Fuel surcharges were created for a simple reason: when diesel or jet-fuel prices rise sharply, carriers need a way to recover those extra costs without rewriting every shipping contract.

But the system is now doing something more complicated.

Some transportation companies are collecting more in fuel surcharges than they are actually spending on fuel, turning what customers may assume is a pass-through expense into an additional source of profit.

Union Pacific is one of the clearest examples.

During the second quarter, the railroad collected $91.1 million more in fuel-surcharge revenue than it spent on fuel. That difference translated into an estimated $83.2 million boost to operating profit.

That does not mean Union Pacific is improperly charging customers. Fuel surcharges are generally determined by formulas written into contracts, often tied to published fuel-price indexes and adjusted with a lag.

That lag is where the economics become important.

When fuel prices rise quickly, surcharges climb. But if fuel prices later fall faster than the surcharge formula resets, a carrier can continue collecting elevated fees even though its actual fuel expense has already declined.

For manufacturers, retailers and small businesses, the distinction matters because transportation costs ultimately flow through the economy.

A retailer paying a higher freight bill may raise prices.

A manufacturer may pass the cost to distributors.

A small business shipping packages may absorb the increase in its margin or charge the customer more.

The issue is not limited to railroads.

Residential-package fuel surcharges at UPS and FedEx are now above 24%, compared with roughly 9% in 2021.

The sharp rise in energy prices tied to the Iran conflict has given carriers a legitimate reason to increase surcharges. But because many of those formulas do not move perfectly in real time with actual fuel expenses, periods of volatility can widen the gap between what carriers collect and what they spend.

That creates a second-order inflation problem.

Oil does not have to remain permanently high for transportation bills to stay elevated. A surcharge can remain in place even after the underlying fuel price has begun falling.

For businesses negotiating shipping contracts, the practical question should therefore no longer be simply, “What is the fuel surcharge?”

It should be:

How is the surcharge calculated, how quickly does it reset, and does it actually track the carrier’s fuel cost?

For investors, there is another lesson.

Just as one-time accounting benefits can make corporate earnings look stronger, favorable fuel-surcharge economics can also temporarily lift transportation-company margins.

The money is real.

But investors still need to ask whether it is repeatable.

JBizNews Desk | New York

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