Truck and mini-van drivers shuttling between Hong Kong and the Chinese border city of Shenzhen are earning extra income from selling a tankful of petrol, or more, bought cheaply on the mainland. They find eager buyers such as lorry driver Ah Man, a mover who spends nearly a third of his HK$15,000 ($1,920) monthly income on petrol. A litre of diesel costs double and petrol, or gasoline, three times more in Hong Kong than in Shenzhen, just an hour's drive away, encouraging an unusual flow of petrol out of southern China into the territory, despite stiff penalties.
"It's just inevitable given lower prices here versus Hong Kong. China's price control has made it so," said an official with top state refiner Sinopec Corp from Guangdong province, near Hong Kong.
Hong Kong's Customs and Excise Department uncovered 1,418 cases totalling nearly 1.7 million litres (375,000 gallons) of illicit fuel in 2004. The number of cases were up 12.5 percent from a year ago with petrol accounting for 60 percent.
The volume is minute compared with the 6.4 million barrels consumed daily last year in the world's second-largest oil market.
But the trend highlights the impact of Beijing's rigid cap on domestic pump prices in the face of record-high international prices. It threatens to worsen China's domestic fuel shortage, especially diesel, if the practice goes unchecked.
It is an irony for China, which had for years been a prime destination for cheaper diesel from Hong Kong and elsewhere in Asia, and a haven for smuggled oil, especially via fishing boats from the territory in the mid-to-late 1990s.
That trend has reversed since last year as Beijing shrugged off a more than 60 percent surge in global oil prices and resisted raising domestic retail petrol prices to check inflation and protect consumers such as truck drivers and farmers.
After months of lobbying by state oil refiners to prop up tumbling profit margins, Beijing raised gasoline retail prices by 7 percent last month, the first increase since August. Yet prices remained about a third of those in Hong Kong and Singapore, and 6 percent below Vietnam's.
Diesel prices were unchanged at $0.43 a litre, among the lowest in the world.
The International Energy Agency said moves by some Asian governments to insulate consumers from higher oil prices had led to fuel adulteration, smuggling and other market distortions.
China-based industry experts have blamed Beijing's artificially low oil prices for inflating demand, which jumped 16 percent last year and was a key driver behind the rally in world oil prices.
Some trucks and mini-vans commuting between Hong Kong and China were found adding extra tanks to their vehicles, with the biggest - container trucks - each able to carry up to 1,000 litres (220 gallons) of diesel in three tanks, Chinese industry sources said.
"We often saw trucks with Hong Kong and Guangdong licence plates filling up tanks in Shenzhen, which is good for us as they contributed to our retail sales," the Sinopec official said.
Illicit gasoline is transported by private cars and vans, which make several trips daily, either using a bigger or additional tank or a hidden container, to elude Hong Kong's 15 percent excise tax on diesel and 50 percent on gasoline.
"The users of the illicit gasoline are greedy private-car owners," said Lam Sze Hau, a divisional commander at the Diesel Oil Enforcement Division under Hong Kong Customs and Excise Department.
Lam told Reuters that triads or smuggling rings were behind illegal petrol stations in Hong Kong, paying mainlanders HK$100-200 ($13-26) a day to operate them.
But some of the smuggled oil is of poor quality. Lorry driver Ah Man used to buy "red oil", a type of illicit diesel dyed in red to disguise itself as industrial fuel, which is exempt from tax.
"It is much cheaper and you save a lot of petrol money," he said, but he stopped using it because it damaged his engines.
Fat profit margins have lured drivers and dealers to brave heavy penalties: a maximum fine of HK$1 million ($128,000) and two years behind bars. Their vehicles may be forfeited and they may be banned from driving for months, Hong Kong Customs said.
The new army of illicit dealers were replacing the old breed of smugglers who used small fishing boats to ship cheap diesel from Hong Kong to the booming southern Chinese provinces.
Back in the early-to-mid 1990s, Beijing's artificially high oil prices made southern China, mainly Fujian and Guangdong provinces, Asia's chief market for smuggled diesel.
China, one of the top regional buyers of diesel in the past decade, made big waves in the Asian market by taking in more illegal oil than the amount shown in its official trade data.
It also spawned the largest smuggling scandal in modern Chinese history. The alleged kingpin of the multi-billion-dollar case, Lai Changxing, China's most-wanted fugitive, took refuge in Canada.
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