Gas prices have skyrocketed since the pandemic and the Ukraine war. Since the beginning of 2024, the average national price for a gallon of unleaded regular gas has jumped nearly 14%, amounting to an increase of more than 40 cents per gallon. This constant increase has caused businesses to face increased operational costs. This is especially true in the case of businesses that depend on deliveries and shipments. Fuel surcharge offers a solution to maintain profitability in such a case.
A fuel surcharge is an additional fee that businesses charge customers to offset the rising costs of fuel. This fee is typically applied to transportation-related services, such as shipping, logistics, and delivery.
The purpose of a fuel surcharge is to help businesses maintain profitability in the face of fluctuating fuel prices. By passing on a portion of these increased costs to customers, businesses can protect their profit margins and ensure the sustainability of their operations.
What is a Fuel Surcharge?
When it comes to managing transportation costs, fuel surcharges can offset the budget. As fuel prices fluctuate, these additional fees tacked onto shipping rates can quickly add up, leaving businesses struggling to keep their logistics expenses under control.
Fuel surcharges are additional fees that transportation companies charge to cover the increasing costs of fuel. These surcharges are typically calculated as a percentage of the base shipping rate and are adjusted periodically based on changes in fuel prices. The surcharge amount can vary depending on the mode of transportation (e.g., air, ground, or ocean) and the carrier’s specific policies.
Understanding the impact of fuel surcharge on a business’s bottom line helps ensure that it does not adversely affect the business. Fuel prices directly affect the overall pricing and competitiveness of the business. Careful monitoring and adjustments to the fuel surcharge can help ensure the long-term viability of the business.
5 Reasons That Cause Fuel Surcharges
As fuel prices depend on a myriad of reasons, so does the rate of change of fuel surcharges. Here are 5 key reasons which you can add a fuel surcharge with the shipping cost in your business’ deliveries and shipments.
1. Rising Crude Oil Prices
As the primary source of fuel for transportation, fluctuations in crude oil prices directly impact fuel costs for carriers. Crude oil has been rising at an unprecedented rate ever since the sharp befall during the economic recession at the beginning of 2020. With the tension rising after the Ukraine war, crude oil prices have increased even more. This directly affects the cost of transportation for a business. Thus it is a primary reason for adding fuel surcharges in the shipping costs.
2. Geopolitical Tensions
Political instability in oil-producing regions can disrupt supply and drive up fuel prices globally. The North American region imports most of its crude oil from Middle Eastern countries. If there is any geopolitical tension between the countries in these regions, it may lead to a reduction in the import quantity of crude oil. Thus it will raise the fuel prices and cause an additional of fuel surcharge.
3. Seasonal Demand Shifts
Fuel demand tends to increase during certain seasons, such as summer when more people travel, leading to higher prices.
4. Supply Chain Disruptions
Disruptions in the supply chain, such as refinery outages or pipeline issues, can cause temporary fuel shortages and price spikes. In addition to this, less fuel-efficient vehicles in a transportation company’s fleet will require more fuel, leading to higher fuel costs that get passed on through surcharges.
5. Environmental Regulations
Stricter environmental regulations on fuel quality and emissions can increase the cost of producing and distributing compliant fuel. Additionally, changes in fuel taxes, emissions standards, or other government policies that impact the cost of fuel can prompt transportation providers to institute fuel surcharges.
How Does Fuel Surcharge Impact a Business?
Fuel surcharges can have a significant impact on a business’s bottom line, especially for companies that rely heavily on transportation services. Higher fuel costs translate into higher shipping expenses, which can eat into profit margins and force businesses to reevaluate their pricing strategies or find ways to cut costs elsewhere.
Because of the constantly increasing rate of fuel prices, fuel surcharges now make up a more significant percentage of shipping costs than ever before. It has risen from 25.3% in 2023 to 45.8% of the shipping rate for a less-than-truckload carrier.
Additionally, the unpredictability of fuel prices can make budgeting and forecasting challenging, as surcharges can fluctuate rapidly and unexpectedly. This uncertainty can make it difficult for businesses to plan and allocate resources effectively.
How to Calculate Fuel Surcharges?
The fuel surcharge is typically calculated based on a formula that takes into account the current market price of fuel, the business’s fuel consumption, and other relevant factors. The surcharge is then added to the customer’s invoice as a separate line item, allowing for transparency and accountability.
Most transportation companies provide a formula or a table to calculate fuel surcharges based on the current fuel prices and the base shipping rate. However, it’s essential to understand the specific calculations used by your carriers to ensure accurate budgeting and cost management.
Here are some basic formulas that can be used to understand how much fuel surcharge should be added to the shipping costs.
Difference in fuel cost = Previous fuel price – Revised fuel price
Difference per mile = Difference in fuel cost / Miles exhausted per gallon
Fuel Surcharge = Difference per mile x Distance traveled
Here’s how different shipment logistics companies apply fuel surcharges to their total billings.
UPS Fuel Surcharges
UPS’s fuel surcharges are adjusted weekly. They take into account the National US average of on-highway diesel fuel prices.
FedEx Fuel Surcharges
FedEx also updates its surcharges weekly based on the price for per gallon as published by US Gulf Coast. FedEx has also added a war surcharge, keeping in view the disruptions caused to shipments because of the Ukrainian war.
USPS Fuel Surcharges
The USPS has no criteria for imposing a fuel surcharge with their shipment bills if the delivery is residential or on a Saturday.
How to Minimize the Impact of Fuel Surcharges?
While fuel surcharges are an unavoidable reality in any business that is dependent on the transportation industry, there are strategies businesses can employ to minimize their impact:
1. Negotiate Contract
When negotiating contracts with carriers, businesses should aim to secure favorable fuel surcharge terms, such as caps or fixed rates, to limit exposure to price volatility.
2. Optimize Transportation Networks
Businesses can reduce shipping volumes and associated fuel surcharges by optimizing transportation networks and consolidating shipments.
3. Implement Fuel-Efficient Practices
Adopting fuel-efficient practices, such as route optimization, driver training, and vehicle maintenance, can help carriers improve fuel efficiency and potentially lower surcharges.
4. Explore Alternative Modes of Transportation
Depending on the situation, businesses may consider alternative modes of transportation that are less impacted by fuel price fluctuations, such as rail or intermodal shipping.
5. Monitor Fuel Prices and Adjust Strategies
Staying informed about fuel price trends and adjusting transportation strategies accordingly can help businesses proactively manage fuel surcharge costs.
6. Partner with a 3PL
You can choose to partner with a third-party logistics company such as ShipTop. A logistics company can help you regulate the shipment operational costs efficiently, from the warehouse to the end user’s location.
Mitigate Fuel Surcharges with ShipTop
Are fuel surcharges impacting your bottom line? Finding the perfect and most efficient way to mitigate these charges is crucial.
One solution is to partner with ShipTop, a powerful fulfillment center that helps you:
- Optimize carrier selection to choose the most cost-effective options for each shipment
- Consolidate shipments to reduce the number of individual packages and associated fuel surcharges
- Negotiate better rates with carriers by providing them with a larger volume of business
- Access real-time data and insights to make informed decisions about your shipping strategy
Partnering with ShipTop can help you take control of your fuel surcharges and keep your shipping costs under control, even in the face of volatile fuel prices. Get in touch with us today to discuss your project.
Conclusion
While fuel surcharges can significantly impact operational costs, understanding what they are, why they’re implemented, and how to navigate them effectively can help businesses minimize their impact.
By adopting strategies such as negotiating favorable contracts, optimizing transportation networks, implementing fuel-efficient practices, exploring alternative modes of transportation, and monitoring fuel prices, businesses can gain better control over their transportation budgets and maintain a competitive edge in the marketplace.
