Fuel price discrepancies drive oil black market (page 1 of 2)

According to a report published in June by US-based research firm AIRNIC, Gulf drivers are paying a pittance to keep their vehicles on the road compared to their counterparts in the US and Europe. Residents of Gulf countries were paying significantly less on the forecourt, from $1.57 for a gallon of regular unleaded in the UAE - a figure which has since risen again - to 85 cents in Kuwait and just 45 cents in Saudi Arabia.

This discrepancy, even among the Gulf states, means that there is money to be made in smuggling fuel over country borders. Criminal gangs, often with the collusion or direct involvement of oil companies, are using trucks, boats and even animals to ferry their cargo.

Large-scale smuggling operations

"Crime syndicates are benefitting from stealing [oil products] at one point and selling them at another, taking them over the borders into countries where you get a higher price," says Samuel Ciszuk, Senior Energy Analyst for Middle East and North Africa at IHS Global Insight.

"Then of course you have larger-scale smuggling operations that take it out of the region on ships - and who know where it goes then? It feeds into the world market and it's hugely difficult to trace; people might not know where it originated from, but nor might they care, either."

The problem stems from Saudi's heavy subsidising of domestic prices for crude oil and oil products in the Kingdom. State-owned oil major Saudi Aramco provides local industry with feedstock at a considerably lower price than is available on the international market, and this cheap product is finding its way out of the country and into vehicles elsewhere in the Gulf and beyond.

"When big companies are involved and making a buck on the side, they are able to access the right fuels to place in the right market - and the sale of fuels that were not supposed to be for export poses a problem for the home government," warns Ciszuk. "But the international trading community and the industry itself will struggle to recognise anything dodgy is going on, as they are doing business with a recognised company selling a cargo."

Saudi Arabia fines guilty firms

In May this year, the Saudi customs investigation authority convicted 11 companies among 19 on charges of smuggling subsidised oil products. Following two months of intensive investigations, the commission in charge of the inquiry hit the guilty firms with fines of more than $300,000 each, and revoked their trade licences. While the list of those firms convicted has not been published, sources close to the investigation told local media that two of the 11 were well-known petrochemicals firms.

"It's a major problem and you'd be amazed by the number of people who are involved in it - a lot of companies are smuggling," says Kate Dourian, Middle East Editor at energy analysts Platt's.

It's not just Saudi that is leaking fuel, and it's not just other Gulf countries that are buying. According to the AIRNIC study, Iran sold fuel at just 32 cents a gallon, the second lowest in the world after Venezuela. However, sanctions aimed at squeezing the life out of Iran's nuclear programme have meant that the Islamic Republic is a growth market for smugglers sneaking hundreds of millions of dollars worth of oil products out of Iraq.

"The phenomenon is more widespread between Iraq and Iran, where there [has been] a lot of talk about smuggling from Iraqi Kurdistan," says Dourian at Platt's.