Washington: With its reign of terror over a large population and ability to self-finance on a staggering scale, the extremist group that beheaded American journalist James Foley now resembles the Taliban with oil wells.

The Islamic State of Iraq and the Levant (Isil), which now controls an area of Iraq and Syria larger than Britain, may be raising more than $2 million a day in revenue from oil sales, extortion, taxes and smuggling, according to US intelligence officials and anti-terrorism finance experts.

Unlike other extremist groups’ reliance on foreign donations that can be squeezed by sanctions, diplomacy and law enforcement, Isil’s predominantly local revenue stream poses a unique challenge to governments seeking to halt its advance and undermine its ability to launch terrorist attacks that in time might be aimed at the United States and Europe.

“Isil is probably the wealthiest terrorist group we’ve ever known,” said Matthew Levitt, a former US Treasury terrorism and financial intelligence official who now is director of the counterterrorism and intelligence programme at the Washington Institute for Near East Policy. “They’re not as integrated with the international financial system, and therefore not as vulnerable” to sanctions, anti-money laundering laws and banking regulations.

In contrast, the late Al Qaida chief Osama Bin Laden was from a wealthy family and enjoyed a network of foreign patrons, and his funding sources were squeezed by financial intelligence officers. Isil “makes their money primarily — if not entirely — locally,” said Patrick Johnston, a counterterrorism specialist at the Santa Monica, California- based RAND Corp’s Pittsburgh office and co-author of a forthcoming analysis of declassified documents on Isil’s finances.

The money that Isil group receives from outside donors pales in comparison to its income from extortion, kidnapping, robbery, oil smuggling and the like, said a US intelligence official who spoke on the condition of anonymity to discuss classified information.

While Al Qaida and other groups which the US designates as terrorists, such as Hezbollah, Hamas and various Palestinian and other groups, have long depended largely on the kindness of sympathisers and state sponsors such as Libya and Iran, some self-financing by militant groups isn’t new.

The Afghan Taliban smuggle opium, minerals and timber; Colombia’s Marxist Farc rebels export cocaine; and Abu Sayyaf in the Philippines, as well as the Al Qaida offshoots in Yemen and North Africa, have raised millions by taking hostages for ransom.

With its control of seven oil fields and two refineries in northern Iraq, and six out of 10 oil fields in eastern Syria, the terror group is selling crude at between $25 and $60 a barrel, Luay Al Khatteeb, a visiting fellow at the Brookings Institution’s Doha Centre in Qatar, said in a telephone interview. That reflects a discount from world market prices due to the risk faced by middlemen smuggling and brokering the oil. By comparison, Brent crude for October settlement fell 1 cent today to $102.28 a barrel on the London-based ICE Futures Europe exchange.

Based on Al Khatteeb’s interviews with contacts in Iraq, the extremist group controls Iraqi fields with a production capacity of 80,000 barrels a day and now is extracting about half that amount. Isil, he said, is likely earning some $2 million a day from crude sales, paid in cash or bartered goods as the oil crosses into the Kurdistan region of Iraq, Syria, Turkey and Jordan.

One important financial battlefield for Isil, said the US intelligence official, is the Baiji refinery in northern Iraq, which produces roughly a third of the country’s total oil output. It’s been shut down since an attack by extremists in June, and remains the scene of heavy fighting between extremists and government forces.

The extremists’ oil income is going to “keep the war machine running, to maintain institutions” in the territory Isil has seized from the Iraqi and Syrian governments, and “the rest of the cash is going to recruiting,” Al Khatteeb said.

Robin Mills of Dubai-based Manaar Energy Consulting and Project Management, said in a telephone interview that authorities have begun cracking down on oil smuggling into the Kurdish region, meaning more of the crude will be used locally by Isil and oil revenues will start to shrink.

A second source of revenue for Isil is taxing residents of the densely-populated cities such as Mosul in the territory it controls, which is roughly the size of Wyoming, and controlling granaries and other critical resources. Criminal activity from bank and jewellery store robberies, extortion, smuggling and kidnapping for ransom is also an important source of revenue.

The group may have raised $10 million or more in recent years from ransom payments alone, said one US official.

Still, Brian Fishman, a research fellow with the Washington-based New America Foundation, a policy research organisation, and many US intelligence analysts, are sceptical of the oft-quoted figure of $2 billion controlled by Isil.

Similarly, initial estimates immediately after the September 11, 2001 attacks putting Al Qaida’s wealth in the hundreds of millions of dollars greatly exaggerated the amount of money Bin Laden had at his disposal, according to later reports by the National Commission on Terrorist Attacks Upon the United States, also known as the 9/11 Commission.

The CIA estimates that it cost Al Qaida about $30 million per year to sustain its activities before 9/11, an amount raised almost entirely through donations, according to a commission staff report.

The 9/11 attacks cost only $1 million, so even if Isil has a fraction of the purported $2 billion — and if it can continue to earn $1 million to $2 million a day from black market oil sales — that’s still a lot of money.

Isil’s “power is tied to the territories and resources they control and the population they extort money from”, Fishman said in an interview. “That suggests this organisation is going to be very resilient and it’s going to take a long time to crunch them.”

Johnston said that a 2010 RAND Corp analysis of financial records seized by the US military from Al Qaida in Iraq, the precursor to Isil, found a direct correlation between funding and terrorist operations.

“Cutting off financing makes them think about which attacks to do, what risks to take, and can we really afford to administer all of this territory as Isil?” Johnston said.

The resources flowing into the group’s coffers now tend to move out the door in the form of payments fairly quickly, agreed the US intelligence official. Still, while Isil may now be the wealthiest terrorist group on the planet, war-fighting and administering territory is expensive, the official said, and although Isil is flush with cash now, a key question is how sustainable its self-financing will be.

Indeed, the flip side of controlling territory that isn’t self-sufficient is that the group will be expected to pay for food, salaries, infrastructure and other services.

“That’s the tension here,” Fishman said. “Presumably, Isil has an obligation to use that money for governing, for paying people to clean the streets,” and that adds to the burden of paying for recruits and terrorist operations.

Although alarm bells have been rung about private Gulf funding for Isil, the money from foreign donors is modest in comparison to self-funding, according to several US officials who spoke on condition of anonymity.