Fuelling crime

Did you fill her up in Kunming?

Up until a few years ago, melamine was known primarily for its use in industry, as a material used to produce hard-wearing plastics. In 2008, it became more widely known for its part in China’s most infamous food scandal. Dairy farmers were adulterating their milk with the chemical so they could pass off watered-down milk to their customers.

The drawback is that prolonged consumption can cause kidney damage. Thousands of children ended up in hospital and several died.

Adulteration was in the news again this week. This time drivers were learning about another malign chemistry involving aromatic hydrocarbons – a set of chemicals that are used to dilute the petrol supply.

At best, these chemicals can damage a car’s engine. At worst, they can pose a serious health risk. One aromatic, benzene, is a known carcinogen. It is not only a danger for people working with the petrol, it can also survive combustion and come out of the exhaust, potentially causing wide-ranging health problems.

The use of aromatics is not a new problem, but it is one that is getting more severe – especially in smaller Chinese cities and remote areas.

C1 Energy estimates that around 12.5% of China’s petrol consumption consists of diluted fuel, reports 21CN Business Herald. The paper also cites dramatic statistics relating to the import of aromatics: up 50% in 2011 overall, with a monthly rise of 113% in December alone.

The latest area to be hit was the southwest of China. Just after Chinese New Year, large numbers of cars in the southwestern cities of Kunming in Yunnan and Guiyang in Guizhou started to suffer from exactly the same problems: jittery engines, stalling, and increased exhaust fumes. These are all effects typical of using adulterated fuel.

The problem is caused by a shortfall in the refining capacity of China’s oil majors, CNPC (whose offshore listed entity is PetroChina) and Sinopec. In order to ensure that they have enough petrol at their retail outlets, it’s claimed they have to outsource from other sources. These suppliers will mix aromatics into the petrol before handing it over to CNPC or Sinopec.

Smaller distributors of petrol – private retailers or small state-owned firms – often water down their own fuel, allowing them sell at lower prices than the big state-owned firms. With no local refineries, Guizhou exemplifies these problems. “Guizhou relies entirely on other provinces for its refined oil, so the supply pressure is huge. Once the supply is short, pressure to outsource rises,” Sang Xiao, an analyst at market intelligence company SunSirs, told 21CN.

Unscrupulous suppliers of petrol benefit in two ways. Firstly, they are able to reduce their costs by adding ingredients that are cheaper than petrol. And since the aromatics are not subject to the fuel tax, their purchase cost is further reduced.

One solution to fix the problem would be to place a putative consumption tax on the aromatic additives. There are some signs that such a move could be imminent – the recent spike in the import of aromatics suggests that the fuel adulterers expect the imposition of a tax, and are therefore currently stockpiling ingredients.

Some believe that a modification in how the fuel tax is collected could make watering down fuel less attractive. The tax is currently levied on the quantity of fuel that is refined. If it were to be collected at the petrol pump instead, the government would be, in effect, taxing both the petrol and the aromatics.

The tax evasion issue is an important issue. The ratio of petrol to aromatics in adulterated fuel is typically 6:4, which means that for every tonne of petrol sold, Rmb550 of fuel tax is avoided. A change in the fuel tax combined with better monitoring of the fuel supply could put an end to this murky industry.

“If the fuel tax collection moves to the gas station, the tax evaders will find it unprofitable. And if quality inspection departments strengthen their supervision, the mixed petrol will naturally disappear,” says an oil company insider.

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