Black Market Manipulation: Egypt’s Diesel Dilemma

Daily ques for petrol products are no longer surprising, they have become the norm as Egypt is increasingly forced to navigate the black market to obtain energy essentials for daily life.

Increasingly a palpable sense of anxiety can be felt concerning the present and future availability of energy products in Egypt.  Consistent supplies of oil, gas, butane, and particularly diesel, are becoming difficult to obtain.  Diesel shortages have created an ominous and potentially dangerous situation greatly exacerbated by the interference of the black market. Black market dealers pose a significant threat to consumers and regulators and their growing influence and interference in supply mechanisms can be increasingly felt. Egypt Oil and Gas investigates the black market for diesel fuel in Egypt.

Causality and Elements of the Black Market
Opinions differ concerning the cause of recent increases in black market activity, although subsidies and smuggling are often cited a primary factors. According to General Ahmed Mewafy, Assistant to the Minister of Supply and Interior Trade, the Egyptian government subsidizes petroleum products at a cost of approximately 114 billion Egyptian pounds per year. Of this, approximately 48 billion pounds are allocated for diesel subsidies.  Government officials have continually justified energy subsidies as a means to help the disadvantaged and avoid increased political instability. However, calls for subsidy reduction have grown louder as the Egyptian economy continues to decline amidst faltering tourism, rising inflation, and currency devaluation.

Subsidies play a large role in the black market as dealers can obtain diesel at highly subsidized prices and illegally smuggle supplies across borders to make substantial profit. Countries such as Turkey and Jordan are often recipients of these black market supplies.  The Gaza Strip is another big recipient. Gaza’s proximity to Egypt, in addition to their limited diesel supplies results in an enticing and consistently profitable option for black market dealers. The amount of across-border smuggling is so high that dealers often have standing arrangements with petrol stations here in Egypt to consistently obtain subsidized diesel. “There are many people who benefit from the difference in the market price and the subsidized price creating a profit for them,” explains Eid Rashad Abdel Qader, Assistant Professor of Economics at Ain Shams University in Cairo.
A lack of regulation and standardization within the distribution process creates the opportunity for corruption and increased black market activity. The high degree of variance in the distribution of diesel amongst petrol stations leaves some stations with large quantities of fuel and others empty. The disparity provides an opportunity for individuals to manipulate quantities in order to set aside large quantities for black market sale.  For example. supply trucks can be loaded with 800 liters of diesel yet only record 100 liters. Corrupt petrol station owners and black market dealers can then make huge profits when they sell the unreported diesel on the black market.

Inconsistent distribution and lack of public information about supply further creates opportunities for corruption, albeit on a smaller scale.  Ambiguity concerning fuel supplies inevitably results in rumors concerning impending fuel shortages.  Such an environment contributes to huge lines for small amounts of diesel. When rumors of a shortage spread, drivers rush to gas stations and exhaust the supply within a few hours. Once the stations run out drivers will continue to wait in long lines for hours until more diesel is delivered. Drivers will often circumvent the line by bribing gas station attendants, who use the opportunity to supplement meager wages.  Many times drivers are told they will not have access to any fuel supplies unless a bribe is given.

Fake diesel also plays a role in black market activity.  Fake diesel is comprised of fuel and water, a mix sold by black market dealers as legitimate diesel.  The mix, while highly profitable, is extremely harmful to engines and fuel tanks. Mostafa El Naggar, a bus driver in El Rehab complained, “From the black market, everything is mixed with water so it is not totally a pure diesel fuel.” Damage stemming from the usage of fake diesel in cars and microbuses can range from 1000 to 2000 pounds in order to fix the motors. Mohamed Ragheb, a microbus driver in Nasr City commented “I got tired from the black market, I pay double the price and I discover the fuel is mixed with water, I couldn’t afford fixing the motor last month.”

Recent Cases
According to internal documents from the Ministry of Supply and Interior Trade over 2,000 black market cases were reported from the period of October 2012 to February 2013. These cases involve approximately 306,373,205 liters of petroleum products. Examples of these are two Misr Petroleum stations, located in Kafr El-Sheikh and Giza that sold thousands of liters of diesel fuel on the black market. The inspection team found that the Kafr El-Sheikh gas station sold around 252,000 liters of diesel and 96,000 of gasoline on the black market over six months. While the other station in Giza sold 20,000 liters of gasoline and 23,000 liters of diesel over the same period. Charges were filed in both cases.

The Supply and Investigation Police (a special branch of the police charged with ensuring that petroleum products are sold to the public at the official price) documented several reports of price gouging on behalf of Oil Libya gas stations located in the Helwan district.  The allegations concerned 447 liters of diesel fuel sold at drastically inflated prices. Samy El-Derwy, owner of two Oil Libya gas stations, spoke to Egypt Oil and Gas concerning his pending case with the Police of Supply Investigations. He stated that the police went to one of El-Derwy’s stations and documented the absence of a Record 21 (the official document for the sold amounts of petroleum products at the gas station).  Charges were filed against El-Derwy claiming that he had intentionally hidden the document in order to sell a portion of the diesel to the black market. El Derwy denied the allegations stating, “The police went to the station at 12 am, the station’s safe was closed…we can’t keep such important files outside the safe.”

On November 28th 2012 the Egyptian General Petroleum Corporation (EGPC) held a meeting with representatives from the Supply and Interior Trade Ministry and the Interior Ministry to discuss the legitimacy of charges against eleven petroleum companies, including Oil Libya. As a result of the meeting several stations were given a three-month probationary period in which the distribution process would be closely monitored. On December 17th officials at EGPC held an additional meeting to assess the processes and mechanisms currently utilized for distribution. During this meeting, charges against El Derwy were dismissed pending resolution of the distribution issue by the courts.

Police also confiscated 416,000 liters of diesel intended for the black market from Caltex Gas stations located on the Cairo/Suez Desert Road during the period of October 2012 to February 2013. Ministry officials suspected black market activity after noticing huge disparities between allocated and reported diesel.  The police believe the owner sold 204,500 liters of subsidized diesel on the black market. According to the internal documents, a similar case occurred in the El-Sharqiyah Governorate where 52,000 liters of subsidized diesel was collected by the owner of Energy Gas Station and resold on the black market.

In addition to inflated prices, the black market hinders the legitimate sale of diesel as distributors have perverse incentive to hoard supplies. Manipulating and holding diesel supplies affords corrupt distributors the opportunity to maximize profit by selling subsidizediesel on the black market at the inflated price.  This hoarding mentality significantly contributes to perceived and actual supply shortages. In the Qalyubiya district police confiscated 32,000 liters of diesel intended for the black market. The investigation proved that the owner of Esso Gas refused to sell diesel to the public claiming that the station ran out of diesel. Similarly, police also charged the owner of a Misr Petroleum station on the Cairo/Alexandria Desert Road of illegally managing his station by refusing to sell the diesel to the public. Upon further investigation the police found around 50,000 liters of diesel presumably also intended for the black market.

Black Market Exacerbates Poverty
The Central Agency for Public Mobilization and Statistics estimated that in 2010/2011 over 25 percent of the Egyptian population fell at or below the poverty line. Amidst declining economic conditions of inflation and currency devaluation, estimates for 2012 are likely to be worse.  The black market for energy products substantially factors into this equation.  The black market problem increasingly affects the lower socioeconomic classes that are reliant on subsidized diesel to function in a basic capacity.  A microbus driver Mostafa Metwally stated,  “I wait in the lines until the next day. Sometimes I can fill my pumps completely or half of the quantity I need. I had to pay double the price to get what I need.” Ahmed Ataya, another microbus driver, complains about the fuel crisis as he is forced to wait many hours just to get diesel. “I finish my work at 11 p.m., but the owner of the microbus requires me to get fuel. I usually keep touring fuel stations till 7 a.m. to be able to have full tanks.” Omar Osman, a taxi driver commented on the personal impact that the black market for fuel has on his life stating, “I am a father of five children, every girl has to have thirty pounds for the transportation, so how can we survive with price increases when we can’t get the diesel at official prices.”  Inflated black market prices continue to exacerbate poverty as higher diesel prices equal higher fees for buses, cabs, and microbuses. Several Nasr City bus drivers stated, “We increased the bus tickets to compensate for the price of black market fuel.” Amr Shawky a service employee and regular commuter stated, “Since the drivers raised the bus tickets, I had to pay 300 pounds more for transportation. I can’t afford that every month.”

Alaa Hafez, owner of a gas station in Nasr City, complained that the discrepancy between the diesel sold in the black market and the legitimate one negatively affects the stations, as many people are forced to buy from the black market when legitimate stations run out. “When will we stop suffering from (the) black market? Officials must work hard to solve this problem,” Alaa stated.  Despite obvious corruption and inflated prices, the absence of alternatives to public transportation leaves consumers and motorists few options.

Current Efforts To Curtail Black Market Activity
Professor Abdel Qader expressed optimism that black market activity could be curtailed if the state implements laws and regulations to end the black market problem. General Mowafy echoed this point, stating that uncertainty characterized by widespread political and socioeconomic instability created increased opportunity for black market activity. He expressed a need for a regulatory body to govern supply and distribution channels. While the onus for reform rests firmly on the shoulders of the government, Mowafy stated that a complete disregard for the law also contributes to increased black market activity. He stated, “Some citizens don’t respect the country’s regulations because they only look out for their own benefits.”  Now the question remains, how does Egypt overcome this problem?

Suggested Solutions
General Mowafy emphasized that the Ministry of Supply and Interior Trade currently employs inspections teams to regulate the fuel market.  In addition to these teams, the monitoring and distribution sector of the Ministry of Petroleum has prepared regular reports on black market activity.

The Supreme Committee for Fuel in Egypt, of which General Mowafy is a member, recently discussed how to redistribute petroleum products within Egypt. The committee made up of members from eight different ministries, prepared a comprehensive study of production and consumption of petroleum products in Egypt. They also have been working for the last four months to analyze the total number of gas stations in Egypt, in an effort to ensure the legal and legitimate delivery of petroleum products to distribution outlets, as well as commercial and industrial companies. The committee, in cooperation with the inspection team of the Ministry of Supply and the Ministry of Interior, is working to secure the distribution channels and processes.

General Mowafy told Egypt Oil and Gas that the Ministry of the Interior Trade and Supply would work with the EGPC to prepare a system to monitor the distribution to help eliminate black market activity.  It was also suggested that the increased presence of police officers at gas stations would help ensure legitimate transportation and distribution.  Mowafy also emphasized the government is working on long-term plans to equip distribution vehicles with GPS monitors to track vehicles once they leave EGPC. The Petroleum Minister Osama Kamal emphasized the importance of implementing strict regulations to combat rising black market activity. The Minister declared to Egyptian TV Channel One that black market activity is punishable by three to five years of imprisonment and fines of 100,000 Egyptian Pounds.

In addition to stricter fines, the Minister also called for increased efforts towards energy conservation in order to combat declining economic conditions as well as combat the rising influence of the black market. General Mowafy believes that “The problem in Egypt is the total reliance on road transport and that’s why we have started to also use railway transport.” The Ministry of Supply and Interior Trade is working on the implementation of alternative methods of transport and distribution as current methods are easily manipulated.

In further efforts to offset the crisis, the government has appointed official monitors at gas stations in popular areas like Cairo and Giza. In addition, the Petroleum Minister Osama Kamal, pointed out in a statement to Ahram Online that the Ministry has recently prepared short and long term plans to address congestion in front of fuel stations.
Sherif Hadara, head of EGPC, told Ahram Online that he sees three options for subsidies reduction. “The first is a gradual reduction of 10 per cent annually across the board; the second is to limit subsidies to certain socio-economic categories; and the third is to replace subsidies with cash-in-hand grants.” He added that while he is responsible for the initiative’s technical aspects, the issue of ending diesel subsidies was a political question that fell on the petroleum ministry.

According to the Minister of Petroleum there are only two basic solutions to end the black market trade of diesel. The first one is to use a Smart Card system in which individuals will receive a certain allotment of subsidized diesel; excess of this amount would be charged at international market prices.  The second method is to gradually remove diesel subsidies simultaneous to increased government assistance in the realms of job creation, education, and transportation. However, on February 12, 2013 the Minister of Petroleum stated that the government would delay a plan to ration subsidized fuel, initially slated for April, by up to three months. “The use of smart cards for making petroleum purchases will be implemented sometime between April and July,” Kamal told Trade Online.

While subsidies reduction is a broader economic issue with implication far beyond black market activity, some experts suggest a common sense approach to subsidy reduction as a means to combat the black market.  Abdel Qader argues, “the government should subsidize those [individuals and companies] that are in need… petro-chemicals companies and others do not deserve to be subsidized by the government.” Either way, all parties agree that something must be done. Diesel subsidies currently cost the state approximately LE50 billion (nearly $7 billion) annually, accounting for more than 40 % of total energy subsidies. With the current state of Egypt’s economic affairs, the country can no longer afford to not do anything.

As lines at gas stations continue to grow many are asking if Egypt is experiencing an energy crisis. While not everyone may agree that the crisis has come, no one can deny that Egypt’s fuel subsidy problem is getting worse.

The government’s heavy diesel subsidies have created a black market that is thwarting the legitimate market and costing the government billions of pounds every year. The government is quickly running out of money and can no longer heavily subsidize fuel like it once did. With gas shortages increasing the price of diesel, many in the country’s lower socioeconomic classes are struggling to pay for transportation.

Measures to improve distribution, regulation and standardization of the diesel must be implemented. Whether it is a Smart Card system or a 10 % cut in subsidies across the board something needs to be done in terms of reducing subsidies. As for stemming the flow of diesel to the black market greater security, information and regulation must be improved. Without regulation, gas stations and black market dealers will continue to steal subsidized diesel and make a profit at the expense of the people.  Failing this, it will only be a matter of time before Egypt finds itself in a catastrophic social, economic, and energy based crisis. 

By Effat Mostafa


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