Will the air campaign defeat Islamic State?

by Gavin Don

The Islamic State is not yet a state (imagine IS at the UN) but I was working yesterday on economic and oil forecasts for Iraq and Syria, and the thought struck me that although IS is not a state, its economy is larger than many actual states.

Consider. IS has sliced approximately 5 million Iraqis and probably another 5 million Syrians out of the economies of Iraq and Syria. In both cases the people living within the Islamic State work at the lower end of national GDP averages for Iraq and Syria, but nevertheless the “proto state” of IS probably has an average GDP per head of about $2,500. That means IS has a GDP of some $25bn, and has the same GDP per head as, for example, Indonesia.

Western media and politicians seem to see IS as a small group of lunatics living entirely on sales of stolen Syrian oil, transported through Turkey via black market buyers and distributors in Slovakia, Dubai, Karachi and a few other less reputable entrepots. This is a naïve and dangerous misinterpretation.

IS oil exports are probably running somewhere around 30 kbpd, with an average margin of perhaps $15 per barrel (even IS has to pay lifting costs and transport costs, and then sells its liquids very cheap). With those margins 30 kbpd would generate $200m of spendable cash – only 1% of the Islamic State’s total GDP. Ready money, sure, and easy to collect, but small.

If IS were a conventional middle eastern state with averagely bad administrative and tax collecting powers it would take perhaps 30% of GDP in tax. As a new administration with a lot of distractions, no administrative depth, and a somewhat discontented and rebellious population, it is likely that IS’ actual tax take is probably much lower. If IS is taxing its economy at half the expected rate it would have “government revenue” of $3.8bn.

On the spending side, IS government services are probably pretty rudimentary, leaving IS able to spend a third to a half of its revenue on defence – something like $1-2bn. Add in transfers from IS sponsors (who and how much not exactly clear), and IS might be spending $2.5bn on defence. With no expensive navy or air force, $2.5bn buys a lot of ground troops. Published sources suggest that an IS fighter is paid somewhere around $500 a month, and I have speculated before that IS might have 100,000 men on its payroll. If those numbers are correct then IS army payroll would total $600m per year – well within its likely defence budget, with the generous balance being spent on munitions, transport, training, communications, and food. When you look at the numbers, IS’ success and survival becomes less surprising.

So, what comes out of this thought is the conclusion that hitting IS’ oil production infrastructure is not quite the killer-blow that western media and governments say it is. Sure, IS would miss its oil money, and sure, export dollars are worth more to IS than domestically taxed Iraqi or Syrian currencies, and so the campaign to cut its oil flow is certainly a very good idea, but IS will not lie down and die simply because it can’t sell oil.