U.S. Targets Islamic State’s Lucrative Oil Smuggling Operations
With U.S. President Barack Obama’s announcement of an open-ended plan for airstrikes on the Islamic State (IS), the U.S. and its allies will need to degrade the power and influence of the Sunni jihadist group, and that means reducing its incoming flow of oil money.
And the Obama administration seems aware of that, according to a New York Times article that reports that the president and U.S. diplomats are pressuring Turkey to cut off the stream of oil smuggled across its border.
IS controls territory in central and northern Iraq, and is thought to be producing between 25,000 and 40,000 barrels per day (bpd). Since they cannot sell this oil legitimately, they smuggle it and sell it on the black market. Some energy analysts think IS could be pulling in between $1.2 and $2 million per day.
“The key gateway through that black market is the southern corridor of Turkey,” Luay al-Khatteeb, a fellow at the Brookings Institute’s Doha Center, told the Times. “Turkey is becoming part of this black economy.”
Turkey, no friend of IS, is hesitant to help because forty-nine Turkish diplomats are currently being held hostage by IS in Iraq. They were taken during the initial IS onslaught in June.
Smuggled oil could be a pivotal issue for the U.S. as it seeks to destroy IS. The militant group sells oil at a reduced price – perhaps around $25 per barrel. At first, it sold the oil to middlemen, who moved the oil to Iran, Syria, Jordan and Turkey. But as IS’s operations grew, they forced out the middlemen, beat back other militant groups, and are now providing security to their own convoys of oil tanker trucks heading out of their territory to market.
The group then uses the revenues to finance its operations, pay salaries — including support for family members of militant members, even after their death — and sign up new recruits.
The economic lifeline for IS will certainly be a top priority for the United States. Up until now, the U.S. military has not targeted the tanker trucks that flow outwards from IS-controlled territory. But an Obama administration official told the Times “that remains an option.”
The tankers are “clearly visible from the sky should any drone pass overhead, so the smuggling is not particularly furtive,” Howard Shatz, a senior economist with the RAND Corporation, writes in Politico. The roads that tankers use could also be destroyed in order to disrupt the money trail.
Another target could be “mobile refineries,” Shatz says, which IS uses to refine crude oil into useful petroleum products. Along with smuggling crude oil, IS sells refined products to local markets. But even though these mobile refineries provide IS with income, they do not have enough capacity to process all the oil coming from IS territories. There are some larger refineries in Iraq, Syria, and Turkey that refine IS oil.
IS is aggressively trying to expand, but oil remains at the heart of its fundraising strategy. The militant group has tried several times since June to take over the massive Baiji refinery, which is 130 miles north of Baghdad. The refinery can process about 310,000 barrels of oil per day, and is a critical piece of infrastructure that the Iraqi government is desperate to hold onto.
In recent days, IS has renewed its attacks on the refinery, firing mortar rounds and hitting a storage tank, according to Bloomberg News. Luay al-Khatteeb of Brookings said if they do capture the refinery, IS will struggle to operate the huge facility without the expertise of technical staff. Nevertheless, it remains a prize for the organization.
The millions of dollars IS is making from smuggling oil may sound like a lot, but the group also has a lot of costs. Paying salaries and buying weapons is one of them, but Shatz of RAND Corporation says that as a group acting as a state, it needs to provide services to the people in its territories. Just to provide the basics of electricity, water, and other administrative services, the Iraqi government spent far more in the past in IS controlled territory than the $2 million-per-day or so the militant group is earning. Ruling with an iron fist will work for now, but if IS is to last, it will need more cash.
Air strikes may succeed in destroying vehicles and other military equipment under IS control, but cutting off the flow of money – specifically from oil smuggling – will likely go further in weakening the Islamic State.
Originally written for OilPrice.com, a website that focuses on news and analysis on topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.