Like a roller coaster, worldwide prices for diesel and gasoline continue to set records in the first oil crisis because of the U.S.-Israeli war in Iran.
U.S. diesel prices—the fuel used for most freight and delivery trucks — is going for an average of $5.64 a gallon nationally in April. That’s up from about $3.76 a gallon before the war began, per AAA. In California, diesel costs more than $7 a gallon.
That means more expensive fuel bills for truckers, tractors and those who move the U.S. economy with diesel fuel. It means consumers are going to spend more on virtually everything, causing a likely rise in U.S. inflation.
This most recent fuel spike is hitting motor fleets (and their shippers) in at least four ways:
- Rising diesel prices are increasing per-mile operating costs and putting immediate pressure on fleet margins.
- Price volatility is making it nearly impossible for shippers and carriers to plan, budget and manage fuel surcharges effectively.
- Higher diesel costs are driving renewed interest in alternative fuels like Renewable Natural Gas (RNG) and electric solutions for fleets.
- Because total cost of ownership calculations are shifting, some alternative technologies are more economically viable than before.
For most fleets, fuel remains the second-largest operating cost after labor. Fuel typically represents 20-to-30% of a fleet’s total operating expenses.
Even the U.S. Postal Service is taking an 8% fuel surcharge, effective April 26. It affects commercial domestic competitive products including Priority Mail Express, Priority Mail, USPS Ground Advantage and Parcel Select.
When prices rise quickly (as they did once the U.S. and Israel launched the latest Gulf war on March 1), the effect is immediately felt at the pump. For carriers, that means higher per-mile costs, tighter margins and increased reliance on fuel surcharges that may lag behind real-time market conditions.
For the week of April 5, less-than-truckload (LTL) market leader Old Dominion Freight Line (ODFL) posted the following fuel surcharges: For LTL shipments, ODFL’s fuel surcharge on its LTL freight was listed as 44.32% of the freight bill. That compared with 26.82% average one year ago. For its full container movements, that surcharge on its 705 tariff rose to 67.9%. That compared with 49.3% average one year ago.
Some small to medium-sized shippers have complained in the past about the fairness of fuel surcharge revenue. They say it rises too quickly when fuel prices go up; and consequently, they are too slow to reduce when fuel goes lower.
“It is a valid criticism,” Satish Jindel, principal of SJ Consulting, which closely tracks fuel surcharges in the LTL industry, told LM.
The fuel surcharge mechanism began when the Organization of Petroleum Exporting Countries (OPEC) came into existence in the late 1970s. Over these past 40-50 years, shippers have complained it’s a way of getting a rate increase.
“It is not a purely fuel surcharge as it was designed,” Jindel said. As a result, some large shippers have developed their own fuel surcharges. Smaller shippers don’t have that option.
“The concept is the best—the way it’s being applied has changed. It has become a way for carriers to make extra money. It’s another thing to be negotiated,” Jindel said.
Some large shippers have developed their own fuel surcharge methodologies. It is a complex task. Not every shipper has that leverage with carriers, Jindel said. “Developing your own fuel surcharge table is no easy task,” he said.
In the near term, fleets are responding with familiar tactics: optimizing routes, reducing idle time, tightening driver behavior controls and revisiting fuel purchasing strategies.
But as diesel prices climb, those incremental efficiency gains become more apparent, particularly for high-mileage operations such as long-haul trucking, where fuel consumption is clocked in around 9 miles per gallon on some long-haul runs.
And it’s not just truckers raising rates because of fuel. Union Pacific Railroad (UP) adjusted rates for rail-owned containers used by intermodal marketing companies. It’s the second such move in five weeks amid a widening gap between the truckload spot market and domestic intermodal rates.
The hedge against fuel price volatility could come with development as motor carriers look more seriously to evaluate advanced fuels and powertrain technologies as a hedge against fuel price volatility.
But those days are far away and of little help to shippers whose freight is caught essentially in a hostage situation to the worldwide price of crude oil. Fleets caught in the current rise in diesel prices are experiencing more than a short-term operational challenge. It is also a strategic signal.
If the war drags on, it’s possible that those prices could tick up even higher. To President Donald Trump’s frustration, most tanker movement in the key Strait of Hormuz—where roughly one-fifth of the world’s oil once sailed through—has ground to a halt.
In a search for some relief, the International Energy Agency pledged to release 400 million barrels of oil from emergency stockpiles of member nations. That is essentially a drop in the bucket for Americans, who consume an average of about 20.25 million barrels of petroleum per day, or a total of about 7.39 billion barrels of petroleum year.
The Trump administration has also eased sanctions to free up some oil from Venezuela. The White House also says it’s waiving maritime shipping requirements under a more than century-old law, known as the Jones Act, for 60 days so that non-U.S.-flagged ships could haul crude oil in domestic-only movements.
