Fuel subsidies ratchet up urgency of tackling smuggling

As global oil prices soar – in many cases surpassing pre-pandemic levels – some governments are raising fuel subsidies, or at least walking back plans to reduce them, in a bid to cushion consumers from rapidly escalating living costs.

The Rwandan government first intervened to stabilise fuel prices in May this year, subsidising the pump price of petroleum and foregoing a percentage of taxes. A similar approach is being implemented in Central and South America, as inflation surges across the region: the governments of Brazil, Mexico and Argentina are among those seeking to mitigate fuel price rises.

Most notably, Ecuador’s President Guillermo Lasso was recently forced to row back on his decision to cut subsidies, in the face of fierce public opposition to the plan and the threat of widespread protests.

It’s a logical position for governments to adopt: the worldwide surge in fuel prices is gaining momentum, squeezing vulnerable households’ budgets, angering citizens and threatening to derail the already patchy recovery from the Covid-driven economic crisis. The problem is especially acute in countries – like India – whose economies rely heavily on oil imports.

Fuel smuggling is on the rise

As some governments introduce or hike fuel subsidies, however, they will need to proactively address the knock-on effects of fuel subsidies – including the fact that they may exacerbate cross-border price differentials and spark a dangerous uptick in fuel smuggling. Indeed, fuel smuggling represents a serious global problem which damages the environment, saps tax revenues and abets organised crime.

Naturally, the most fragile economies are those that suffer the greatest harms from an unchecked illicit trade in fuel. In Lebanon, for example, where citizens are already experiencing an escalating energy crisis, state-subsidised fuel is being smuggled into Syria, where it’s worth ten times more. This discrepancy is contributing to severe shortages for ordinary Lebanese people who are already struggling to access basic necessities.

It’s also causing problems in West Africa. Cheap gasoline from Nigeria is being smuggled to neighbouring nations where it commands much higher prices. Although Nigeria’s president, Muhammadu Buhari, has promised to cut fuel subsidies, pump prices remain significantly lower than equivalent supplies in Togo, Ghana, Chad and Cameroon. Admittedly, it’s a tricky balance: Nigeria is Africa’s largest crude producer but many of its citizens live in extreme poverty and regard affordable fuel as one of their few perks.

A ray of hope

Fuel smuggling is particularly appealing to organised crime groups as illicit fuel is relatively easy to procure, low risk and incredibly profitable. Fuel may be acquired direct from the service station pump or from wholesalers, while some is stolen in bulk from producers’ pipelines.

Some countries are leading the fight against this damaging practice and are taking concrete measures to curb fuel smuggling. In the Philippines, the introduction of a high-tech fuel marking scheme by SGS and Swiss security experts SICPA has already enabled the government to significantly raise tax collection, as well as taking smuggled fuel off the market.

Even at low concentrations, the presence of fuel markers can be detected with analysers which yield quick yet precise results, making it a flexible and secure system which can be implemented at every stage of the supply chain – from refineries, through wholesale depots and transport networks, down to the roadside pump.

In the two years since the Philippines implemented its molecular fuel-marking programme, the government has collected P299 billion in duties and taxes as well as seizing many illegal fuel shipments.

The additional tax dollars are unsurprisingly a boon to Manila as it recovers from a brutal third wave of Covid which compounded the country’s economic problems. Credit ratings company Moody’s expects Philippine’s GDP growth to fall short of its government’s 2021 growth targets, only forecasting a return to pre-pandemic figures by the end of 2022.

Meeting the challenge

As more and more governments turn to fuel subsidies to address sky-high fuel prices, they will have to be careful not to aggravate the fuel smuggling problem. By focusing instead on overhauling regulatory structures and rationalising tax policies around fuel distribution – aided by the deployment of technical solutions, such as fuel markers – fuel supply chains can be improved, and revenue deficits plugged.

As world leaders and dignitaries convene in Glasgow for the UN’s COP26 summit on climate action, it’s important to remember that fuel smuggling not only presents a risk to the financial stability of many already-precarious nations but also threatens to damage their environmental credentials.

The rapid—and sustained—rise in oil prices has increased the stakes for everyone. Most governments and industry leaders understand the gravity of the challenge, with fuel smuggling moving up the international agenda. Cracking down on smugglers and fraudsters could mean that valuable resources are released to aid swifter financial recovery in a post-Covid world— a cause worth fighting for.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes