By Sam Dagher

AL-YAROUBIYAH, Syria—Plumes of black smoke billow on the horizon of this border town in northeast Syria, a thumb-shaped corner of the country that pokes into neighboring Turkey and Iraq.

The smoke isn’t from war, but it rises from the deadly fight over resources between Islamic State and Kurdish fighters. Men, women and children operate thousands of primitive metal kilns to refine crude oil distributed by the warring sides to buy loyalty. Residents sell the fuel they make to black-market traders.

With oil now the only stable income in these impoverished rural communities, each side offers a choice: Fight us and die. Or, join us and earn a living.

The U.S. seeks to expand its support of Kurdish forces fighting Islamic State for control of the towns and villages bound by the Tigris and Euphrates rivers. The Wall Street Journal found the conflict as murky as the sludge that spills from the makeshift kilns onto land grazed and farmed since Biblical times.

As one 27-year-old tribesman said, local Arabs are eager for oil income but most hate the Kurds as much as they fear Islamist militants.

Islamic State controls most of the southern section of Syria’s Hasakah province and nearly all of the adjacent Deir Ezzour province, both rich in oil and gas, as well as most of nearby Raqqa province.

For Islamic State, Hasakah province is an integral part of its self-proclaimed caliphate that currently stretches from the outskirts of the northern Syrian city of Aleppo to the fringes of Baghdad, the capital of Iraq.

The militants use oil money to secure allegiance and support their war, according to interviews with tribal leaders, Islamic State militants and Kurdish military and intelligence officials. Sharing profits with tribal elders and their followers also keeps a steady supply of Islamic State recruits, these people said.

The United Nations and some analysts estimate that Islamic State produces roughly 50,000 barrels a day from oil fields it controls. The effect of recent U.S.-led coalition airstrikes against oil facilities used by the Islamist militants is unclear.

A Kurdish paramilitary force claiming more than 30,000 fighters has seized the northern section of Hasakah province and set up a self-rule area that has established courts and passed laws in a bid for permanent autonomy of Kurdish-majority regions in Syria. The force, called the People’s Protection Units, or YPG, also controls oil wells and sells crude at a discount to local Arab tribesmen, providing income for both Kurd fighters and local families.

The Kurds produce about 40,000 barrels of crude oil a day from wells they control, according to Kurdish officials here. Some of it is sold to the mostly Arab kiln operators at $15 a barrel, they said.

Eight barrels of crude yields roughly six barrels of gasoline or diesel fuel, which are sold for an average of $40 a barrel, said one kiln operator. There are an estimated 3,000 refining kilns in Kurdish-controlled areas, officials said, all built since the start of Syria’s civil war.

Interviews with former Islamic State fighters now held as prisoners by the Kurds, as well as telephone interviews with residents in territory held by Islamic State, reveal similarities in how the two sides run their oil enterprises.

Like the Kurds, Islamic State sells crude oil to kiln and refinery operators at discounted prices: On the world market, the crude might fetch $75-$80 a barrel. And like the Kurds, Islamic State hires local residents to protect and operate the oil fields—or join its ranks as fighters—with salaries as high as 100,000 Syrian pounds a month, about $512.

The violence that inflames Islamic State’s Sunni Islamist extremists against all other Muslims—and all other religions—is focused here instead on control of land, resources, roads and border crossings that yield revenues.

“Material gains are what’s driving this war, nobody has principles,” said Sheikh Humeidi Daham al-Jarba, a septuagenarian recognized as one of the leaders of Shammar, one of the largest Bedouin tribes in the Middle East.

“For as far as I can remember,” he said, “these three provinces never had their own direction, always with the strongest and the power on the ground.”

Mr. Jarba, who has joined forces with the Kurds, recently formed a Shammar militia to help fight Islamic State, which lurks as close as 20 miles southwest. In July, he was given the honorary post of governor of the al-Jazeera canton, one of the new Kurdish self-rule areas.

Armed members of Mr. Jarba’s new militia, Jaish al-Karama—“Army of Dignity,” in Arabic—guard the entrance of his gated compound, which has large sofa-lined rooms to host tribal meetings. Many of the guards wear checkered red-and-white kaffiyehs, or head scarves, and leather gun holsters. Fuel tankers, SUVs and pickup trucks speed past on the main road.

Oil refining is the chief livelihood in Ali Agha, a nearby village that survived on agriculture until 2005 ushered in five years of drought. Most of the remaining 400 residents have homes made of mud-brick walls and a roof of mud over straw and wood pillars. They rely on small generators for power. Water is drawn from nearby wells. Sewage passes through plastic pipes to a dump outside the village. There is a single school, which ends at ninth grade.

In an agreement overseen by Mr. Jarba and replicated in other villages, residents pledged to support Kurdish forces and denounce anyone joining Islamic State. “Life is hard and we struggle just to put food on the table,” said one resident, who nonetheless sees his village as better off than others in the region.

The area’s troubled history under the Syrian regime, which also used oil money to reward and punish local Kurds and Arabs, paved the way for Islamic State conquests this summer, analysts and residents said. Syrian government forces now have only a limited presence in two cities of the region.

As Hafez al-Assad, Syria’s late strongman and father of the current president, began consolidating his power in 1970, he sought to subdue the resource-rich tribal areas, according to residents and tribal elders. Arabs from other parts of Syria were resettled here, with the most loyal granted the best land. Local tribal and social structures disintegrated in the power shift. Kurds, whose towns and villages were renamed in Arabic, were the biggest losers.

In the years before the uprising against President Bashar al-Assad in March 2011, people who pledged allegiance to the regime were rewarded with jobs and business in agriculture, oil and trading, said landowners and residents.

Once civil war broke out, the Assad regime focused on protecting Damascus and other cities to the west, largely abandoning land and resources here.

Fawaz al-Bechir, a leader from the Baggara tribe, which is concentrated in Syria’s Deir Ezzour province, said he laughed when Syrian security officials in Damascus had asked him to rally his tribesmen to fight Islamic State.

“I told them, ‘For decades you did everything to undermine our authority and weaken us and now you want us to help?’” Mr. Bechir said. The only way he can control his people is if he can pay them salaries or provide oil to compete with the Kurdish forces and Islamic State.

In the ensuing war, residents said, they looked to any group offering protection and steady work.

Hasan al-Khalil, an Arab tribesman and landowner who has joined forces with the Kurds, said it was understandable for people who had thrived under the regime to seek a similar accommodation with Islamic State. “They will do anything to stay on top of the tribal pyramid,” he said.

When protests against Mr. Assad erupted, Mr. Jarba, the Shammar chieftain, said he discouraged his people from taking part. “Visibility was poor so to speak,” he said, “and we couldn’t tell where things were headed.”

Karim al-Mifleh didn’t take his leader’s advice. Mr. Mifleh, 19 years old, said he and some of his 30 siblings—his father has three wives—engaged in protests. In 2012, he dropped out of ninth grade to join a rebel group set up by Mr. Jarba’s cousin and linked to the Free Syrian Army, the secular rebel coalition backed by Saudi Arabia, Turkey and the U.S.

The militia swelled to some 10,000 men, mostly Shammar and related tribes and clans. Needing more funds for salaries and overhead, the group seized oil wells and took over the refining and sales, Mr. Mifleh said. He was paid 60,000 Syrian pounds, about $307, for guarding the wells.

Islamist rebels arrived in the region in early 2013, seeking a share of oil and other resources, including grain stores. At first, they joined forces with Mr. Mifleh’s Shammar-dominated group. They ousted Assad regime forces from the Yaroubiyah border crossing in March 2013.

But the rebel groups had a falling out—in part over the rising power of the Kurdish forces. Many fighters, including Mr. Mifleh, were absorbed by Islamic State, which was gaining strength.

The Kurdish militia fighters toward the middle of 2013 captured the Yaroubiyah border crossing, along with most of the oil wells and grain silos, from Islamist rebels.

At the time, Mr. Mifleh’s father and some of his brothers were living in the Yaroubiyah area claimed by the Kurds. Mr. Mifleh and other fighters were captured in June by the Kurds after Islamic State launched a botched offensive to seize the border town, surrounding villages and nearby oil wells.

Mr. Mifleh is now in a prison run by Kurdish forces. His father, who works in the oil business under the protection of Kurds, has disavowed him for joining the militants.

In Islamic State territory to the south, fighters exploit local tribal tensions, playing one against the other, Mr. Mifleh said. They mistrust locals, referring to them in Arabic as supporters as opposed to those who have pledged allegiance. The militants also seek to foster enmity among Arabs toward Kurds. “They plant in our heads that Kurds are traitors and infidels who should be fought,” he said.

Last month, Islamic State fighters kidnapped two Arab truck drivers transporting crude oil bought from the Kurds, a Kurdish security officer said. The drivers were killed, he said, and their heads were then severed and hung from the trucks on a main road not far from Yaroubiyah—a warning to residents about cooperating with the Kurds.

In September, Islamic State recaptured four villages next to the border crossing here at Yaroubiyah. Kurdish security and military officials say the group is determined to seize the strategic border crossing, along with surrounding grain and oil resources.

The threat of an Islamic State attack loomed over a meeting last month in Yaroubiyah organized by the Kurds to help Arab residents, mostly Shammar, choose neighborhood councils and leaders.

Arab men, some in tribal dress, and women covered up except for their eyes, sat at classroom desks moved to the courtyard of a school for the meeting. Children giggled and played.

“We need people to volunteer for the neighborhood watch, you will coordinate directly with the Asayish,” said the organizer referring to the Kurdish police. “You will report any suspicious person or car.”

No one raised a hand.

“Come on, anyone, this is for your sake,” the man said.

On a stretch of road outside of town, one villager had set up a makeshift gasoline station with a pump and two metal tanks filled with fuel from a nearby kiln. “ Abu Luay ’s Fuel” was spray-painted in Arabic on one of the tanks.

— Mohammad Nour al-Akraa in Beirut contributed to this article.

The Wall street Journal