How Diesel Prices Affect Freight Shipping
Freight shipping costs and diesel fuel prices are inextricably linked. While not always directly reflected in actual freight rates, if diesel prices are high, shipping costs will be, too. After all, the three components of freight costs are linehaul, fuel and accessorials. And with diesel prices, just like gas prices overall, rising to new levels for what appears to be awhile, shippers and carriers must change their calculus on what to charge and what to spend to move freight. Why the focus on diesel? Diesel in some form or fashion fuels three of the four major transportation methods - truck, rail and container ship. As of this writing, the U.S. Energy Information Administration records the average diesel price at $5.73 per gallon, up 75% over the same period in 2021. Intermodal spot rates account for fuel costs, and thus these rates are up about 14% year over year, when if diesel was not incorporated, they'd actually be down during that period. On the other hand, truckload spot rates tend not to incorporate fuel costs, but instead turn to fuel surcharges to make up the difference in gas prices (though contract rates for other modes still use fuel surcharges). Accordingly, truckload spot rates are down year to year. However, many owner-operators are changing their driving patterns, either taking only shorter distance loads or even taking a break from trucking altogether.
What does surcharge fuel mean?
A fuel surcharge is a fee added to shipments to adjust linehaul rates for the fluctuations in diesel fuel prices. In other words, surcharges for fuel protect carriers, whether they be ocean, intermodal, truck or air, against unanticipated rises in gas prices like those occurring in 2022. To calculate fuel costs and surcharges, carriers may either use a percentage of the total linehaul cost or a cost per mile. Freight providers in the U.S. must base their fuel charts - and thus surcharges - on the EIA posted rates and projections, though it's important to note there is no federal mandate or regulation surrounding how fuel surcharges are calculated. So each carrier and mode can be a bit different.
In essence, though, carriers consider a baseline average projected fuel price they often plan for the year ahead, then institute surcharges for fuel based on how far above that baseline prices rise. A general rule of thumb for truckload and intermodal for mileage based surcharges, is a fuel surcharge of one cent for every six cents the diesel price rises above the projected baseline. Others use percentage-based surcharges instead. When it comes to ocean freight, a fuel surcharge is typically known as a BAF - or bunker adjustment factor - named for the bunker fuel that these ships use. Though in other instances, steam ship lines may keep it simpler and go with "bunker fuel surcharge." In air parlance, it's often known as a carrier-imposed surcharge when carriers account for higher fuel prices.
It's easy to see why shippers and carriers should care about fuel costs, as they directly impact their bottom line. As noted above, for owner-operators and smaller carriers, these exponentially increased diesel prices may make them at least temporarily reconsider their line of work, thus taking more transportation options away. And the prognosis isn't great, as diesel has lower inventory than unleaded gas, so prices are likely to stay higher, longer. But why should the average person care about gas prices? Aside from the pain they directly feel at the pump, companies will pass the added shipping costs along in the prices of their products, meaning higher bills at the grocery store, or on Amazon, or wherever people do their shopping. In other words, these diesel prices are directly linked to inflation.
Need help figuring out fuel surcharges or other freight shipping costs? Drop us a line and we'll be happy to use our experience to help you navigate these high diesel prices with shipping solutions that make sense for your bottom line. On top of that, please do visit our Learning Center to learn more about the industry - and us. Or you can start with a few of the links below:
- Domestic Freight Services: Intermodal, Truckload, LTL
- Outsourced Managed Transportation Service Solutions