Why Do Shippers Use The DOE Fuel Surcharge? A History Of The National Fuel Surcharge

Most shippers reimburse for fuel with fuel surcharge schedules handed for generations without questioning why they are used or whether they continue to fit today’s strategies. Though each schedule may vary slightly, most of them use the Department of Energy’s weekly price index as an input to calculate reimbursement costs. 

But this practice is outdated and inaccurate, and it is one of the only transportation management mechanisms that has not been renovated or revisited for decades.

The Inaccuracies of a Fuel Surcharge Index

The reality is, the Department of Energy’s (DOE) Diesel Fuel Price Index is a weekly average for fuel prices across the country. In 2019, shippers who used this price index to calculate their surcharge rates over-reimbursed for fuel by an average of 34 cents per gallon. 

The excess costs incurred by shippers stem from four key distortions: taxes by state, real-time market shifts, prices of carrier procurement practices, and geographic distortion across the country

Compare average pricing mechanisms to the benefits of a market-based approach in this simple infographic.

When calculating diesel reimbursements with a surcharge index, these four factors are completely ignored creating one uniform price for every movement. In reality, prices of fuel can vary dramatically across shipments. 

Switching to market-based reimbursements brings fuel into alignment with broader supply chain agility and capitalizes on the best data available to the marketplace. Making this adjustment can result in nearly 20 percent savings in transportation fuel costs compared to traditional methods.  

So, Why Do Shippers Still Pay Inaccurate Diesel Fuel Surcharge Rates?

If DOE-based surcharge programs are so inaccurate, how have they endured for more than 40 years? Its inception is antiquated and couched within the market dynamics of the 70s and 80s, making it largely irrelevant under today’s market conditions. Delving into the history of the DOE’s national fuel index and its use in transportation sheds light on its limitations in today’s supply chain environment, leading shippers to seek more accurate fuel reimbursement solutions.

After 40 Years, A Better Fuel Management Solution Exists

Despite today’s rapidly evolving economy—with volatile fuel prices, revolutionary technology, faster speed to value, and a proliferation of data to enhance operational transportation practices—fuel reimbursements have yet to evolve since the 1980s. 

In few other industries are antiquated methodologies tolerated, yet transportation seldom questions the use of base rates and fuel surcharge schedules. In no other area are data points from the 70s and 80s acceptable, so why is it standard practice for a line item that costs between 20-30 percent of your transportation spend? 

Ditch the DOE & Adopt Market-Based Fuel Management

Fuel enables the movement of goods but does not add value to the service provided by the carrier. It should, therefore, be a pass-through expense. Depending on the market, and lane being traveled, traditional reimbursement practices are unfair for one party or the other. With old price calculations, everyone is at the mercy of the market.

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 eliminate four key distortions: time, price, tax, and geography.

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.

Read how Breakthrough is helping elevate transportation strategies, directly from our clients.