As Profits Vanish Upstream, Criminals Will Look Downstream

As Profits Vanish Upstream, Criminals Will Look Downstream
(AP Photo/Eduardo Verdugo, File)
X
Story Stream
recent articles

The pandemic-induced oil slump of 2020 is far from over. Since global fuel demand dropped 30 percent and oil futures turned negative for the first time, oil producing countries have taken steps to stabilize prices and recalibrate production, but uncertainty still prevails.  As volatile as the oil market may be, however, one segment of it remains relatively unscathed: the illicit downstream marketplace. While governments struggle to confront the pandemic and the energy industry reels from dramatic changes in the global economy, fuel remains a daily necessity for billions of people.  When high demand combines with economic hardship and disrupted essential services, profiteers will take advantage.

Criminals, especially organized criminal groups, have a perennial advantage over legitimate businesses: unencumbered by legal constraints, they can pivot to new opportunities with remarkable agility. In almost any sector, when legitimate supply chains are strained or disrupted, black markets expand. When governments either cannot or do not meet the public’s needs, criminals—especially the organized kind—are quick to fill the void, sometimes taking on the role of public service providers. We have already seen this dynamic in Mexico and Brazil, where criminal groups have gained legitimacy among poor communities during the pandemic by distributing aid and enforcing mitigation measures.

Notwithstanding these “Robin Hood” tactics, the pandemic has hurt criminal groups who traffic in intrinsically illicit products. With curfews and stay at home orders, retail distribution is a challenge, and as all sorts of transportation and maritime activity that provide cover for illicit trading have declined or even ceased, criminal groups have had to adjust their supply chains. Fuel, however, as commodity that is not only legitimate but also essential everywhere, presents attractive opportunities. Many borders may now be closed to travel, but essential goods generally pass, sometimes with fewer customs officials on duty due to pandemic-related restrictions—a situation that invites fuel smuggling, even through ports of entry.  As one Moroccan security expert put it, closed borders are “only closed for legal things.” One case in point involved Turkish authorities, who in a March operation recovered over five million liters of smuggled fuel, a record seizure in a country where oil and fuel smuggling generates massive illicit profits.

Plummeting oil prices may have curtailed both legitimate and illicit operations upstream, but the incentives for downstream crime have largely remained in place. Prices at the retail end of the petroleum value chain are subject to a different array of forces and actors than those of crude, and in some places have held fairly steady or rallied amid the pandemic. In India, for instance, a convergence of economic and political forces has kept pump prices from declining for long. And when retail prices don’t stay down, the incentives for other downstream scams—adulterating fuel with lower-grade products, or diluting taxed fuel with untaxed products, or dumping transit fuel or fuel slated for export on the domestic market—don’t diminish, either. 

Even when prices at the pump have dropped, they have often maintained the cross-border differentials that make smuggling refined products a lucrative global business. In Southeast Asia, where fuel smuggling is a thriving industry, retail prices may have fallen across much of the region, but diesel still, in May, costs less than half in Malaysia what it does in Indonesia, and about 40 percent less than in Thailand or the Philippines. In Nigeria, where imported refined products have long been smuggled out of the country on a massive scale, a months-long shutdown of retail stations within twelve miles of the border has been partially lifted—and gasoline smugglers can earn well over a 200% profit just by moving product across the border into Cameroon or Benin.

Furthermore, in outlying areas where legitimate supply chains are most likely to be disrupted amid the pandemic, countless people across the developing world will still need kerosene and diesel to light their homes, cook their food, and power businesses and essential services. Criminals, from individuals with jerry to syndicates that operate at scale, will take on the risk of filling that gap, becoming de facto public service providers in the process. Once those illicit supply chains are established, any “return to normal” will likely struggle to displace them. 

This might all seem like relatively benign profiteering. But in far too many cases, downstream crime is not just a small-time racket but a major income stream for vicious criminal organizations, terrorist groups, and militant outfits. The same people who traffic in fuel often sell drugs, weapons, and human beings. Accordingly, fuel theft amid the pandemic needs to be recognized and addressed as a major security risk. Governments should conduct thorough risk assessments for downstream crime, explore concrete countermeasures to detect it, adopt policies that disincentivize it, and work with partner states to combat it. The means are available to counter downstream crime, and—along with it—the more reprehensible crimes it finances.

Dr. Ian Ralby is CEO of I.R. Consilium and a senior fellow at the Atlantic Council Global Energy Center.

Dr. David Soud is head of Research and Analysis at I.R. Consilium, a family-owned firm that consults globally in matters of maritime security, resource-related crime, transnational organized crime, and strategies for addressing emerging security challenges.

Rohini Ralby is managing director of I.R. Consilium.

All three authors are contributors to the Atlantic Council’s new report, Downstream Oil Theft: Countermeasures and Good Practices.



Comment
Show comments Hide Comments