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The death of Saudi Arabia’s King Abdullah bin Abdulaziz brings up plenty of questions for analysts about what will happen to energy prices, given the country’s role in the global oil market. For consumers, the question is simpler: Why haven’t lower gas prices made fuel surcharges gone away?
Although prices at the pump have plummeted, consumers can still pay a surcharge when they ship a package, fly internationally or even get a lift across town from a taxi or car service. Experts say there are a few reasons why.
The wholesale price of diesel fuel is roughly half of what it was last spring, said Tom Kloza, global head of energy analysis at Oil Price Information Service. “And yet, the retail prices for diesel fuel have dropped by nowhere near what’s happened in wholesale,” he said.
Consumers don’t reap the benefits of lower wholesale prices because trucking companies and other big consumers of diesel fuel negotiate with their suppliers based on the wholesale rate, but use the retail price as their benchmark for calculating surcharges.
Some surcharges are imposed using data from a month or even two months earlier, which can make a big difference when the price of oil falls as rapidly as it has in recent months.
Philadelphia, one city where cabbies can collect a fuel surcharge, has roughly a two-week lookback. The city’s parking authority, which regulates the surcharge, says surcharges for each upcoming month are posted on the third Friday of each month based on the average price of gas in the preceding month.
UPS and FedEx use a two-month lookback for surcharge tables, which slows the speed at which falling prices can benefit customers.
Companies that have to buy a lot of fuel can offset price volatility by hedging. They can benefits by locking in rates when prices go up, but they can get stuck with higher costs if prices drop suddenly, as they have in recent months.
Carriers don’t do this for all the fuel they expect to need, though, which means they do reap some benefits from lower prices. Although Kloza pointed out that some sophisticated contracts let them take advantage of price drops, sudden fluctuations — even ones ostensibly in their favor — can still give them whiplash, as anonymous sources told Reuters last month.
The main reason companies hang onto fuel surcharges, is because they’ve come to depend on the revenue those extra charges generate — and because they can.
FedEx and UPS both set fuel surcharges on a sliding scale based on the U.S. Energy Information Administration, so when fuel prices fall, surcharge revenue does, too.
Last month, FedEx CFO Alan Graf told investors, “The year-over-year reduction in fuel surcharge revenue largely offset the benefit of the lower fuel prices,” on the company’s quarterly conference call. As of February 2, FedEx fuel surcharges will increase.
For airlines, labeling part of an international traveler’s cost as a “fuel surcharge” has what industry consultant Robert W. Mann called “tactical reasons.” They might have contracts stipulating that they only have to pay commission on the base fare of a ticket, or breaking off a fuel surcharge might give them an apparent edge for comparison-shoppers. (This can be the case on international flights; Mann said the DOT has “pushed back” on these practices in the U.S.)
“When I last analyzed that market, the carrier-imposed fuel surcharge was at least equal to and probably more than the actual cost of fuel per seat,” Mann said. But, thanks to higher demand and industry consolidation, the market will bear those prices, surcharges and all.