Oil Smuggling: Is It Time To Start Worrying Yet?

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I've been waiting in vain for more information on the U.S. companies involved in buying oil smuggled out of Mexico by drug gangs. So far the money tied to U.S. firms is small potatoes. Trammo, a small firm, paid $2.4 million for hot oil, and two even smaller San Antonio firms may have paid $40K and $100K. Who, and where are the big fish? Worldwide, oil smuggling involves a lot of money and players; the people at Havocscope estimate it's worth $7.7 billion a year, which puts it well below cigarette smuggling ($50 billion) and above music piracy ($4.5 billion). See the full list here. Should we worry?

The WSJ suggests that this is a symptom of cartels fighting as enforcement shrinks the drug pie, while an industry expert wonders if Mexico will go the Nigeria route, which raises the scary possibility that successfully reducing drug trafficking could create even more instability in Mexico and in U.S. petroleum markets.

"The cartels are fighting for pieces of a shrinking pie. When you have no pie left...then you have to look for another illegal business to pay your people," said Ariel Moutsatsos, adviser for international affairs for the attorney general of Mexico.

Industry experts warned of the risks to Mexico from unchecked oil-smuggling. "You could eventually end up in the same situation that you have in Africa," said Wayne Wilson, managing director with Protiviti, a risk-management consulting firm. In Nigeria, violent gangs tap into oil pipelines and raid oil company facilities to steal hundreds of millions of dollars worth of oil each year."

Stolen oil is the key component of cycles of violence in both the Niger Delta and in Iraq. In Nigeria, the stolen oil directly buys weapons for the gangs who smuggle it, which has in the past raised the violence in the area, which raised world oil prices, which made the stolen oil more valuable, increasing theft, which increase the weapons imports.... Oil theft in Nigeria has become very sophisticated (there is a discussion of the ability to "hot tap" pipelines) and sad (same report: 5000 people have been killed taking fuel from pipelines since 1998).  And here's a link: http://www.meforum.org/1020/how-iraqi-oil-smuggling-greases-violence. When I spoke with the author Bilal Wahab in 2007, he estimated that smuggling at a single border point could easily fund 400 car bombs a day.

If this is really what's taking shape in Mexico, then we may soon long for the good old days of drug cartels, but I think it's worth considering whether we're actually seeing anything new. There have been networks of diesel thieves near the border for years.

And it may be that more of the oil we buy is stolen than we realize. Oil tankers change hands as many as 300 times at sea, so there's no good way to track the ownership of oil--yet. And I've also been told by academics that as much as 10 percent of the oil coming into the port of Houston may be stolen. (Readers, feel free to diss this totally unverified information.)

For me, the question is not whether to start worrying, but how. Oil smuggling is, like oil futures market rigging, currently invisible but potentially very powerful. The trick is to start measuring it, and tracing out the networks of trade. If I were a policy maker, I'd ask the Department of Energy to start publishing an annual report on oil smuggling.

And for what it's worth, Mexico is not the only major US oil supplier with something funny going on around its pipelines. The Economist reports that a mysterious arcadian bomber has attacked an Encana pipeline in British Colombia six times in the past 10 months.

(Photo Credit: http://www.flickr.com/photos/kenjonbro/2824471343)