So research firm Stifel Capital Markets hosted an interesting conference call the other day with Craig Dickman, the founder, CEO, and chief innovation officer of Breakthrough Fuel – a company Dickman established some 13 years ago to, in his words, help shippers and carriers move towards a more “transparent” discussion of fuel costs.
Heather Mueller, Breakthrough’s vice president, also joined in on the call and the two of them provided some interesting insight into how fuel costs – and particularly fuel surcharges – can get “distorted” by geographic region, state taxation rates, and other factors.
This is a big deal as Stifel noted that fuel represents some 22% of total truckload costs.
Thus getting a better handle on not only the “distortions” affecting diesel fuel costs in various regions of the U.S. not only can help the bottom line of both motor carriers and shippers, it can also be a way of determining when trucks powered by different fuels (such as natural gas) or different transportation modes, such as intermodal, make more sense from a freight pricing perspective.
Now, at its heart, Breakthrough Fuel is based on the premise that fuel surcharges based on the weekly average retail prices for diesel fuel calculated by the Department of Energy (DOE) – or more specifically the Energy Information Administration (EIA) within the DOE – do not accurately reflect fuel prices paid by motor carriers moving a particular load of freight in a specific lane for a specific shipper.
Thus the aforementioned “distortions” affecting diesel prices results in “large variances” between the price for fuel paid by motor carriers to haul a specific load of freight and the price for which they are reimbursed via fuel surcharges.
Here’s what Dickman and Mueller pinpointed as the main “distorting factors” affecting diesel fuel prices:
- Time-based distortions have averaged six cents per gallon over the past 11 years. When the prior week’s DOE average diesel fuel price is used to determine the current week’s fuel surcharge, the surcharge doesn’t take into account the changes in price taking place in the current week. According to the company’s calculations, some 17% of the weeks over the past 11 years have had week to week distortions averaging 10 cents per gallon or higher. For that reason, Breakthrough Fuel uses daily wholesale pricing instead of weekly average pricing in order to minimize this time-related price distortion.
- Geographic distortion occurs because fuel pricing varies from region to region based on regional supply and demand, based on factors such as seasonality, downtime at local refineries, and other unique local circumstances. How big a pricing issue can this be? Well during the fourth quarter last year, the gap between fuel prices (excluding taxes) in the upper Midwest differed from prices available on the West Coast by 30 cents per gallon.
- Price distortion due to state and local fuel taxes worsened over the last 10 years, according to Breakthrough Fuel’s analysis. In 2006, for example, the state with the lowest diesel fuel taxes charged 13 cents per gallon in overall fuel taxes, whereas the state with the highest fuel taxes collected 39.8 cents per gallon – a gap of 26.8 cents. But by 2016, the gap between the state with the highest fuel taxes (Pennsylvania) and the state with the lowest fuel taxes (Oklahoma) increased to 55 cents per gallon.
- Then there is the distorting effect caused by the gap between wholesale and retail fuel pricing. This “spread” usually averages about 7% over the long term, but has risen to nearly 15% in recent years.
Those are interesting issues for truckers to consider, especially as discussions are now taking place on whether to increase fuel taxes as a way to generate more money for roadway investments.
We’ll see how they’ll shape the fuel pricing debate going forward.
