Rapid fuel price jump hits transportation hard

For most trucking carriers, fuel is largely a pass-through cost, typically recovered through a fuel surcharge tied to the weekly average diesel price published each Monday by the DOE. Most fuel surcharge tables assume a fuel efficiency of roughly 6.5 to 7 miles per gallon. There is also usually a fixed amount of fuel embedded in the base transportation rate, which generally covers the cost of fuel up to about $1.00 to $1.50 per gallon. As a result, most surcharge tables begin around this level and increase incrementally as diesel prices rise.

Many large fleets have purchasing agreements with fuel suppliers that allow them to buy fuel in bulk at or slightly above the wholesale price. While this may appear to be an arbitrage opportunity on the surface, many carriers use this spread to offer more competitive pricing when the market is balanced and capacity is relatively loose—as has largely been the case over the past three years.

When wholesale prices rise faster than the average retail price, it compresses the buffer created by the spread between retail and wholesale diesel—labeled FUELS in orange on the chart. The smaller this spread becomes, the less flexibility carriers have to pass fuel costs through effectively. When prices ease, the opposite occurs. Recently, this spread has shrunk from around $1.02 to $0.68 per gallon.

The speed of the change is particularly important, as pricing teams typically adjust rates based on historical data. Many contract rates were likely structured assuming a spread closer to $1.20 per gallon. This means that although rates are increasing through the fuel surcharge mechanism, they may not be improving profitability and could actually be reducing it.

Spot rates tell a different story. Many smaller fleets and owner-operators do not have the volume needed to secure fuel purchasing agreements. Their costs are tied more closely to retail fuel prices, which are passed through to customers more directly and often more quickly.

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Meanwhile, the trucking market appears to be transitioning toward a tighter environment following a strong holiday season and the disruption caused by Winter Storm Fern. Spot rates (NTI) have been reluctant to decline after the late-January storm crippled transportation networks. Although it is difficult to isolate the direct effect of fuel prices from underlying market dynamics, rising fuel costs appear to have contributed to the recent increase in spot rates. As carriers continue to refuel at higher prices, these pressures could persist.

The trucking industry is no stranger to fuel price volatility, but the timing and magnitude of the current increase present potential challenges for both shippers and carriers. For shippers, the concern is straightforward: higher transportation costs. For carriers, the impact is more nuanced, as margin pressure and operational costs must be balanced against changing market rates.

There are also broader economic considerations. Rising energy costs can eventually inhibit demand if they increase too sharply. Some level of higher fuel prices can support domestic economic activity, as the U.S. is one of the world’s largest oil producers. However, if prices rise too quickly, the resulting inflation and volatility can erode demand in other areas of the economy. As of last week, conditions have not reached that level, but many economists believe the duration of the conflict will be the key factor determining how disruptive this latest geopolitical shock ultimately becomes for supply chains and the broader economy.

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