Countering Islamic State: How much can a squeeze on oil revenue do?

Air strikes by the United States and Russian militaries show a new focus in international efforts against the self-proclaimed Islamic State in Iraq and Syria: to undercut the group by degrading its ability to use oil as a financial lifeline.

It’s a logical strategy – seizing on what many experts see as the biggest way to meaningfully constrict funding for the Islamic State (often abbreviated as IS, ISIS, or ISIL). The effort to squeeze IS financially – already under way on many fronts before the Paris attacks – gained new intensity last week.

Russia’s defense minister said Friday that the Russian air strikes destroyed 15 oil refining or storage facilities and 525 oil trucks – and said this will put a serious dent in IS oil revenues, according to an Associated Press report.

The US military also reported destroying more than 116 trucks last Monday that were being used to transport oil sold by the militant group.

How much can such stepped-up efforts from the air achieve?

Experts on the group say a money war against IS isn’t likely to deal a devastating blow, but it can impose meaningful damage.

“It's an extremely important part of a comprehensive solution,” says W. Andrew Terrill, a Middle East expert at the US Army War College in Carlisle, Pa. The leaders of IS “make excellent use of the money they attain…. The more you cut off that money, the more you make it difficult for them to do the funding of all sorts of nefarious projects.”

The promising side of this strategy is that oil is clearly a major source of IS funding, and the group needs a lot of money to operate. Distinct from groups that exist more narrowly as terrorist organizations, IS has an army with payroll costs reaching millions of dollars per month.

The challenges are also clear, though. Oil isn’t the Islamic State’s only sizable funding source. Most notable is the extraction of rents (various forms of extortion, fees, and taxes) from populations in IS-held territories.

“Over time, we’re going to have a significant impact on the oil revenue piece [of the puzzle],” predicts Hardin Lang, an expert on the Middle East and political Islam at the Center for American Progress, a left-leaning Washington think tank. “It’s going to be a much harder piece of the puzzle to cut down on their ability to extort from the population.”

That’s why, in a recent in-depth analysis, Mr. Lang concluded with colleagues that it will be hard to starve IS of funds without retaking its currently sizable territory.

In carving out a territorial base, IS represents a different form of terrorist threat. Aspiring to be a self-financing and growing “caliphate,” it’s not reliant on wealthy patrons in nations like Saudi Arabia and Kuwait, the way Al Qaeda was.

Still, heightened efforts on the funding front can do something important, the report suggests. It says these efforts can aim to “make America’s adversaries devote more time and energy to securing resources than sowing chaos in the Middle East and beyond.”

Estimates of Islamic State funding are based on imperfect intelligence, so it’s hard to know how much impact military and financial targeting of Islamic State is already having.

US intelligence estimates have pegged IS monthly oil revenues as high as $40 million to $50 million, although some analysts believe that has dropped to about $10 million. The oil is typically sold to smugglers who truck it elsewhere in the region, including across the Turkish border.

There is some debate about how important oil is to Islamic State coffers. Some intelligence officials estimate that oil may account for half of the terrorist group’s revenue. But other experts say that the extortion of local populations may be the Islamic State’s No. 1 source of income.

Other activities yield smaller but meaningful income: the sale of antiquities, kidnappings for ransom, human trafficking, gifts from rich supporters. Last but not least is the one-time haul of money looted from banks when IS took over places like Mosul, Iraq – a total that may have reached $500 million to $1 billion in that city alone, experts say.

On the cost side of the IS ledger, payroll of fighters alone may run higher than $300 million per year. The group also has to spend on paying oil-field technicians, and on providing some government services in the regions it controls.

Add it all up, and some analysts see the IS financial model as unsustainable in the long run, without further territorial conquests. That becomes especially true if the opportunity to sell oil can be constrained.

"There are already signs that ISIL is unable to provide fundamental services to the people under its control," a US Treasury analysis concluded early this year. "Its revenues are insufficient to fund the several billion dollar annual budget that the Government of Iraq had previously allocated to these areas." The analysis pointed to diminished availability of fuel, food, and electricity in the region.

In the past, the Obama administration had been reluctant to make oil trucks a military target, a reflection of the hard choices involved in the money war. To squeeze the Islamic State is also to squeeze the larger local populations. “The goal is to liberate the population,” with minimal hardship on them, says Lang. Yet attacks targeting oil production affect the energy supply of those populations, he says, not just black-market sales beyond the region under IS control.

In last week’s strike against oil trucks, concerns about civilian casualties were addressed by dropping leaflets ahead of time warning drivers to leave their vehicles, a US military spokesman said.

One Rand Corp. analysis last year listed air strikes against oil facilities and industry-related targets first in its list of steps to degrade IS finances. But it also urged against rendering oil fields permanently inoperable.

“The tricky element will be avoiding destroying those assets that legitimate successor governments will need to maintain either revenue or legitimacy,” said the analysis by Patrick Johnston.

To Lang, next steps for the US in the fight to crush the group’s cash flow should include encouraging Turkey to do a better job securing its border with Syria – and perhaps assisting in the effort. That border is a channel for money and foreign fighters to reach IS, and for smuggled goods including oil to flow in the other direction.

Such efforts to cut off trade and funding are at best a partial fix, Lang argues.

Looking ahead, “The thing that’s going to make the real difference on ISIL’s bottom line is pushing back on their control of territory ... and their ability to extract rents from the population,” Lang says.