JUL
30

Black Market for Black Gold

 
A fascinating new dynamic has emerged in recent weeks: a growing black market for oil and petroleum products across the Middle East, revenues from which are bankrolling ISIS, Libyan militias, and the Kurdish Autonomous Region alike. Reuters reported last week that the Islamic State’s caliphate is now almost entirely funded by oil revenues, generated by the roughly 80 small oil wells within ISIS territory. Now that the group has blocked the flows of government subsidized petrol products in parts of Iraq and Syria, it is selling gasoline produced at bootleg refineries for $3.50-$5.50 per gallon—triple the normal price. In addition to controlling revenues and supply within its own borders, ISIS is smuggling oil into Turkey and Iran through Mosul and the Kurdish Autonomous Region, respectively. According to reports, the sales and smuggling are bringing in up to $3 million per day for the Caliphate. While significant, $3 million per day is small in the context of oil’s actual worth and the revenues of other producers. For example, based on EIA’s records of OPEC revenues, in 2013 Algeria earned roughly $164 million per day from its oil exports. Algeria is a relatively modest member of the cartel, only producing 1.6 million barrels per day that same year. Saudi Arabia, OPEC’s largest member in terms of production, earns approximately $750 million per day. In addition to low output, ISIS must sell its oil at a steep discount. U.N. sanctions placed on the organization have made it impossible to purchase the oil through official channels, forcing them to slash prices. According to Keith Johnson of Foreign Policy, some of the oil is sold to middlemen in Syria at a scant $10 to $22 per barrel, who transport it to Turkey, Iran, and Kurdistan for refining. Other oil, which is sold directly by the Islamic State from its own tankers, earns the caliphate $50 to $60 per barrel. These oil fields are unlikely to maintain current output for long—they are old and require constant maintenance to keep pressure high and oil flowing. ISIS is unlikely to have the technical capacity to maintain and repair equipment as necessary. It is worth noting, however, that the group has various other sources of funding. Like many other terrorist groups, its revenue streams include extortion, protection rackets, local taxes, and smuggling. The group’s need to provide some basic local government services to maintain control of its new territories means it also has relatively high expenses. ISIS isn’t the only growing provider of black market oil. The Kurdish Autonomous Region is taking its subversive oil exports to the next level. A tanker full of KRG oil was cleared over the weekend by the United States Coast Guard to unload in none other than the port of Galveston, Texas. The tanker’s approximately 1 million barrels of crude oil onboard—worth some $100 million at international prices—has been the subject of an escalating dispute. The U.S. State Department officially opposes independent Kurdish oil sales, but an anonymous official was quoted earlier this week saying the department would not interfere with the cargo as a “private commercial matter,” and went on to say, “Our policy has not changed. Iraq's energy resources belong to all of the Iraqi people.” Some speculate that the Coast Guard’s clearing of the tanker in cooperation with the U.S. National Security Council is just the latest sign of American frustration with Iraqi Prime Minister Nuri al-Maliki’s ineffective governance, and could have even been an effort to pressure Maliki into cooperating more closely with the United States and the Kurds. Baghdad has repeatedly threatened to sue anyone that buys Kurdish oil, and stepped in on Monday, claiming that the KRG "illegally misappropriated" the tanker's cargo, securing a warrant to seize the oil if it is brought ashore in Texas. The KRG is fighting back, seeking to address “certain misrepresentations” by Iraq’s oil ministry. The Kurdish government maintains that it legally shipped and sold the oil currently held aboard the United Kalavrvta tanker, 60 miles off the coast of Galveston. Its lawyers also argue that the U.S. court has no jurisdiction over what is essentially an Iraqi constitutional issue. A federal magistrate ruled yesterday that U.S. Marshals were not authorized to seize the cargo unless the ship comes closer to shore, or the oil is unloaded onto smaller vessels, leaving the vessel in effective tanker purgatory. One of four vessels loaded with Kurdish crude, it is far from the first to experience significant challenges in finding a buyer. All Kurdish oil is being sold at some discount, as buyers are concerned about potential legal challenges from Baghdad. Speaking of discounts, Libya continues to face challenges in its effort to resume exporting oil. Last week, it was determined that while some ports had re-opened and oil exports were seen as viable, buyers were uninterested in purchasing the oil at full prices given the nation’s repeated failures to resume exports over the past year. Another spike in violence over the weekend led to the burning of a fuel complex near Tripoli, as fighting between rival militia groups spiraled out of control. Firefighters abandoned efforts to extinguish the blaze, ignited by a missile strike, while two rival brigades of former rebels fighting for control of Tripoli International Airport turned the area south of the capital into a battlefield. Oil smuggling has been a critical driver of the country’s persistent instability, according to a recent report. Last year the country lost over $5 billion from oil imported from Europe, which was sold as heavily subsidized gasoline to the Libyan people, who then smuggled back out of the country. In the face of nonexistent export revenues and the drain of smuggling on the country’s withering financial resources, the interim central government has shown no ability to tackle the myriad battling militias. Each of these three cases is connected by the common effort to achieve statehood—or at least, in the case of Libya, prevent collapse. For ISIS, which has arguably “gone from being the world's richest terrorist organization to the world's poorest state,” oil revenues are enabling them to maintain order over the territories they have seized. For the Kurdish Regional Government, oil exports are a way to obtain the necessary revenues to achieve their long-sought sovereignty. For Libya, oil smuggling is obviously a matter of survival for many civilians, but revenues from legitimate exports are imperative if the country intends to re-unify and take power back from various regional militias. In a region which seems terminally in flux, the black market for black gold appears more alive than ever.