What does one get for a penny nowadays? If you're a shipper or a carrier struggling with soaring diesel fuel prices, plenty of aggravation.
The national average price of a gallon of diesel fuel jumped 14.3 cents in the last week of February to $3.71 cents a gallon, according to weekly data published Monday by the Department of Energy's Energy Information Administration (EIA). The increase, the biggest week-over-week gain since June 2009, has been triggered by the ongoing civil unrest in Libya as well as by worries that disturbances could spread to other Middle East and North African countries and potentially disrupt oil supplies. The average diesel price is up 85 cents a gallon from the same time last year.
At press time, the EIA had not released price data for the first week of March, but no one expects a downturn in prices from the prior week.
The spike in prices has, in turn, put fuel surcharges at the front and center of discussions between shippers and freight haulers. Many shipper contracts that include language governing fuel surcharges set them at one penny per mile for either every five- or every six-cent-a-gallon increase in the price of diesel as calculated by the EIA. Given the recent spike in oil prices, many carriers who use six cents as the trigger point will be looking to modify existing contracts to allow them to raise the surcharge a penny for every five-cent increase in diesel prices.
The one-penny differential is hardly insignificant, especially when viewed on a per-mile basis. For example, if diesel fuel prices rose by $1 a gallon from current levels, a carrier assessing a one-penny-per-mile surcharge for each five-cent-a-gallon increase would capture surcharge revenue equal to 20 cents a mile. However, if the rate were set at one penny per mile for each six-cent-a-gallon increase, the surcharge revenue for the carrier would be 15.6 cents a mile.
Ben Cubitt, a former top shipper executive and now senior vice president of consulting and engineering for Transplace, a Frisco, Texas-based third-party logistics service provider, says carriers still coping with softness on certain lanes lack the leverage to force the change on shippers.
Cubitt said that once freight volumes show a sustained increase, carriers will have more success in persuading shippers to accept a formula of one cent for each five-cent hike in fuel prices. Cubitt said he spoke to executives at a carrier, whose name he wouldn't disclose, who said that fuel surcharge modifications would be the first order of business "if and when capacity tightens and [the carrier has] leverage again with shippers."