Islamic State Loses Its Oil Business

Allied air sorties have damaged the terrorists’ chief source of funds
The aftermath of an airstrike near the besieged city of Kobani, close to the Turkish border, on Oct. 15 Photograph by Murat Kula/Anadolu Agency/Getty Images

On Sept. 10, President Obama announced the U.S. would launch a campaign of airstrikes against the terrorist group Islamic State in Syria and Iraq. The idea was to bomb the jihadis into nonexistence. That’s proving hard: Not only is Islamic State well armed, it’s also well financed, thanks to oil wells and refineries it’s captured. By late June the organization was raising as much as $2 million a day refining and smuggling oil, U.S. officials and terrorism experts say.

Although the airstrikes have failed to keep Islamic State from advancing in the field, they have succeeded in damaging its oil network, reducing its ability to make gasoline and diesel for its tanks and trucks and diminishing a vital source of funding. An Oct. 14 report from the International Energy Agency in Paris estimates the jihadis now control only about 20,000 barrels of daily oil production, down from about 70,000 in August. Most of that production is in Iraq.

In early August, Islamic State controlled seven oil fields and a refinery in Iraq and six oil fields in eastern Syria. The group could produce only half the potential output from the resources it controlled, but it had no problem tapping the region’s well-established oil smuggling network to sell what it did pump. This summer most of Islamic State’s oil flowed through local middlemen and was paid for almost entirely in cash, making transactions extremely difficult to track and shut down through the conventional methods of freezing terrorists’ funds in banks.

According to the IEA, U.S.-led sorties over Syria and northern Iraq are “frustrating the jihadists’ ability to operate oil fields and refineries.” Before the airstrikes, most of the oil smuggled from Iraq was loaded from the Ajeel oil field near Tikrit onto tanker trucks and routed toward Kurdistan. The IEA, citing Iraqi industry sources, estimates Islamic State was loading 120 trucks a day to move about 20,000 barrels from Ajeel. Airstrikes, including ones targeting convoys, have cut that to about 10 trucks and 2,000 barrels a day, the IEA says.

Airstrikes have also wiped out dozens of makeshift “teapot” refineries in Syria, depriving the jihadis of fuel for their war machine. Richard Mallinson, an analyst with Energy Aspects, a consulting firm in London, suspects Islamic State may be running short. Moreover, Turkey and the Kurds have cracked down on its smuggling. In late September the Kurds seized four of its tanker trucks. Since the terrorist group took over Mosul in June, oil prices have fallen more than 20 percent, making its discounted oil less attractive.

Islamic State needs money to run a chunk of territory that’s home to several million people, says Michael Knights, an Iraq expert at the Washington Institute for Near East Policy. These people need basic services the jihadis will have a hard time providing without oil revenue. “Very quickly, Islamic State has gone from the richest terrorist group in history to the world’s poorest nation-state,” he says.

Knights was always more skeptical than other analysts about the sustainability of the money machine. Most of the oil Islamic State got out of Iraq was looted from storage tanks and pipelines. “I think the window where they were making millions of dollars a day was very brief, just a few weeks probably,” he says. “And it closed super quickly once the Turks and Kurds started cracking down on the oil they were smuggling.” Islamic State is now stuck with a handful of damaged oil fields. “They were never going to be an oil power without a pipeline,” Knights says.

Oil is essential to funding Islamic State’s military endeavors. The terrorist group is stuck with high overhead. It has to repair equipment and maintain the salaries it pays fighters. According to Faysal Itani, a fellow at the Atlantic Council’s Rafik Hariri Center for the Middle East, Islamic State pays its roughly 25,000 fighters about $400 a month each, almost triple what competing Syrian rebel groups pay. Itani says Islamic State’s ambitions to create a caliphate have left it vulnerable. “If you’re going to act like a state, you can be taken down like one,” he says. “Draining their oil revenues will eventually start to hurt their ability to attract those fence-sitters out there who are not ideological.”

With most of their capacity in Syria destroyed, the jihadis may go after two refineries closer to Lebanon and still controlled by forces loyal to the regime of Bashar al-Assad. That would open up a broader war and potentially limit Islamic State’s ability to press its Iraqi offensive.

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