Turkey should battle the Islamic State by buying Kurdish oil, which would disrupt the caliphate’s oil export networks and deprive it of an important revenue stream.
In October, Turkey allowed soldiers from Iraq’s Kurdish Regional Government (KRG) to cross through Turkish territory to defend Kobani, the Syrian Kurdish city that was under siege by the Islamic State (IS).[i] The KRG reinforcements have successfully prevented IS troops from taking full control of the city, representing an important setback to the caliphate’s territorial ambitions.[ii]
Turkey’s decision to confront IS has strengthened the US-led coalition’s prospects. Regardless of what military moves Turkey takes to counter IS, however, its inability to stem IS oil exports into southern Turkey will permit the group to continue consolidating its financial backing.
Since its rapid expansion in June, IS has become financially self-sustaining and no longer requires external support. A major funding source for IS now stems from oil sales. In this way, before US-led airstrikes, IS was estimated to earn USD 2 million per day.[iii] Although this figure, which is likely inflated, has dropped as a result of the airstrikes, oil exports continue to provide IS with an important revenue stream.
IS oil exports primarily pass through southern Turkey, and Ankara has struggled to stop the flow.[iv] Many of the transactions occur in cash, which means that tracing them is nearly impossible. IS oil is also mixed with crude from other sources, making it difficult to detect.[v] Smugglers use export routes that are not fixed and are therefore difficult to destroy; oil is transported via barrels and diesel is exported through small irrigation plastic pipelines that can be quickly buried underground. Turkish border guards are reportedly sometimes complicit in the smuggling, in return for a cut of the sales.
At first glance, it is difficult to understand why smugglers take part in these operations. By doing so, they are supporting IS, which is notorious for its brutal suppression and its horrendous acts of violence.
The explanation is primarily an economic one: IS oil and oil products are cheaper than their counterparts being sold in Turkey. IS diesel, for instance, sold in September for USD 4.73 per gallon.[vi] Diesel sold inside of Turkey in July, by comparison, was USD 7.26 per gallon.[vii] Turkish gasoline was similarly priced. In August, IS sold its crude for anywhere from USD 25 to USD 60 a barrel, well below the USD 100-plus price point in international oil markets.[viii]
These price differentials matter in southern Turkey, which is one of the country’s most impoverished regions. On average, a gallon of gasoline costs Turkish citizens about 30% of their daily income.[ix] In southern Turkey, this percentage is doubtlessly higher. Individuals near the border can make significant financial gains by purchasing IS oil and selling it at a steeper price in Turkey.
Turkey’s high fuel prices are caused by exorbitant tax rates. In 2012, Turkey hiked fuel taxes to close the current account deficit, reportedly giving it the highest gasoline taxes in Europe and the third highest taxes on diesel.[x] The current account deficit was in turn largely driven by Turkey’s energy import bill. Because Turkey has limited hydrocarbon resources of its own, it imports nearly all its oil and natural gas. Last year, its energy import bill amounted to approximately USD 50 billion, roughly equivalent to the size of its 12-month running current account deficit.[xi]
As long as this price differential exists, smuggling will continue. To reduce the economic incentive behind IS oil smuggling, therefore, Turkey needs to lower its domestic fuel prices, which can be achieved by buying cheaper crude oil. Iraqi Kurdistan is the most obvious supplier of such cheap crude. First, Kurdish oil is cheaper than oil on global markets. Second, infrastructure costs are minimal because pipelines are already installed to transport Kurdish oil to the Turkish port of Ceyhan. Third, transport costs are low due to geographic proximity. Fourth, Turkey is well leveraged to negotiate a low price with the Kurds; the KRG is completely dependent upon Turkey to export its oil and it is desperate to do so.
Importing Kurdish oil can lower Turkish fuel prices further in a more indirect way. Buying Kurdish oil would reduce Turkey’s current account deficit because it would lower its energy import bill. With proper fiscal management, Turkey could reduce fuel taxes as the current account deficit decreases; one of the main reasons the taxes were put in place, after all, was to close the current account deficit.
If done properly, therefore, buying Kurdish crude could significantly lower fuel prices in Turkey. Oil imports would be cheaper and directly reduce fuel prices. Indirectly, using Kurdish crude could allow Ankara to lower fuel taxes, which would further cut fuel prices. These compounded fuel price reductions would minimize the attractiveness of smuggling, cutting off an important revenue stream for IS.
Would Turkey be so bold as to anger both Washington and Baghdad by directly consuming Kurdish oil? Both are opposed to any move that increases the KRG’s autonomy because they fear that this will lead to the breakup of Iraq.
At first glance, it seems too daring a move, but frankly, Turkish-Kurdish relations have been deepening rapidly and have already reached unprecedented levels. 30 years ago, Ankara did not publicly recognize the existence of Kurds in Turkey. 20 years ago, it would have been unimaginable that both Turkey’s President and Prime Minister would have spoken in Kurdish. Ten years ago, no one would have expected that Turkey would be the export route for the KRG’s oil. Five years ago, it would have been inconceivable that PKK leader Abdullah Ocalan would be openly engaging with Ankara. Last year, no analyst could have predicted that Kurdish forces would be crossing through Turkish territory to defend Kobani.
Buying Kurdish oil would be bold and unprecedented, but it is possible. When considering the expanding relationship between Kurds and Turks, it seems that Turkey buying Kurdish oil is at the very least likely, if not inevitable. Consuming Kurdish oil would simultaneously address Turkey’s macroeconomic woes and its chronic shortage of hydrocarbons. It would also weaken IS in a way that is arguably as effective as any military intervention.
[i] Reuters, “Peshmerga, Syrian rebels battle Islamic State in Besieged Kobani,” http://www.reuters.com/article/2014/11/03/us-mideast-crisis-idUSKBN0IK15M20141103
[ii] Charlotte Observer, “In stalemate at Kobani, Turks and Kurds carry on a propaganda battle,” http://www.charlotteobserver.com/2014/12/05/5364705/in-stalemate-at-kobani-turks-and.html#.VISl5THF-So
[iv] Al Monitor, “Turkish villages smuggle IS oil through makeshift pipelines,” http://www.al-monitor.com/pulse/originals/2014/09/turkey-syria-iraq-illegal-oil-pipeline.html
[v] Financial Times, “Fuelling Isis Inc,” http://www.ft.com/cms/s/2/34e874ac-3dad-11e4-b782-00144feabdc0.html#axzz3LEtpx3zX
[vi] Al Monitor, “Turkish villages smuggle IS oil through makeshift pipelines,” http://www.al-monitor.com/pulse/originals/2014/09/turkey-syria-iraq-illegal-oil-pipeline.html
[vii] Fuel-prices-europe.info, https://web.archive.org/web/20140701084648/http://www.fuel-prices-europe.info/
[viii] Al Arabiya, “Experts: ISIS makes up to $3 million daily in oil sales,” http://english.alarabiya.net/en/perspective/analysis/2014/08/28/Experts-ISIS-makes-up-to-3-million-daily-in-oil-sales.html
[ix] Bloomberg, “Highest Gas Prices: Countries,” http://www.bloomberg.com/visual-data/best-and-worst//highest-gas-prices-countries
[x] Hurriyet Daily News, “Turkey tops gasoline tax list in Europe,” http://www.hurriyetdailynews.com/turkey-tops-gasoline-tax-list-in-europe.aspx?pageID=238&nid=15144
[xi] Financial Times, “Cheaper oil a balm, not a cure, for Turkey,” http://blogs.ft.com/beyond-brics/2014/10/22/cheaper-oil-a-balm-not-a-cure-for-turkey/
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