Putin knows that Isil will be strangled without more oil as price falls further

Much of the EU lies at the end of a huge pipeline of Russian gas. Russia will heat Europe this winter. In what is now known as the ‘Middle East’, Russia has long been a presence. When Russia looks south it sees the Muslim world. When we look south we see the sea. Russia’s entire southern border is Islamic; America’s is Mexico. The Soviet Union was defeated, not by Americans, but by Muslims in Afghanistan.

As a result, Russia is always keenly aware of the region, its ethnicities, and various ancient peoples who live cheek-by-jowl whether Persians, Turks, Kurds or Arabs.

It has constantly backed Iran, which backed Bashar al-Assad in Syria, and it has stood behind Assad and his father through many Arab-Israeli conflicts. Russia, for its own geo-strategic ends, values political stability over adventurism. And, if the results of the past 10 years are anything to go by, so too should most people.

Signs of Russia’s potency and America’s decline in the region are important visits to Moscow: Assad visited recently, as did Israel’s bossman Benjamin Netanyahu and, just before both of them, President Abdel Fattah el-Sisi of Egypt.

On the other side is Saudi Arabia, which has been tacitly supporting Sunni groups, like Isil and, of course, there is Turkey, whose president has been happy to accommodate Islamic groups of all sorts. Traditionally, and pre-dating the Arabs, the Ottomans and Iran have been implacable enemies. So there is lots of ‘previous’ in the area.

But now it seems that the Isil threat to the regions has brought Russia and America – and perhaps Egypt and Israel, and possibly even Iran and Turkey – together, on the same side.

Why would this be? Is it understandable revulsion at the beheading of innocents, or is it the refugee crisis in south-central Europe?

No: it’s the oil. Isil undefeated is a threat to the oil regions of the Middle East, and that’s a threat to everyone. Just look at the map.

It shows where Isil is and what oil fields are within its range. You can see that the Kurdish area of northern Iraq is threatened, and so too are the Shia oilfields of southern Iraq.

Oil has been central to the Isil governing strategy from the start. As distinct from al-Qa’ida, Isil wants to create a caliphate and that costs money. If you want to run a state, then you have to finance that state. Currently around 6.5 million people live in Isil-held territory in Iraq and Syria and, quite apart from extortion, oil revenues are a significant source of cash for Isil. It’s thought that Isil gets around $8million a month for oil sales from the oilfields it controls in Syria and Iraq.

Isil sells the oil in Turkey and even in Syria at way below market value via a series of middlemen. It is also trying to operate refineries and is known to have kidnapped local engineers to try to maintain these refineries.

Isil needs cash.

Not only is Isil trying to build a caliphate, but, according to the King of Jordan, it is paying its Jihadists up to $1,000 a month, which is way above the local salary. The group is therefore burning through money at a rapid rate and the only way it can build its State and keep its troops fighting in the field is by having more and more money.

Where will it get the cash?

From oil, of course.

Here’s where the big powers get nervous because Isil, like al-Qa’ida before it, understands that the oilfields of Saudi Arabia are within striking distance, not from an invasion force from Iraq but from a locally recruited force. Remember, Saudi Arabia is the greatest source of jihadist fighters for Isil. Certain mosques in Saudi are the recruitment centres for Isil.

In 2006, al-Qa’ida was able to detonate a massive explosion just outside the Abqaiq refinery – the biggest in the world. In 2013 there was a three-day siege of Amenas gas facility in Algeria by Isil, which left 39 foreign workers dead. So we know that Isil regards oil targets as legitimate and a source of both propaganda and revenue. While Saudi fields are the richest, the main activity for Isil would still be in Iraq and what remains in Syria, where it controls territory and has its network.

Now here is where the economics becomes interesting.

Every time the price of oil falls further, it makes Isil move to capture oilfields more, not less, urgently. Isil came to prominence just when the price of oil was at its highest and, like the Scottish Nationalists and oil producers everywhere, the Isil treasury department was probably betting on oil staying above $100 a barrel.

While they have robbed banks in Mosul and other conquered towns and continue to extort money from the locals, the real on-going cash flow comes from oil. It is strange to talk about the treasury department of Isil but it is an organisation like any other – and all organisations need money. Isil’s monetary problem is that the value of its major trading commodity has fallen rapidly.

As a result, it has to re-run its budget numbers, forecast revenues and cost base. Now that the price of oil has fallen to levels that no one in the business thought possible, Isil has to get more oil just to maintain the same revenue. This need will push it further into oil-producing areas of Syria in the east, and will also force it to move westwards into Iraq. Such a proposition means that Isil will be attacking on two fronts to get its hands on new oil revenues. These attacks will weaken it militarily and this could be why the big powers have moved against it now.

The Russians know this game. They have fought many resource-poor enemies in the past. The Nazis ploughed deeper and deeper into Russia in search of what Himmler described as, “villages, peopled by German colonisers, reaping crops from the rich dark earth”. Hitler, himself with an eye on the oil fields of the Caucasus region and, knowing that Germany had no oil, declared in 1942, “If I do not get the oil of Maikop and Grozny, then I must end the war”.

Similarly today, Russia understands that Isil will be strangled without more oil as its price continues to fall. It also knows that if it defeats Isil, Russia will be top dog in the region, with both Assad and Iran – its allies – in a strong position.

Obviously the quid pro quo for a deal with Russia in Syria is that the West won’t worry too much about Ukraine. After all, Ukraine has no oil.

All in all, not a bad week at the office for Mr Putin.