BAGHDAD, Iraq (AFX) - Smugglers were loading gasoline on a ship at an illegal port in southern Iraq when police surprised them with a raid that ended with five smugglers and two policemen dead.
The October clash at Abu Flus was one of many attempts by security forces trying to stop smuggling of Iraqi petroleum products to neighboring countries, a practice that is costing the country billions of dollars every year.
Smugglers are selling millions of gallons of Iraqi gasoline, kerosene and diesel fuel outside the country every year. They then reap huge profits by selling the petroleum products back to the government for import.
'The most serious challenges facing the oil industry are smuggling and terrorism. They are both hitting the national economy, robbing Iraq and blocking development,' said Oil Ministry spokesman Assem Jihad.
Despite the fact that Iraq has the world's third largest proven oil reserves, the government is forced to import refined oil products to cover domestic demand. As recently as September, the country's three main refineries were working at half their pre-invasion capacity, processing only about 350,000 barrels day compared with about 700,000 barrels a day before March 2003.
Aging refineries, corruption and attacks by insurgents on infrastructure, such as pipelines, have been blamed for the production shortage.
In September, the oil ministry estimated that it would spend $800 million on imported oil products in the last four months of the year.
Many people try to subsidized their meager incomes through purchasing government-priced oil products and selling them to smugglers who take the products by boat or tanker trucks to Jordan, Syria, Kuwait, Iran and the United Arab Emirates.
Jihad said Iraq buys oil for about 54 cents a quart and sells it within the country for between 7 and 13 cents, subsidizing the remainder.
'This is encouraging smuggling to neighboring countries,' Jihad said.
Jihad said it was impossible to calculate how much petroleum is smuggled. Sabah al-Saidi, who heads the Iraqi parliament's anti-corruption committee, said the Oil Ministry inspector general has listed 13 Iraqi companies smuggling oil and says they are backed by Iraqi political groups.
'We are losing an average of $700 million a month. Most of the products are smuggled by sea.'
In a report two weeks ago on smuggling, Iraqi government said security forces had captured two tanker trucks in the southern province of Basra while trying to smuggle kerosene.
'The main mission at the oil ministry is to eradicate this phenomenon,' said Oil Minister Hussain al-Shahristani in a recent television interview.
Amer al-Baldawi, who serves on the Iraqi parliament's economic committee, said one solution would be to raise prices in Iraq to those in neighboring countries.
Gasoline at some Baghdad gas stations costs about a dollar a gallon, but it takes hours of waiting in the line to fill up. On the black market, gasoline costs about $1.40 a gallon.
In the United Arab Emirates, by contrast, it costs about $1.76 a gallon and in Syria and Jordan it's about $2.40 a gallon.
More than 90 percent of the Iraqi government's income comes from oil exports.
Iraq's oil industry losses since Saddam Hussein's ouster in 2003 stand at about $15 billion, Jihad said.
Before the war, the Beiji refinery, the country's largest, produced more than 2.5 million gallons a day, nearly half what the country needed. But, Jihad said, the refinery currently produces only about 400,000 gallons a day.
Oil smuggling first began in the 1990s when Iraq was under U.N. sanctions. The government was in dire need of hard currency, and smuggling oil to Iran and selling it to international markets as Iranian oil was the easiest way to get cash.
The chaotic security situation and continuous attacks on pipelines, tanker trucks and refineries have had an enormous impact on Iraq, which has the world's third largest oil reserves after Saudi Arabia and Iran.
In a bid to curb the smuggling, the government has stopped supplying some gasoline stations near the border and is forcing fishing boat owners to prove they truly are fishing before they can buy gasoline. All boats using the Shatt al-Arab waterway that leads to the Persian Gulf now must be registered.
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