Why the uprising in Iraq could cause oil prices to spike

Part 3
Why the uprising in Iraq could cause oil prices to spike (Part 3 of 7)

Iraq uprising: Assessing ISIS’s goals and effects on investments

What does ISIS want?

ISIS has focused on achieving dominance in Iraq. Its goal since its foundation in 2004 has been remarkably consistent: it wants the complete failure of the government in Iraq. The insurgents want to establish a caliphate in Iraq.

Iraq InflationEnlarge Graph

ISIS had remained relatively calm between 2003 and 2011. However, recently, the organization gathered momentum as the civil war in Syria turned into a sectarian conflict. ISIS’s original aim was to establish a caliphate in the Sunni-majority regions of Iraq. This later expanded to include controlling Sunni-majority areas of Syria.

How is ISIS funded?

The oil-rich nation of Iraq has attracted U.S. oil majors, including Exxon Mobil Corporation (XOM), and Chevron Corp. (CVX), which have a strong presence in the Rumaila and Kurdistan regions of Iraq, respectively. Exxon Mobil holds leases on approximately 900,000 onshore acres and, at the end of 2013, claimed a net 23.2 development wells in Iraq’s West Qurna Field. The field holds about half the proved reserves of Rumaila. Exxon also has agreements with the Kurdistan Regional Government in northern Iraq to explore for oil. Chevron holds an 80% stake and is the operator of the Qara Dagh block in the Kurdistan region of Iraq. ETFs like the SPDR Energy Select Sector ETF (XLE), the Vanguard Energy Index Fund (VDE), and the iShares Dow Jones US Energy Sector Index Fund (IYE) have major holdings in these companies.

ISIS operates in part as a mafia-style commercial enterprise and in part as an international charitable organization looking for wealthy donors from the Gulf States and elsewhere. In 2012, it took over oil fields in Syria, reaping profits from selling the oil at discounted prices to anyone willing to pay.

ISIS has traded in raw materials in the areas it has captured and even dabbled in selling antiques from monuments under its control. In Syria, ISIS has built up something like a mini-state, collecting the equivalent of taxes, selling electricity, and exporting oil to fund its militant activities. Its biggest single success was plundering an over-$425-million government vault in the Iraqi city of Mosul, which it captured on June 10.

Find out more about ISIS’s seizure of the city of Mosul in Iraq in the next part of this series.

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