Inside Pakistan’s oil smuggling paradox

Govts narrative “oil smuggling needs to be stopped as it threatens the local economy”, is disconnected from reality

Pakistan grapples with a perilous oil smuggling dilemma, marked by recurring incidents at the western end of its Balochistan province. Following each catastrophe, the government issues reports, shuts the border and blames lesser-known oil smugglers, only to reopen the border shortly after. These short-term responses fail to address the underlying socioeconomic incentives, leading to continued unrest and a thriving informal market for smuggled petroleum products.

The government’s narrative that “oil smuggling needs to be stopped as it threatens the local economy”, is disconnected from reality. In Pakistan, as well as in Balochistan and Iran, individuals respond to formal and informal incentives within socio-economic constraints. Not to forget, importing petroleum products significantly burdens Pakistan’s fragile economy, as these products account for over 30% of the country’s import bill. Taxes and margins add 35% to 45% to their original price, raising both the general price level and the demand for alternative fuel sources.

It is pertinent to note that nearly one million people of Balochistan live within 50 km distance of the international border. The total number of households living within this distance is estimated to be 0.1 million. Up to 2 million people, known as kolbars, depend directly on this trade, using thousands of zamyads (vehicles) and khaiks (ships). This trade is ubiquitous in Balochistan, and border closures consequently leave millions jobless with no alternative viable income sources.

Reports claim that oil smuggling costs Pakistan one billion dollars annually in terms of tax losses. However, the government saves trillions in reserves by acquiring cheaper smuggled fuel, offered at a $30-$40 per barrel discount compared to international price.

The economies of Pakistan and Iran are deeply intertwined due to their proximity. Concerns about potential US economic sanctions deter Pakistan from engaging in the oil trade. However, China, Taiwan and Iraq have acquired Iranian trade waivers/permits from the US. A similar waiver to develop the Chabahar Port was also granted to India by the US. Meanwhile, Pakistan has never requested such waivers. However, it does offer detrimental energy subsidies due to lobbying pressures.

The government also claims that oil smuggling serves as a safe haven for criminal activities. Some smugglers do indulge in criminal activities, facilitated by the undocumented nature of the sector, which supports black markets and leads to corruption. However, legalising the oil trade can mitigate these issues. Formal documentation and employment opportunities can incentivise individuals to abandon illicit activities, helping the state in curbing criminal behaviours.

It also needs to be acknowledged that Pakistan’s approach to smuggling is based on the outdated 1977 Smuggling Act, which itself is not in line with the 1969 Customs Act. Policymakers in Pakistan need to understand that law must evolve with time, space and circumstances, influenced by various economic and non-economic factors. The rigid legal or illegal binary oil smuggling definition does not always hold in practice; some goods, like smuggled oil, may be illegal but socially accepted. Viewing oil smuggling within a spectrum encompassing both formality and informality is more constructive.

Oil smuggling should not be treated as an existential challenge. An authoritarian approach has often failed the state, as seen recently at the Chaman border, where the government failed to control demonstrators.

Unlike many government-to-government initiatives that have failed to bring improvement, policies on oil smuggling should focus on transnational people-to-people relations, with locals as main stakeholders.

By addressing the underlying socioeconomic incentives and impacts, Pakistan can develop more effective, long-term solutions to its oil smuggling dilemma, benefiting both its economy and its people. It must not undermine the rationality of a common citizen. So, let’s focus less on individual actors and more on the incentives mechanism.