- Oil: A Blessing And A Curse For The Middle East
- U.S. Targets Islamic State's Lucrative Oil Smuggling Operations
In a remote area along the Turkish-Syrian border, a line of oil trucks materializes seemingly from nowhere. Quietly, the vehicles line up to purchase oil. The drivers will pay about $18 a barrel, well below the average market price of $93.45.
Still, for the seller -- the Islamic State -- the price represents a 100 percent profit since it has no investment in the oil production.
This is a crucial part of how the group being called "the most dangerous Islamic extremist terrorist group in the world" fills its coffers and funds its brutal advance across Syria and Iraq.
U.S. intelligence officials believe that the Islamic State (IS) -- which they refer to by its former name of ISIL -- has become one of the wealthiest terror groups in history, netting somewhere between $2 million and $3 million every day.
I first wrote about the group's profit making here several weeks ago. Also, as I previously reported, the group continues to sell oil from Syrian wells back to the regime of President Bashar Assad, with whom it is engaged in a fight to the finish.
In fact, most of the illegal trade carried out by IS is oil from fields in eastern Syria, and more recently from fields captured since June in Iraq. The terror group is creating its own economy through a series of pragmatic trades, as Turkey's Zaman newspaper recently detailed.
The U.S. -- along with a coalition of mostly Gulf Cooperation Council states and Jordan -- has started to target some of the Syrian fields in an attempt to sever the group's sources of revenue.
An interesting question to ponder is why did the U.S. and its allies allow IS to achieve so much economic power? The explanation is that the Islamists' take-over of oil wells in Syria, and later Iraq, was gradual. Also, some wells were captured not by IS, but by other Islamists groups that later merged with IS.
Upon "acquiring" the wells, IS faced the immediate challenge of keeping them functioning, which requires skills that neither ISIS nor its affiliates had. ISIS solved the problem by finding local technicians who managed to keep the oil wells pumping at around 60 percent of full capacity.
Before the outbreak of civil war in 2011, Syria was producing between 385,000 and 400,000 barrels per day. An operating capacity of 60 percent still means the group reaps around 200,000 bpd and turns a massive profit, despite selling the oil well below the official market rate.
The report in Zayman quotes an unnamed Western oil executive who used to work in Syria as saying that "the Islamic State makes not less than $2 million daily." That may sound like a lot of money -- and it is -- but IS has huge overheads. It needs to pay, feed, and house its thousands of fighters. It needs to purchase weapons and munitions, and give money to the families of fighters killed in battle. And if they are cognizant of political realities, the group is probably regularly stashing a few million dollars in secret bank accounts for later.
In the meantime, IS has managed to deprive Damascus of some serious revenue stream. The Syrian government reports that its production fell from 164,000 bpd in 2012 to an average of 28,000 bpd in 2013. Oil sales made up nearly a quarter of state revenues before the war. The government says it has lost $3.8 billion in stolen oil because of the conflict.
Syria's pre-war production, estimated in 2001 at around 380,000 bpd, suffered heavily when Kurdish forces took control of some of the fields located in Hasaka province and IS took fields in Shadad, al Omar, Tenak and Ward operated by companies such as Royal Dutch Shell, Total, and Petro Canada.
A number of wells were shut down as foreign firms withdrew and rebels looted equipment. Few people with technical expertise remain in areas where the Islamic State has taken over.
Meanwhile in Iraq, the same script is playing out. IS-controlled oil fields produce around 80,000 bpd. Production has gone down severely as a result of military action by the U.S., its allies and Kurdish forces, but in the interim, IS continues to rake in millions every day.
By Claude Salhani of Oilprice.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.