How the cost of diesel fuel impacts freight rates.
May 4, 2016
Filling up at the gas pump has been far less painful lately. Oil prices, and subsequently retail gasoline prices, have plummeted from historical highs. Motorists often have enough left over after gassing up their SUVs, minivans and sedans to spend on extras like morning coffee, eating out and even taking vacations further from home.
Now imagine your income was tied to the price of gas. Instead of having extra money in your pocket by spending less on fuel, you basically have the same amount of money to spend because your paycheck is lower as well.
How the cost of diesel fuel impacts LTL carrier rates.
In the past two years, truckload and LTL carriers have been paying about half as much per gallon for diesel fuel today than two years ago. One might think they can use those savings to address higher costs in other areas and/or lower shipping rates to customers. But it isn't that simple.
That's because a carrier's fuel costs are covered through fuel surcharges that are linked to the average price of diesel. While trucking firms are essentially paying half as much per gallon, they're also generating less revenue from fuel surcharges.
Many LTL carriers use a table to determine fuel surcharges, much like the chart in this blog from C.H. Robinson. As the fuel rates fluctuate, so does the cost.
Full truckload carriers usually assess fuel surcharges on a per-mile basis. They are typically added whenever diesel costs more than a base rate, such as $1.17 a gallon. The higher diesel climbs above the base rate, the more the per-mile charge. For example, if the current U.S. national average diesel fuel price is $2.12 per gallon, that translates into a per mile surcharge of $0.16. In comparison, just a year ago the price of diesel was $2.86 per gallon with a surcharge of $0.29.
Base freight rates.
The lower fuel prices have helped to ease rising base freight costs. The base rate increases are likely driven by higher wages for drivers due to the ongoing shortage combined with other rising costs such as compliance, maintenance and equipment upgrades outlined in the ELD mandate.
For LTL carriers, these higher costs have resulted in average General Rate Increases (GRIs) of nearly 5 percent across the industry in each of the last two years.
The Cass Truckload Linehaul Index, which measures market fluctuations in per-mile truckload linehaul rates, independent of additional cost components such as fuel and accessorials, showed year-over-year increases going from 2.3% each month between July 2016 and July 2017 to 12.3%. After being negative for 13 months, the index has been positive for the last 4 months.
While we are experiencing lower fuel surcharges, base rates are still on the rise. The lower fuel has been helpful in slowing the rise of freight costs, but has not combated it entirely. Fuel is only a portion of what determines the cost to ship your freight.
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