This analysis may explain an overlooked factor in the recent oil price war which drove brent crude prices way down, much to the dismay of oil dependant economies like Russia and Iran.
The Islamic State, previously the Islamic State of Iraq and Syria (ISIS), has been a key focus of global attention for the past several months, becoming the number one terrorist target for the United States and its Western allies.  However, one of the remarkable but little known features about this terrorist organization is how it operates a significant oil and gas network in both Syria and northern Iraq as a key source of its funding. These militants, according to U.S. Energy Information Administration (EIA) chief Adam Sieminski, “produce as much as 100,000 oil barrels per day (bpd), reaching $9.6 million in the world markets. The expectation for Islamic State militants’ oil income is less than this amount” (BasNews, September 25). Restricting the ability of the Islamic State to derive revenue from this oil network for its terrorist operations has been a key focus of U.S. military strategy and Western diplomatic activity since the organization became the latest strategic threat to American interests in the Middle East.
On September 23, U.S. fighter jets attacked over a dozen modular and makeshift oil facilities operated by the Islamic State in both Syria and in Iraq. According to U.S. Central Command (CENTCOM), 13 of the airstrikes were against 12 modular oil refineries in Syria controlled by Islamic State fighters, along with the al-Tanak oil field in the Mayadin and Albu Kamal areas of Deir al-Zor province as well as the Qouriyeh oil-producing area. Deir al-Zor, which borders Iraq, is now almost entirely controlled by the Islamic State, but was a major Syrian oil-producing province before Syria’s civil war began more than three years ago. Furthermore, on September 28, the United States and its allies conducted eight air attacks against Islamic State positions in Syria. Among their targets were four makeshift oil refineries. 
Internationally, the United Nations also has recognized the importance of the Islamic State’s oil operations. On August 15, 2014, the UN Security Council unanimously adopted Resolution 2170 under the binding Chapter VII of the UN Charter, which deployed sanctions against the “Islamic State” and “Nusra Front” to disrupt the financing resources of these two militant organizations, included banning the purchase of oil from them and imposing sanctions on companies that do so. 
Despite the level of international attention to the oil revenue component of the Islamic State’s operations, little is known about the production and trade of oil and other illicit activities that have made the Islamic State one of the world’s leading terrorist organizations.
The Nature of the Islamic State’s Oil Activities
In the convoluted picture emerging in the no-man’s-land between Syria and Iraq where Islamic State militants dominate, reports began to surface in early June that Islamic State fighters were selling looted Syrian oil to the regime of President Bashar al-Assad. According to Shiraz Maher, senior research fellow and head of outreach at the International Centre for the Study of Radicalization at Kings College London, the Islamic State was selling oil from the territory that it controls back to the al-Assad government in Damascus. Maher observed, “It [the Syrian regime] will act in its own self-interest and that will mean cutting a Faustian pact with the fighters of ISIS for the time being” (New Statesman [London], June 23; VOA, June 20).
At the same time, much of what is known about the Islamic State’s oil operations can be traced back to the period of Saddam Hussein when the former Iraqi leader used smuggling routes to export oil in order to avoid Western sanctions. James Phillips, a Washington expert, observed that the supply chain of routes, individuals, families and organizations that allow oil smuggling are well-established and predate the Islamic State. Some in fact date back nearly two decades to when Hussein smuggled oil during the UN’s oil-for-food program, established in 1995. Phillips remarked, “Those borders have never been sealed and they never will be sealed” (New York Times, September 14).
Earlier this year, the Islamic State made key strategic gains in its effort to harness regional oil producing capabilities by launching a two-day military operation overrunning key areas of northern Iraq. Shortly after the fall of Mosul on June 10, the group held seven oilfields and several small refineries in northern Iraq and was besieging Iraq’s largest refinery at Baiji. Then in mid-June, the Islamic State overran the Najma and Qayara oilfields near Mosul and advanced further south toward Tikrit, taking over the Himreen and Ajil fields. Ajil alone is a key strategic asset that produced 25,000 bpd and 150 million cubic feet of gas per day, which was shipped to the Kirkuk refinery. Most of the Islamic State-held oil wells (one Kurdish official estimates there are roughly 80 of them) are sealed and not producing, but according to Iraqi officials, those that are pumping are having their output sent to be processed by mobile refineries in Syria in areas controlled by the Islamic State. The fuel is being turned into low quality gasoil and gasoline, which are then brought back to Mosul for sale (Reuters, July 23).
According to Mosul provincial council’s energy committee head Husham al-Brefkani:
We have confirmed reports showing that the Islamic State is shipping crude from Najma oilfield in Mosul into Syria to smuggle it to one of Syria’s neighbors [Turkey]… It is triple the price before, but drivers have to buy it because subsidized government fuel was halted (VOA, July 23).
Al-Brefkani added that Turkish middlemen were buying the smuggled crude at the heavily discounted rate of roughly $25 per barrel versus the world spot market price of roughly $100 per barrel. According to a Turkish party deputy for Hatay near the Turkish-Syrian border, the Islamic State smuggles oil to Turkey through secret pipelines along the Syrian-Turkish border at Hatay, Urfa, Antep, Gaziantep and Kilis, with total sales since the beginning of the year now reaching $800 million (Taraf [Istanbul], June 13).
The Turkish government, however, has dismissed these allegations. On September 24, Turkey’s Energy Minister Taner Y?ld?z denied the allegations, saying that the country’s energy trade was in compliance with all rules and regulations and that “Turkey has not received such oil” (A Haber [Istanbul], September 24). Al-Brefkani maintained, however, that the Islamic State was now the sole sponsor of the imports from Syria, commenting, “They use part of it for their vehicles and sell the rest to their traders in Mosul” (Daily Zaman [Istanbul], July 23).
Experts estimate that the Islamic State is obtaining approximately 300-500 barrels of oil from each of the refineries under its control, in some cases generating $1-3 million dollars of revenue per day (Bugün [Istanbul], September 26). However, there is some dispute about the actual amount of revenue that the Islamic State is generating from oil operations. For example, Masrur Barzani, intelligence chief and head of the Kurdistan Regional Government (KRG) National Security Council as well as KRG President Masoud Barzani’s son, said that the Islamic State receives as much as $6 million in revenue per day (National Iraqi News Agency, September 22).
Meanwhile, the Islamic State has also been vandalizing oil installations used by Kurdish Peshmerga forces in northern Iraq in order to deny the Kurds a major source of their own revenue. On August 28, Islamic State militants torched the Ain Zala oil fields in Ninewah province near Mosul in order to hinder the Peshmerga forces’ advance as they approached Islamic State strongholds. The Ain Zala oil fields produced 20,000 oil barrels per day and have estimated reserves of about one billion barrels (BasNews, August 28).
Aside from its oil operations, additional information about the vast revenue network that the Islamic State generates came from recent testimony by a senior U.S. government official. On July 24, Deputy Assistant Secretary of State Brett McGurk told the Senate Foreign Relations Committee that even before the militants captured Mosul, Iraq’s second-biggest city:
We had been concerned about Mosul for the past year, as it had become the primary financial hub for ISIL [Islamic State], generating nearly $12 million per month in revenues through extortion and smuggling rackets. 
The Future of the Islamic State’s Oil Operations
For the foreseeable future as the United States and coalition allies ramp up the air campaign against the Islamic State, the oil factor will continue to play a major role in strategy. The aerial campaign has already led to a dramatic increase in prices that the Islamic State charges its customers. According to the UK-based Syrian Observatory for Human Rights associate Rami Abdelrahman, the price of a barrel of diesel has more than doubled, from 9,000 Syrian pounds ($55.76) to 21,000 ($130) in Aleppo (Reuters, September 28).
Part of the problem for the coalition planners of the allied air attacks is one of scale; unlike the stationary refineries now under the Islamic State’s control, a medium-sized makeshift refinery, mounted on trucks, can process up to 200 barrels of crude a day. Interestingly, the United States has adopted a policy of disabling rather than destroying Islamic State oil facilities. At the September 25 press conference discussing the attack on the Islamic State’s refining facilities in Syria, Defense Department spokesman Navy Rear Admiral John Kirby stated:
We’re trying to remove the means through which this organization sustains itself. These refineries were in place before ISIL [Islamic State] came along. And assuming that Syria gets to a point where it’s better governed, you know, we’d like to preserve the flexibility for those refineries to still contribute to a stable economy in what we hope will be a stable country when the Assad regime is not in control anymore. 
Kirby added that until the time when the refineries can be used by a moderate opposition, the airstrikes will stop the refineries from being used to produce petroleum.
Another issue that the Islamic State is facing in exploiting Syria’s oilfields is operating them without the trained personnel who have been driven away by the militant groups’ brutality. In June, Syria’s largest light oilfield, Omar, produced roughly 32,000 bpd, Tanak – 19,000 bpd and the badly damaged al-Kharrata, Thayyem and al-Ward fields just 300 bpd between them. These fields were already mature and geologically complex and, as mature fields, relied on large amounts of water injection to maintain pressure and sustain production (The National [Abu Dhabi], September 29). Much of the output is refined locally in primitive facilities, the type hit in the recent raids.
Furthermore, the Islamic State’s control of Syrian and Iraqi oilfields is not absolute – in Iraq, Kurdish and central government forces have retaken several fields, leaving just the Hamrin, Najmah and Qaiyarah oil fields in Islamic State hands.
Turkey’s entry into the fight against the Islamic State will likely prove to be a game changer, if for no other reason than the use of Turkish airfields will allow a massive expansion of aerial attacks. It will also hit the Islamic State’s oil revenues, as the group’s oil exports involve not only improvised pipelines, but large amounts of oil trucked through mountainous and dangerous territory, which will now be vulnerable to air attack. These trucks and pipelines would have to cross the 560-mile Turkish-Syrian border that, theoretically, is now sealed.
A second potential asset in combatting the Islamic State would to be to purchase oil from Syrian Kurds, allowing them the financial resources to continue fighting the Islamic State. Abdurrahman Hemo, the Kurdish Economy Minister for Cizire in Syria’s northeast, said that despite the region’s inability to fully utilize its oil reserves, diesel is still less than half the price of water, remarking, “Over the last two years we have had enough oil and diesel oil to provide for ourselves, but we cannot produce most of the oil and want to sell it to countries needing energy resources, particularly Turkey” (Anadolu Agency, September 28).
What is obvious is that in the long term the Islamic State wants to have a global presence like al-Qaeda, but, unlike al-Qaeda, seeks to underpin its appeal beyond terrorism to incorporating historical Islamic precepts. With the resources the Islamic State is acquiring, the West and its allies face a difficult job stopping the organization, especially if the coalition limits military operations to airstrikes that only damage, not destroy, the oil infrastructure under the Islamic State’s control. This restraint further complicates the eventual coalition response to the Islamic State should the airstrikes’ success come to be evaluated as insufficient and impact what form future U.S. assistance to Iraqi “boots on the ground” may take. Allied airstrikes are already impacting the Islamic State’s oil revenue income and if the aerial campaign is combined with a tight closure of the Syrian-Turkish border and the funding of Syrian Kurds via oil purchases, the militant group will face the difficult situation of sharply declining revenue and an expanded “boots on the ground” conflict – all objectives of the current coalition campaign.