Trends
Fuel Oil Smuggling. A $1 Billion Shadow Economy Benefiting Iran And Its Proxies?
It’s a reality unfolding in Iraq, fueled by a sophisticated fuel oil smuggling operation that has flourished since Prime Minister Mohammed Shia al-Sudani took office in 2022.
Imagine a network so vast and intricate that it rakes in at least $1 billion annually—all under the radar of international watchdogs. It’s a reality unfolding in Iraq, fueled by a sophisticated fuel oil smuggling operation that has flourished since Prime Minister Mohammed Shia al-Sudani took office in 2022.
At the heart of this shadow economy is a government policy meant to allocate heavily subsidized fuel oil to asphalt plants across Iraq. Sounds benign, right?
But here’s where it gets murky – a vast network of companies, groups, and individuals in Iraq, Iran, and Gulf states are diverting between 500,000 and 750,000 metric tons of heavy fuel oil (HFO) every month—equivalent to 3.4 to 5 million barrels of oil. Instead of paving Iraq’s roads, this fuel ends up exported, mostly to Asia, with some clever disguises to evade detection.
Two Routes, One Goal- Profit
How does this work? Well, the smuggling follows two main paths.
Blending with Iranian Oil – By mixing Iraqi fuel oil with Iranian oil, smugglers pass it off as a purely Iraqi product, allowing Tehran to dodge the stringent U.S. sanctions on energy exports. This sleight of hand means Iranian fuel, typically sold at a discount due to sanctions, fetches a higher price when masquerading as Iraqi.
Forged Documentation– The second method involves exporting fuel oil originally allocated for Iraq’s subsidy program using falsified paperwork to hide its origin. This benefits Iranian-backed militias in Iraq, who reportedly control this entire smuggling operation.
Estimates of the revenue from these schemes vary, but the consensus among intelligence sources is staggering—ranging from $1 billion to over $3 billion annually.
The Iranian Influence
Iran’s grip on Iraq runs deep. Beyond smuggling, Tehran wields significant military, political, and economic influence, often through powerful Shi’ite militias and political parties. For Iran, Iraq is more than just a neighbor—it’s an economic lifeline.
Iranian-backed groups dominate key sectors, sourcing hard currency from Iraqi exports and using Iraq’s banking system to bypass U.S. sanctions.
Yet, this illicit trade isn’t without consequences. Iraqi institutions and officials risk becoming collateral damage if the U.S. decides to crack down. With a hardline approach toward Iran potentially on the horizon, the pressure on Baghdad is mounting. But the Iraqi leadership is in a bind—they depend on the support of Iranian-backed Shi’ite groups to remain in power, making it nearly impossible to dismantle these smuggling networks.
On Washington’s Radar
Fuel smuggling is no longer just an economic concern for Iraq—it’s become a geopolitical flashpoint.
With Iran and U.S.-sanctioned individuals deeply embedded in the operation, Washington is keeping a close eye on this billion-dollar network. The issue even surfaced during high-level discussions in September when Iraqi Prime Minister Mohammed Shia al-Sudani visited the U.S.
Although U.S. officials have remained tight-lipped about the specifics, a State Department spokesperson confirmed that Washington has stressed to its Iraqi counterparts the dangers of illicit trade and the importance of transparent oil markets.
Yet, despite this diplomatic pressure, the U.S. Treasury has not commented on whether Iraqi officials or entities face potential sanctions.
Why the U.S. Cares
At the heart of U.S. concerns are Iran’s nuclear ambitions and its support for groups labeled by Washington as terrorist organizations, including Hamas, Hezbollah, and the Houthis. Smuggling networks that funnel billions to Iran undermine the effectiveness of these sanctions and fuel Tehran’s regional influence.
Central to the smuggling scheme is Asaib Ahl al-Haq (AAH), a Shi’ite paramilitary group and political party with deep ties to Iran’s Islamic Revolutionary Guard Corps (IRGC). AAH played a key role in nominating Sudani for prime minister, positioning itself as a significant political force with 16 members in Iraq’s parliament.
In 2019, the U.S. sanctioned AAH’s leader, Qais al-Khazali, citing the group’s involvement in serious human rights abuses, including the killing of protesters and a deadly 2007 attack on U.S. soldiers. In response, Khazali openly mocked the sanctions, posting a video on X where he sarcastically expressed disappointment that it took Washington so long to target him.
How Iraq’s Fuel Oil Smuggling Network Operates
Fuel oil smuggling is not a new phenomenon in Iraq, but since Prime Minister Mohammed Shia al-Sudani took office in October 2022, the operation has grown significantly in scale and sophistication. What was once a more informal operation has now become a well-oiled machine generating massive profits—estimated at over $1 billion annually.
This expansion is clear when you look at the numbers: Iraqi fuel oil exports are on track to exceed 18 million tons this year, a staggering increase compared to just 8 million tons in 2021.
How is this surplus fuel oil created?
The answer lies in the manipulation of official allocations and the involvement of a network of companies, militias, and government bodies.
One of the primary ways that fuel oil is diverted for export is through overstating the needs of asphalt plants.
These plants, which are supposed to use fuel oil for construction purposes, exaggerate their fuel requirements when requesting allocations from the government. However, some of these plants exist only on paper, allowing the entirety of their allocated fuel to be diverted and sold on the international market.
At the heart of this scheme is the State Company for Mining Industry, a government-run entity originally created to support local industries, such as asphalt production. However, during Sudani’s tenure, it has fallen under the control of powerful Shi’ite militias, particularly Asaib Ahl al-Haq (AAH).
This shift has allowed AAH to leverage the company for large-scale fuel oil exports, especially high-sulfur fuel oil (HSFO), often using facilities like Al-Thager Asphalt Industries Factory to store and move the oil.
Many of the asphalt plants involved in the smuggling network are either directly controlled by AAH or Kataib Hezbollah—another Iran-backed militia designated as a terrorist organization by the U.S. These groups play a pivotal role in diverting large quantities of fuel oil and using the facilities as staging grounds for smuggling.
Sudani’s Role and the System of Control
Iraq’s fuel oil allocation system is tightly controlled by Sudani’s office through the National Operations Command (PM-NOC). This body oversees the movement of fuel and ensures that trucks carrying oil can pass through checkpoints manned by Iraq’s oil police. The Oil Products and Distribution Company (OPDC) processes requests for fuel movement, which include detailed specifications such as cargo volumes, vehicle numbers, and driver details.
However, this system has been manipulated to serve the interests of those behind the smuggling network.
In January 2023, just months after Sudani took office, the government adjusted fuel prices, lowering the subsidized price of fuel oil from $220 per ton to between $100 and $150 per ton—well below the market price of $300 to $500 per ton. This price reduction has created a significant profit margin for the smugglers, enabling them to sell diverted fuel on the international market for a much higher price.
The Expanding Network
To further cement the smuggling operation, Sudani’s government authorized the creation of 37 new asphalt plants, effectively doubling the number of plants almost overnight. However, some of these new projects appear to be fictitious, designed purely to secure more fuel oil allocations for export. These plants are then used as cover to help smuggle the oil across borders.
Despite previous efforts by Sudani’s predecessor, Mustafa al-Kadhimi, to clamp down on the trade, such as cutting allocations and raising prices, the network has continued to thrive.
The smuggling of fuel oil is not just a matter of economics; it is deeply intertwined with Iraq’s political dynamics. Iran’s influence in Iraq—through groups like AAH and Kataib Hezbollah—has ensured the persistence of this illicit trade, making it difficult for the government to take meaningful action against it.
Blending Iranian Fuel Skirting Sanctions
The illicit fuel oil trade in Iraq has found a way to flourish by employing sophisticated methods to bypass international sanctions and sell fuel on the global market.
A critical aspect of this operation involves blending Iraqi fuel oil with Iranian fuel, allowing Iran to skirt tough sanctions on its energy exports. This smuggling network continues to exploit Iraq’s subsidized fuel program, which offers fuel at prices far below market value.
Once diverted from the official allocations, the smuggled fuel oil follows one of two primary routes, both shrouded in deception and manipulation.
One method involves exporting Iraqi fuel directly through southern ports, like Basra’s Khor Al Zubair and Umm Qasr, with forged documents listing the fuel as legitimate byproducts of refining, such as vacuum residue or flancoat. These are substances that can be exported without raising suspicion since they are legal byproducts of oil refining.
The second route, which is particularly crucial for Iran, involves blending the diverted Iraqi fuel oil with similar Iranian fuel oil, passing it off as purely Iraqi. This blending operation makes it easier for Tehran to bypass sanctions placed on its energy sector by Western nations. The fake documentation used in both routes ensures that the fuel appears legitimate when it reaches buyers, primarily in Asia.
The Heart of the Operation. Basra
The southern Iraqi city of Basra has emerged as the epicenter of this smuggling operation. Key blending facilities, often managed by the State Company for Mining Industry, are located throughout Iraq, and they play a central role in processing and exporting the illicit fuel.
These facilities are authorized to transport fuel oil between blending stations and export products like flancoat.
However, the blending operations themselves are carefully concealed, with Iraqi engineers handling the technical aspects, typically during ship-to-ship transfers at sea, making it hard to detect the mixing of Iranian and Iraqi fuel.
Evolving Government Responses
In an attempt to address this growing problem, Sudani’s government has raised the subsidized fuel price several times. By July, the price had surged to $369 per ton, and allocations to asphalt plants were recommended to be cut to about 60% of their capacity.
However, since August, these prices have started to decrease again, now ranging between $228 and $268 per ton, keeping the profit margins high for those involved in the smuggling network.
Despite these efforts, the smuggling continues to thrive, with the blending of Iraqi and Iranian fuels serving as a key method for evading sanctions and profiting from the illicit trade. As the network grows more sophisticated, it becomes increasingly difficult for authorities to close the loopholes that allow these illegal operations to flourish.
For now, the smuggling of blended fuel oil remains a critical source of revenue for Iran and its proxies, leaving Iraq’s government with a tough challenge in curbing the trade.