Fears over oil supplies are once again mounting after reports began to circulate, from Thursday onwards, that under orders direct from the Kremlin, Russian oil companies are being told to prepare for a sudden delivery cut in exports to Russia’s Western neighbours.
The Daily Telegraph broke the story that the government had made the call to at least one oil company, with LUKOIL – Russia’s second-largest oil producer - widely suspected to be the likely recipient on the other end of the line. Both Moscow and LUKOIL have firmly denied the accusations that they are about to cut supplies to Germany and Poland through the Druzhba pipeline.
A spokesman for the oil giants, said: “LUKOIL is delivering the same amount of oil and oil products to Western Europe as before.
“We have received no orders from the government,” the company’s spokesman hastened to add.
But, when digging a little deeper, it appears that we shouldn’t be so surprised by Russia considering using energy supplies as a geopolitical leverage.
According to a report published in March 2006 by the Swedish Defence Research Agency, a government QUANGO, Russia has cut-off exports on around 40 occasions in the past.
It is believed that the most recent threat to supplies would be enacted as soon as Monday, according to The Telegraph. Coincidently this is the day of the emergency EU meeting, in Brussels, to discuss the crisis in Georgia, in which sanctions against Russia - for its part in the conflict - are on the agenda.
Any such move would be a dramatic escalation in the crisis in South Ossetia, and one which would undoubtedly inflame global energy markets.
Forex traders in Asia cited the report, by the newspaper, as one reason out of a number of contributing factors for the dollar's decline against other currencies and the rise in US oil prices which were up $1.16, (1%), in trading at $116.75 a barrel in trading on Friday.
Traders have watched with growing unease the escalating row between Russia and the West over Moscow's military action against Georgia, as the price of a barrel has remained sensitive to the front-page news.
Global oil supplies remain tight despite the economic downturn engulfing North America, Europe and Japan. Speculators believe that a supply cut in the current climate could drive crude prices much higher, possibly to record levels of $150 or even $200 a barrel.
Russia itself is sat on some $580bn of foreign reserves, the world’s third largest, and appears willing to pitch itself against the West in order to pursue geo-strategic ambitions.
It is widely assumed that Russia would sooner cut gas supplies, as opposed to oil, as a means of pressuring Europe as this is where direct dependence is greater. But, perhaps the reasoning is that gas cuts would not hurt the United States. Oil is a better weapon for striking the West on a grander scale, as the effects of the price of a barrel of oil are global, not regional.
The hostile climate between the world’s former ‘superpowers’ may not be quite that of what is was during a large proportion of the second-half of the twentieth century, but it will become a ‘cold war’ of sorts should people find themselves unable to afford to heat their homes or run their cars as autumn approaches.
Although Russia is wealthy, the corporate sector is heavily reliant on foreign investors and the internal bond market is tiny. In terms of its domestic economy perhaps Russia would be shooting itself in the pocket should the pipeline shut-off go ahead.