While other terrorist groups, such as Al-Qaeda, depend heavily on donations from their followers and sympathisers, IS has been able to secure its own funding, independent of foreign sponsors, by becoming a monopoly producer of oil in areas under its control.

According to the Financial Action Task Force (FATF), IS represents a new form of terrorist organisation, where funding is ‘central and critical’ to its activities. Unlike other similar groups, IS has managed to establish  a functioning state, issuing  identity cards, collecting taxes, putting its own legal system in place, and maintaining its own army of up to 25,000 fighters.

In order to fund these activities, IS relies on multiple sources of funding, including up to USD1 billion seized from Iraqi banks; hundreds of millions in taxes and extortion, taken from millions civilians living in the territory under the group’s control; revenue from agriculture; and millions of dollars from looted antiquities and ransom claims.

Since the beginning, oil has been a strategic resource for IS, providing the group independent and continuous financial backing to buy arms, food, spare parts and medicine as well as ensuring local support, allowing  recruitment of new fighters and the ability to attract  experts from different fields. Besides, it ensures the self-proclaimed state a relatively high degree of self-sufficiency since part of the production is consumed locally, thereby satisfying IS’ strategic needs for electricity, mobility, and heating.

Oil price plunge – a double edged sword 

Plunging oil prices did significantly reduce the “caliphate’s” profits, but at the same time, had adverse effects on anti-IS coalition efforts, reveals the European Parliament Research Service. A study from March indicates “Kurdish Regional Government (KRG) oil revenues, for example, are significantly lower than expected, resulting in an estimated USD14 billion debt, of which USD 4 billion is owed to foreign oil companies. KRG President Massoud Barzani’s low popularity, and the risk of instability, may be additional disrupting factors, given that most territorial advances against IS throughout 2015 were made by the Kurdish Peshmerga and the Kurdish People’s Protection Units (YPG), supported by the US-led coalition and Iraqi security forces.”

In addition, low prices have crippled the revenues of Saudi Arabia and other countries in the Arabian Gulf, heavily engaged in conflicts in Syria and Yemen, which are expected to fall by USD 300 billion in 2016 according to the International Monetary Fund estimates, and may diminish their commitment in the struggle against IS.

Despite crumbling oil prices, IS was still making USD 40 million a month on oil alone in early 2015, but US-led and Russian airstrikes have significantly reduced this amount. In addition, most oil fields in the area are maturing and IS doesn’t have the know-how or the technology to maintain them. However, it is difficult to determine definitive oil production in the ISIS control territories.

IS groups sell most of their crude directly to independent traders at oil fields. Before air strikes were lunched, Syrian and Iraqi buyers were waiting in long lines with their trucks to buy oil directly from the field. Now, they are told the exact time and location where they can fill up their trucks, avoiding the risk of waiting in lines and being obvious air targets. Ironically, even various Syrian rebel groups that clash with IS on the front lines, had no other choice than to buy oil from the group.

Besides larger oil refineries, significant portion of oil is refined by local residents in rudimentary refineries, whose products are sold to IS under purchase agreements. In the past, approximately half of the oil was shipped to Iraq while the other half was consumed in Syria. But after intensive air attacks ever more fuel is transferred to Iraq due to numerous Russian air attacks within Syrian territories. In early March this year, CNN reported that IS production has fallen below 20,000 bpd, while Col. Steve Warren, spokesman for the Combined Joint Task Force in Baghdad, says it may have fallen to about 34,000 barrels a day, from 50,000 produced in early 2015.

Because of this rapid decline in production, some commentators have argued that IS’ lucrative business will eventually dry out.

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IS production may have fallen to about 34,000 barrels a day, from 50,000 produced in early 2015,

Air attacks heavily damage IS oil production

There is no doubt US-led and Russian airstrikes have significantly reduced IS oil revenues, its production infrastructure and trade potentials. But there are different opinions as to how successful air attacks have been as both parties involved accuse the other side of underachievement in suppressing IS and its oil producing capabilities, and it seems reports, above all, reflect the chilled relations between the two global powers who are both trying to take the credit for any success, while trying to diminish the contribution of theri rivals.

Until last fall, reports and eye witnesses from Syria claimed that western airstrikes had not been aimed at oil tankers. Russians, on the other hand, have been said to have attacked them more aggressively. Western allies, however, focused on disrupting the extraction process and IS vehicles. But since last October, the US-led coalition has launched Operation Tidal Wave II, aimed against oil transport, refining and distribution facilities and infrastructure. Targets also include transport trucks operated by middlemen, which previously were left alone. Additionally, the goal of the campaign is to hit the oil fields hard enough so they cannot be exploited by IS, but not destroy them completely, so they could be later repaired by professional companies.

This is, however, easier said than done. Most of the engineers and oil company personnel have left the country, while IS have managed to attract some of the oil business professionals and to smuggle spare parts and equipment to repair the damage and continue to keep the black gold flowing. “As of 9 February 2016, the military operation in Syria had resulted in the destruction of, or caused damage to, 1,216 oil infrastructure-related targets,” the European Parliament research study specified. In addition, IS has lost about 40 percent of the area it held in Iraq, as well as parts of north-eastern Syria that have both good farmland and oil.

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The latest news from IS occupied territories suggests that the caliphate is struggling with declining oil production, caused by airstrikes

IS suffer serious blows

So, is destruction of IS’ oil a sure path to victory? It’s not that simple of course, but airstrikes have significantly harmed IS positions and undermined the caliphate’s resilience.

The latest news from IS occupied territories suggests that the caliphate is struggling with declining oil production, caused by airstrikes. IS has been forced to ration the use of gasoline and other fuels. Present oil production has become unreliable and is often disrupted. Although not all the small refineries have been destroyed, the remaining facilities cannot meet the demand of IS according to the experts from the Middle East Forum.

Since late 2015, IS head officials have been warning IS fighters to stop using military vehicles for personal use. In addition, IS has cut the salaries of its fighters, as the group is facing ever greater financial problems. According to CNN’s sources in northern Syria, the price of fuel outside IS control is about USD 20, while in IS-held territory it has stayed above USD 40, while opposition activists say the price of gas in Raqqa has risen 25 percent. Such difference in prices is likely suggesting fuel shortages.

In addition, IS has also lost control of stretches of the Syria-Turkish border to Kurdish forces, stopping widespread illicit trade from which IS benefited. Perhaps IS’ biggest problem now is a shrinking tax base as people have fled territory under its control, especially the professionals it needs, such as doctors and engineers.

Still a dangerous opponent

Despite the growing pressure IS faces, the group still makes for a dangerous opponent and is a long way from being defeated or its sources depleted. In the past two years, IS has seized a lot of personal property which has been resold, while bank accounts of those who wanted to live within its borders have also been seized. In addition, IS earns as much as USD150-200 million from illicit trading of antiques from Syria and Iraq, according to Russia’s ambassador to the United Nations, Vitaly Churkin, who claims the main centre for smuggling of cultural heritage items is the Turkish city of Gaziantep. “The stolen goods are sold at illegal auctions through a network of antique shops and at the local market,” he says.

Furthermore, the European Parliament study predicts that IS will acquire more funding from its western wilayat or province in Libya, Yemen and Nigeria, or resort to more violent means such as kidnapping for ransom all across Africa and the Middle East. In addition, the study warns that IS may intensify its propaganda and intensify its attacks worldwide and energise its supporters. Finally, the caliphate may take advantage of the political and economic instability in the countries that are particularly hard hit by low oil prices, while taking advantage of the growing social discontent among their population. Such socio-economic uncertainty creates fertile ground for radicalization, which IS may use to spread its influence and ideology especially in petro-states such as Saudi Arabia, Nigeria, and parts of Russia.

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