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Oil prices discourage smuggling

By Chen Xiaorong (China Daily)
Updated: 2009-03-02 07:57

Lines at Shenzhen gas stations stretched for miles last fall, as higher prices in Hong Kong sent drivers scurrying across the border. [File photo]

Inspectors at Shenzhen Customs now have one thing less to worry about, thanks to the steep fall in international crude prices.

During the middle of last year, when crude oil prices touched $147 a barrel, retail fuel rates in Hong Kong, which is situated across the border from the city, skyrocketed to double or even triple Shenzhen prices.

Retail price for unleaded gas rose to $2.15 a liter when oil prices peaked. Shenzhen's retail price, in contrast, was more or less stable at an average of $1. The disparity had many vehicles from Hong Kong turning up at gas stations in Shenzhen for refueling.

Local vehicles had to wait in long queues at gas stations to refuel. Some Shenzhen citizens started to arrive late for work because their buses were getting cancelled due to lack of fuel.

The price inequality also had another side effect. Tempted by the huge margins that came from buying fuel cheaply and selling it at a higher price in Hong Kong, many drivers shuttled between the two cities, smuggling fuel across the border.

Some resorted to innovative measures to avoid suspicion at checkpoints, refitting tanks in Mercedes-Benz vehicles or microbuses to help smuggle more fuel, as much as 200 liters in these 'big stomach' carriers.

"It seems those cross-border cars with big stomachs have simply vanished," said a customs inspector at the Shenzhen Huanggang Port, who asked not to be named.

Nearly 300 vehicles were involved in such smuggling operations, said the Hong Kong Container Transportation Employees General Union.

"It is a hugely profitable business. Some truck drivers earned as much as $6,800 a day," said Yu Tian, a customs official in Shenzhen. Tsim Wai, a Hong Kong driver who employed three cars to smuggle fuel at least three times a day between the two cities, was reportedly earning $3,060 a day from the business. "As far as I know, an illegal company owning 30 cars could earn as much as $13.6 million a year," said Tsim.

The fuel smuggling business spawned other illegal activity, including a roaring trade in driving licenses for smugglers. Local policy allows Hong Kong entrepreneurs investing in Shenzhen to also apply for driving licenses in the city. Some underground financiers used the loophole to lend money to smugglers who registered fake companies to get local licenses.

Hong Kong's Customs and Excise Department has uncovered 42 cases of fuel smuggling so far, which involved nearly 20 tons of smuggled gasoline ferried in 31 vehicles, between January and May last year, the Guangzhou Daily reported.

Hong Kong's unleaded retail price is now $1.68 a liter. Shenzhen's is $0.87 a liter.

"Taking transportation costs and brokerage charges to middlemen into account, smugglers could only earn about $0.15 a liter now," said the inspector. "It's no wonder there are fewer oil smugglers with such little profit."

But the inspector is afraid the smuggling will restart if international crude oil price fluctuate sharply again and China's domestic price for refined oil products is kept low. So far there is no regulation to stop the business. The only way is to stop the vehicles with illegally refitted tanks.

Chinese government holds domestic prices below international costs to keep inflation in check and stave off social instability. China's domestic fuel prices were among the lowest in the world, more than 50 percent below international levels, in 2008. Chinese oil refiners suffered losses as world crude prices soared. But many international aircrafts and ships making refueling stops in China benefited from the subsidy.

The National Development and Reform Commission (NDRC) changed the nation's pricing system for oil products in January to move it closer to the global level. A market-based ceiling that takes the cost of crude oil into account replaced a guidance band for retail fuel prices.

"The difference in the prices of oil on the mainland and elsewhere gives a big push to illegal activity," a customs official familiar with the matter said. "It is not only a headache for oil producers, but also a tough cat-and-mouse game for us."