three principles in shippers’ transportation networks. That key is in the way they calculate and reimburse for the fuel that moves their goods to market.
Fuel Recovery is the only shipment-specific, market-based fuel reimbursement program in the industry. Using daily fueling station data from across North America, Breakthrough brings accuracy and transparency to a historically distorted line item in shippers’ budgets. The transition to a Fuel Recovery program removes excess costs which helps establish a baseline to inform ongoing strategic improvements to both fuel and freight strategies.
Currently, diesel fuel reimbursements are calculated as a surcharge based on the department of energy’s retail diesel price index (DOE Index). And although this settlement process is highly relevant and necessary in the shipper and carrier relationship, the calculation shippers use hasn’t been updated or addressed in decades. The DOE index was established in the early 1980s but was never designed to accommodate the intricacies of commercial trucking fuel calculations. To this day, many shippers rely on it to control almost 30 percent of their total transportation shipping costs.
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.
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