Why is the Price of Fuel Going Up?
In recent weeks, U.S. fuel prices have skyrocketed to record highs and are expected to continue rising. What are the factors contributing to this? There isn’t a single answer, but like the price of any commodity, it’s based on supply and demand. Below are a few factors impacting rising fuel prices.
Production: At the beginning of the pandemic, petroleum refineries reduced output as the economy slowed. Output has not yet ramped back up to pre-pandemic levels.
Inflation: Overall U.S. inflation rose at a 7.9% annual rate in February, and consumer prices are the highest in 40 years. The cost of all commodities is rising. Fuel oil increased 43.6% on an annual basis, the highest inflation rate of any expenditure category listed in the U.S. Bureau of Labor Statistics table for consumer prices. The post-pandemic economic recovery has left many households with extra cash. The tight labor market also allows workers to earn more money by working more hours, running additional miles, and earning higher wages or per mileage/shipment pay.
Continually Loosening COVID Restrictions: Commuters are returning to the office, air travel has picked up, and people are vacationing again. While we all want things to go back to normal, this sudden surge of fuel usage is not being met with enough supply. This directly causes prices to go up.
The Crisis in Ukraine: Russia is one of the biggest oil producers in the world. After its recent attacks in Ukraine, many traders, shippers, and financiers shunned Russian oil. Furthermore, the U.S. has now imposed sanctions on Russian oil. Last year, around 8% of imported U.S. oil came from Russia.
There are several other factors that are pushing the price of fuel up and up. But the simple economic reality is that demand is outpacing supply. We should expect prices at the pump to continue to rise for a while into the future, and with that, owner-operators should be prepared to adapt and pivot in their businesses to compensate for the higher expense.
What is a Fuel Surcharge?
A fuel surcharge is a mechanism in the trucking industry that helps balance the fluctuations in the cost of fuel. Incorporating a fuel surcharge into transportation pricing became a widely accepted practice years ago. For those who have been in the transportation industry for a while, you may remember that fuel spiked above $4.00/gallon for the first time in U.S. history after Hurricane Katrina. This spike in fuel prices may have put the trucking industry out of business if fuel surcharges hadn’t offset the additional cost of fuel. In today’s world, there are a variety of sources for fuel information, and the fuel surcharge is calculated in many different ways. For simplicity, we will look at one of the most common methods to calculate fuel surcharge based on today’s numbers. An example of a common formula is listed below:
Fuel Surcharge =
[the current price of a gallon of fuel - the base price of a gallon of fuel in a shipping contract] /
the average miles per gallon of a truck
National Average on 3/11/22 = $4.85
Base Price = $1.25
$4.85 - $1.25 = $3.60
$3.60 / 6.5 mpg = $0.55 CPM fuel surcharge
This surcharge helps owner-operators offset the costs of high fuel prices, especially in times like these. Read more about how Fuel Surcharge works here.
How Can You Make More Money with the Fuel Surcharge?
You often hear Independent Contractors who say they “make money” off of fuel surcharge. The higher the price of fuel, the more they make! How can that be? To win this “game” you have to get better fuel economy than the miles per gallon (“mpg”) the fuel surcharge is based upon.
Let’s look at these examples of a 1000-mile load:
As you can see from the chart above, the better your miles per gallon, the more you save on fuel, and in most cases, you actually make a profit from the fuel surcharge. Please keep in mind that the calculations above depict just one example of how fuel surcharge could be calculated - actual calculations may vary significantly.
How Can You Modify Driving Habits to Save on Fuel?
As a truck driver, you actually have a lot of control over how much money you spend on fuel. There are several ways you can modify your driving habits right now that can put extra money in your pocket.
Slow down - generally, 10 mph equals 1 mpg
Find the “sweet spot” - lower RPMs burn less fuel
Be smart with braking
Stay in higher gears when possible
Think about and use your tractor’s momentum when possible
Utilize cruise control when it is safe to do so
Cut out of route miles
Minimize idling
To learn more about each of these topics and put these practices into action, read our article here.
How Can You Manage Cash Flow with Rising Fuel Costs?
As an owner-operator, one of the most important pieces of your business that you need to manage is your cash flow. How much money (cash) you have coming in, versus how much money you have going out for your business and home expenses. When fuel prices are high, this becomes even more important. Read more about when you should fill up your tank, the dangers of cash advances, and how to plan your fuel-ups accordingly, by reading our article here.
How Can You Optimize Fuel Using Discount Networks and Fuel Cards?
If you’re hauling freight for a carrier, stay within their fuel network to take advantage of their negotiated discounts. If they offer a fuel optimizer program, take advantage of that too.
Thanks to the ever-growing list of fuel cards and smartphone apps, owner-operators have the tools needed to ensure they are paying the lowest price possible for fuel during their next fill-up. Fuel cards are designed to offer carriers and drivers per-gallon discounts on fuel and other services specific to trucking.
There are many different types of fuel cards offered by a variety of companies. Some fuel cards are offered by truck stops, some are offered by fuel providers/oil & gas companies, some by trucking and driver associations, and others by companies whose only service is their fuel card.
Based on conversations our team has had with our owner-operator clients, ATBS is able to list a few fuel cards that we often hear about:
For more information about fuel card discounts, check out our article here.
The Bottom Line
There is no denying that fuel is going up and you will need to adjust how you do business. Rates are still at an all-time high, and you can still make great money as long as you manage your biggest cost. As fuel rises, you might need to take an extra load to compensate for the lag in fuel surcharge, but the best operators will do just as well, if not better, with the high price of fuel!