Hitting the Islamic State’s Oil Isn’t Enough

U.S. and coalition warplanes have launched a rapidly intensifying air campaign against the Islamic State’s oil wells, refineries, and pump stations in recent days, mounting combat missions designed to incinerate tanker trucks and knock out the facilities that form the backbone of the group’s oil-smuggling racket.

The air raids are meant to wreck the Islamic State’s ability to profit off captured oil fields, but even if the strikes work, the extremists will have plenty of cash on hand. That’s because the militant group’s most important revenue stream comes not from crude oil but from extorting money from the millions of people who live under its brutal rule in territory seized in Iraq and Syria.

In July, Daniel Glaser, the assistant secretary for terrorist financing at the U.S. Treasury Department, said the Islamic State had a massive one-time cash infusion from the dozens of banks it seized in Mosul, Iraq, in 2014. The group’s biggest ongoing source of money, however, comes from something quite different: extortion. Forcing the 8 million people under its thumb to pay extortion fees nets the Islamic State hundreds of millions of dollars a year, Glaser said, with the militants requiring payments for everything from garbage pickup to heating oil to road tolls.

Oil sales and smuggling ranked third, he said. That means the current U.S. air campaign — dubbed Operation Tidal Wave II after a series of famed World War II bombing runs — may be less effective than U.S. officials hope. President Barack Obama’s administration had previously ruled out targeting tanker trucks or major parts of Syria’s oil infrastructure because of the risk of causing civilian casualties and concerns about permanently destroying oil facilities that the country would eventually need once the war ended, officials said.

That internal debate ended with a literal boom on Oct. 21, when U.S. warplanes began to knock some of the biggest Syrian oil fields out of action, at least temporarily. The Islamic State has controlled most of Syria’s major oil fields since 2014, but the pumps at the largest fields — Sijan, Azraq, Abu Hardan, Tanak, and al-Omar — have all been hit in about 12 airstrikes since the start of the campaign last month. In one bombing raid early on Monday, four A-10 Warthog aircraft and two AC-130 gunships destroyed 116 tanker trucks near the Syria-Iraq border, after dropping leaflets warning the drivers that a strike was imminent, military officers said.

The Obama administration has said that disrupting the Islamic State’s finances is a key pillar in its strategy for ultimately defeating the group, but after more than a year of U.S.-led airstrikes, experts say the effort has mostly failed. While Western governments have imposed sanctions against suspected Islamic State interlocutors, the group has kept up its military operations in Syria and Iraq while claiming credit for bombings from Afghanistan to Egypt to France, where horrific attacks in Paris left at least 129 dead on Nov. 13. However, U.S. and European intelligence officials say it remains unclear whether the Islamic State’s core leadership directed and financed the recent spate of terrorist attacks.

Valérie Marcel, an associate fellow on energy at Chatham House in London, said as long as the group controls territory in Iraq and Syria, it will be able to keep generating revenue.

“As soon as they expand territory, their potential for taxes, theft, tolls, and oil revenue increases,” Marcel told Foreign Policy. “They need territorial expansion to maintain their revenue. Controlling territory is the bottom line.”

So far, the United States has relied on the Iraqi Army, Kurdish fighters, and other local groups to fight the Islamic State on the ground and seize back territory — with mixed results. On Monday, Obama said sending U.S. troops to fight the group on the ground would be a “mistake.”

It’s hard to measure the size or scale of the Islamic State’s economy, given that it doesn’t report traditional financial data like other countries. But multiple reports indicate its economy is booming. In 2014, the last year for which data is available, a Thomson Reuters study found that the group controlled assets in excess of $2 trillion and had an annual income amounting to $2.9 billion.

The group, which portrays itself in its propaganda as building a genuine state, raises this money through “taxes.” This includes a 5 percent tax collected for social welfare and salaries, an $800-per-truck levy on vehicles entering Iraq from Jordan and Syria, a road tax of $200 in northern Iraq, a 50 percent tax for the ability to loot Raqqa’s archaeological sites, and a 20 percent tax at similar sites in Aleppo. And for non-Muslims, there is a religious protection fee known as a jizya.

These payments could generate some $30 million per month, according to Thomson Reuters. A 2015 report by Rand Corp. analysts put extortion and taxation revenue higher: $600 million in 2014. That same study estimated that oil generated only $100 million that same year, though many other military and civilian experts say the oil-related revenues are far higher.

U.S. officials said they believe the recent air assault in Syria will put a dent in the Islamic State’s oil profits, which are based almost entirely on selling crude oil within the territory the group controls in Syria. “It should further constrain their ability to sell to truckers,” said one U.S. government official, who spoke on condition of anonymity.

According to Elizabeth Rosenberg, a sanctions expert at the Center for a New American Security, traditional economic penalties levied by the Treasury Department’s Office of Foreign Assets Control don’t work against the Islamic State because the office doesn’t have a traditional banking system to target. Unless specific individuals doing business with the group can be identified, the department’s hands are tied.

Betsy Bourassa, spokesperson for terrorism and financial intelligence at the Treasury Department, and the State Department declined to comment as to whether they believe financial measures like sanctioning people close to the Islamic State has been successful.

Fawaz Gerges, a professor of international relations at the London School of Economics who is writing a history of the Islamic State, criticized the United States for allowing the group to benefit from its oil and war economy for so long. He said Washington and its allies must do more to disrupt it.

“ISIS has been able to create a diverse, self-contained war economy that basically provides enough resources to keep the fight on,” Gerges said. American efforts to disrupt this have “not been as effective as they could have been. They did not deliver a decisive blow.”

There is no sign that the Islamic State’s income from extortion, stolen oil, and other theft has dramatically decreased over the past year, experts said. Oil income appears to have declined somewhat, but industry analysts disagree about how much it may have declined — and why. Global oil prices have dropped, coalition bombing damaged some facilities, and the Islamic State lost control of the valuable Ajil oil field in Iraq when it was pushed out of the city of Tikrit in March, which all could have contributed to reducing the group’s oil income.

The Iraqi government also has stopped paying state salaries and benefits to people in Nineveh province, which is held by the Islamic State and includes Mosul, depriving the Islamic State of a source of income to extort from the local population, though it’s unclear precisely how much it has lost as a result, said Howard Shatz of the Rand Corp. think tank.

Otherwise, the group’s finances remain mostly intact. As a result, the only way to cut off the group’s cash flow is for a military force to drive the militants out of their sanctuary in Iraq and Syria, thereby preventing them from extorting money from a captive population, he said.

But the United States and its European allies remain reluctant to commit a large ground force to take on the Islamic State directly, and — apart from Kurdish fighters — the Iraqi Army and other local forces on the ground have often struggled to roll back the Islamic State from key strongholds.

For the moment, the U.S.-led air campaign appears aimed at encircling and besieging the key cities of Raqqa in Syria and Mosul in northern Iraq in a bid to cut off the group’s smuggling and supply routes.

“Unless you have a capable local force, it looks like it’s more of a war of attrition,” said Shatz.

FP reporter Paul McLeary contributed to this report.

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