By EconMatters [11]
I have to admit that I am a news junkie. So my TV was glued to CNN on the day of the Paris terrorist attack [12]. During its coverage, one of the CNN commentators mentioned that ISIS makes about $2 million a day in oil revenue. That piqued my curiosity and decided to find out more about ISIS oil operation.
Oil as a Strategic Weapon
According to FT [13], ISIS oil strategy has been long in the making since the group emerged in Syria in 2013. The group saw oil as a funding source for their vision of an Islamic state, and identified it as fundamental to finance their ambition to create a caliphate. ISIS controls most of Syria's oil fields where it created a foothold in 2013. Crude is the militant group's biggest single source of revenue.
Read: Obama Put Taiwan on ISIS Radar [14]
ISIS has derived its financial strength from being the monopoly oil producer in a huge captive market in Syria and Iraq. Despite a US-led international coalition to fight ISIS, FT describes a "minutely managed" sprawling ISIS operation akin to a national oil company in just two years with an estimated crude production of 34,000-40,000 barrels per day (bpd).
$1.5 million a Day to Fund The Terrorist Group
The group sells most of its crude directly to independent traders at the wellhead for $20-$45 a barrel earning the group an average of $1.5 million a day. Without being able to export, ISIS brought hundreds of trucks and started to extract the oil and transport it. According to an FT interview of a local sheikh, an average of 150 trucks is filled daily with about $10,000 worth of oil per truck. Most traders can expect to make a profit of at least $10 per barrel.
Son of Turkey's President Is In on ISIS Oil?
The arbitrage had the potential to go a lot more than $10 a barrel when oil prices were high. Russia has accused Turkey of buying ISIS oil (allegedly the son of Turkey's President [15] is involved, and also allegedly the U.S. is aware of it), reselling it to Japan and Israel for huge profits. Smugglers have been using boats, pumps, carrying on foot, by donkey or horse. Some see the oil production from ISIS as a contributing factor to the global oil glut pushing down oil prices.
Read: Using the Wave Principle to Trade [16]
ISIS Adapts to Low Oil Prices
However, the biggest threat to ISIS oil production has been the depletion of Syria's aging oilfields despite the group's efforts to recruit skilled oil workers. ISIS does not have the technology of major foreign oil companies to counter the production decline.
ISIS has tried adapting to the new lower oil price environment by turning to oil midstream and downstream. FT and Aljazeera both reported that ISIS has recently expanded into refining and petrol stations. In ISIS-controlled territory, there's no shortage of demand.
Russia & China Eyeing Middle East While Obama 'Pivots' to Asia
It is widely acknowledged that one of the reasons the international coalition against ISIS has not been effective is the reluctance of the coalition to target ISIS oil infrastructure (trucks, oilfields, pipelines) where there's a large civilian presence, and for the potential environmental impact [17]. Russia jumped in to aggressively target specifically ISIS oil operation and infrastructure aiming to cut off its funding source after ISIS took out a Russian plane. In essence, Russia is trying to push the U.S. aside and take a leadership role in dealing with the ISIS and Middle East chaos.
Russia's timing is impeccable just as the U.S. is 'pivoting' to Asia [18], while China is only too eager to help Russia with an eye on the Middle East energy assets for its future energy security. The alliance of China and Russia may have been weakened on a now fragile economic ground [19] due to the slowing economy in China and low oil prices negatively impacting Russia. However, the U.S. could be in serious trouble if the world starts trading oil in Reminibi instead of the U.S. dollar now that IMF has approved Chinese yuan as a main world currency.
Read: Federal Reserve and Interest Rate Hike [20]
Coalition In-fighting
Judging from the allegation that Turkey is buying ISIS oil, and that Turkey shot down a Russian Jet within a narrow 17-second window (some say the actual window is only 5 seconds), there is some serious in-fighting within the coalition against ISIS (perhaps that's why Obama is desperate enough to drag Taiwan into the 'Coalition' [14]). One thing seems to always ring true in international politics: When it is about money or self-interests, countries seem more than willing to go that extra mile despite potential dire implications.
This could mean ISIS will keep its funding source with its oil making its way to all the intended and 'unintended' recipients like Japan, a significant U.S. ally. ISIS has so far demonstrated its ample capabilities in adapting and organizing its operation, this suggest there's a long way to go in the fight against ISIS terrorists.