A topic on everyone’s mind recently is fuel. Fuel impacts all of us, whether in our daily commute or in the supply chains that deliver us our products. Thus, rising and falling fuel prices play an important role in our supply chains. Rail carriers utilize a rail fuel surcharge to help balance the fluctuations in the cost of fuel. Let’s explore what it is and how it impacts you, your supply chain, and the products you use.
What is Rail Fuel Surcharge?
Fuel Surcharge is a tool that was designed for railroads to recover the cost of fuel that is consumed when they move railcars. Moving railcars takes a lot of fuel, and freight engines use a significant amount. Although rail is one of the most cost-effective methods of long-distance transportation, locomotive engines still consume a lot of fuel.
Fuel Surcharge was first developed when the cost of fuel increased to a point where the railroads decided to pass the additional fuel costs onto those who ship with them. The railroads decided to apply a Fuel Surcharge to each railcar shipped on either a mileage or percentage basis, which can be found in their published Fuel Surcharge provisions.
This fuel surcharge is published monthly by the railroads and is in addition to the private and/or tariff rates that you pay when shipping by rail. If you are a rail shipper, and unexpected costs on invoices are troubling to you, understanding Fuel Surcharge and knowing what you are looking at on an invoice will be a huge help.
And if you do not ship by rail but use any of the thousands of products that are affected by rail transportation supply chains, understanding Fuel Surcharge can help you understand the fluctuation of prices of the commodities you use.
Railroad Additional Revenue
In many cases, the amount of Fuel Surcharge the railroads apply exceeds their actual fuel cost. This sometimes happens because the Fuel Surcharge is based on a combination of fuel costs and projected futures.
In addition, the rail rate also covers some of their fuel costs. Depending on how reasonable your rail rate is, the total revenue may be more than you were expecting.
Re-Baseline of Rates
Throughout the years, the railroads have occasionally reset the measure of their Fuel Surcharge rates.
Over the past 15 years, when Fuel Surcharges increased to a higher level, the railroads would apply a lower surcharge and add the difference to the base rate. Below is an example:
The issue for shippers in this case is that the re-baselined rate will now be subject to an annual rate increase, which translates into a larger increase per car.
Furthermore, when the Fuel Surcharge levels fell to a point where the surcharge was 0%, the railroads, except for the BNSF, did not compensate shippers back. Fortunately, we have not seen the rail carriers re-baselining in recent years because Fuel Surcharges have been relatively low, until recent months.
How is Fuel Surcharge Calculated?
The U.S. Energy Information Administration (EIA) publishes two key fuel prices that the Railroads use to calculate their Fuel Surcharge.
The first measurement is the previous month’s On Highway Diesel Fuel average, which is the average price of diesel for motor vehicles plus tax.
The second measurement is the previous month’s West-Texas Intermediate Crude Oil (WTI) average, which is the average price of crude oil produced in Texas and Southern Oklahoma, which is used as a pricing basis for other crude oil markets.
The railroads will use these monthly prices to assess either a Mileage Based Fuel Surcharge or a Percentage Based Fuel Surcharge. Mileage Based Fuel Surcharge is generally based on the short miles published in Trimble’s PC Miler application, while Percentage Based Fuel Surcharge applies a percentage increase to the rail freight rate.
Past and Future of Rail Fuel Surcharges
The price of fuel has seen ups and downs over the past five years. More recently, the price of fuel saw a sharp decrease in 2020 because of COVID-19 and the sudden slowdown of manufacturing and rail shipping.
Fuel prices then began slowly increasing over Q3 and Q4 of 2020 as industries and supply chains started back up. In April 2021 we correctly predicted that Fuel prices would continue to increase over the course of 2021 and into 2022. However, we saw the sharpest increases occur during Q2 and Q3 of 2022.
As of August 2022, fuel prices are beginning to decrease slightly and are expected to stabilize through the rest of the summer into early fall without any other disruptions.
However, one wildcard at the end of summer and beginning of fall is hurricane season. Traditionally this is a season that creates chaos in coastal and southern supply chains because of the damaging weather. This could cause a disruption that affects supply, which will eventually affect prices as well.
The above graph illustrates the timeline of fuel prices, which correlates to Fuel Surcharge and ultimately, the price of products. The price from the WTI rose steadily until early 2019, then fell a bit before tumbling dramatically in 2020. The price has been rising steadily since then, surpassing 2019’s highest price in December of 2021.
How We Manage Fuel Surcharge
The complexity of fuel surcharge can make planning for rail costs difficult. So how can you get ahead of this constantly changing cost?
We used best practices for managing fuel surcharge to develop a comprehensive database of fuel prices. We are consistently reviewing changes in fuel prices and the many different fuel surcharge provisions that the railroads use to ensure our database is accurate. In this database you can see Mileage- and Percentage-based Fuel Surcharges for a variety of railroads.
Our various applications encompass current Fuel Surcharge in a variety of ways. Our Rail TMS offers reporting to help you understand current shipping costs, including the current fuel surcharge, as well populating accruals based on the rate and fuel surcharge, which can assist you with the audit freight invoices issued by the rail carriers. With our Rail Rate Analysis Software, you can evaluate both your rail rates and the Fuel Surcharge applied by the railroads to determine where your rates are out-of-line and where you may have leverage in negotiations.