Economy, Domestic Economy

Fuel Smuggling Triggered by Huge Profits

Fuel Smuggling Triggered by Huge ProfitsFuel Smuggling Triggered by Huge Profits

A significant difference between fuel prices in Iran and those in its neighboring countries have turned fuel smuggling into a lucrative business. Even the government’s anti-smuggling regulations, such as heavy fines, have done little to curb the illegal fuel trade. Experts believe energy subsidies provided by the government have caused the price gap.

Domestic fuel prices are influenced by the global crude oil prices, refining and distribution costs, domestic demand, availability of resources and fuel taxes levied by the government.

Fuel prices are highest in developed countries, meaning that these governments make the most profit from taxes on diesel and gasoline. The opposite is true in Iran and other oil-rich countries such as Saudi Arabia and Venezuela. These countries not only earn zero revenues from domestic fuel sale, they also spend huge amounts on fuel subsidies.

According to the National Development Fund, countries spend approximately $5.3 trillion on energy subsidies, equal to 6.5% of the total global gross domestic product (GDP). The figure topped the total global spending on healthcare in 2013 (6% GDP).

In addition to posing a heavy financial burden on the government, energy subsidies in Iran cause many other problems, including air pollution as a result of people using public transport less.

Based on the Subsidy Reform Plan, approved by the parliament in January 2010, the Iranian government was supposed to utilize financial resources obtained from the removal of energy subsidies toward improving social security and welfare as well as economic development.

However, the government has been distributing the annual $17 billion savings on energy subsidies among households in the form of monthly cash payments, causing a hike in liquidity and leading to higher inflation, according to IRNA.

Experts also believe that low efficiency in fuel consumption and distribution caused by lack of adherence to standards, along with the decline in the value of Iran’s national currency against other currencies — owing to the western sanctions against Iran’s economy over its nuclear energy program— has further widened the fuel price gap between Iran and the neighboring countries.

A closer look at fuel prices in Iran and the neighboring countries clearly explains the high rate of fuel smuggling to these countries.

Recently, the Iranian government revoked monthly quotas of cheaper fuel and is now selling it for a single price of 10,000 rials (0.3 at market exchange rate), while diesel prices stand at 6,000 rials ($0.18) per liter.

This is while in Iraq, every liter of gasoline costs $0.63, while diesel is priced at $0.62 per liter. This means a profit of $0.33 and $0.44 respectively in gasoline and diesel smuggling from Iran to Iraq.

Fuel prices are even higher in Iran’s other western neighbor, Turkey, where every liter of gasoline and diesel are sold at $1.81 and $1.54 respectively. This means the smugglers can gain a profit of about $1.51 and $1.36 per liter from gasoline and diesel smuggled into the country.

Therefore, even though the Iranian government imposes a fine equivalent to three times the value of smuggled fuel, illegal traders are still willing to take the risk in view of the huge profits.