CONCERNS over Georgia and the possibility that Tropical Storm Gustav could become the first major storm since 2005 to hit the oil installations in the Gulf of Mexico have finally caught up with the markets. Post-Georgia Russian worries have helped push the oil price up by 8 percent. For almost two weeks it looked like the momentum of falling oil prices was stronger than geopolitical fear. Not any longer. Geopolitics had its sway.
Despite little change in fundamentals, crude markets bounced back last Thursday in what was described as the biggest gain in more than two months — rising 5 percent last amid rising tension in Georgia. And the rise continued this week too. And the blip once again underlined the role of geopolitics in defining and pushing the global crude markets — for politics and crude markets are entwined in a rather complex manner.
The conflict portrays shifting global dynamics with Georgia finding itself on the fault line. The issue of control of oil and related infrastructure — so vital to the needs of the West — was once again at play and indeed it had not much to do with the fundamentals of the crude game.
The region under the hammer, the disputed regions of South Ossetia and Abkhazia, had an energy connotation. This was no ordinary piece of land. The war was never really just about territory or ideology; it was about influence over a vital energy corridor to the West. And the markets took that point seriously.
This disputed region is home to one of the world’s most important pieces of infrastructure, the pipeline which carries oil from the Caspian Sea to Europe. The 1,774 km Baku-Tbilisi-Ceyhan (BTC) pipeline, carrying Azeri oil from the Caspian Sea fields to Turkey’s Mediterranean port of Ceyhan is the second-longest oil pipeline in the world is capable of transporting 1.2 million barrels of crude per day, by passing Russia. It stretches from Baku in Azerbaijan, through Georgia, passing very close to the Georgian capital Tbilisi and then traveling on to the Turkish coastline where the oil is shipped to hungry Western markets.
Construction of the BTC pipeline began in 2003 and was completed in 2005. Its inauguration was a major moot point for the West. It was then heralded as the US answer to Russia in the ongoing Great Game of this 21st century. And this energy corridor made the region increasingly important for the West and indeed neither Russia nor the West could have remained oblivious to the geopolitical and strategic importance of the developments in South Ossetia and Abkhazia from an energy security point of view.
Oil supplies faced threats with tensions in Georgia’s breakaway region of South Ossetia escalating into a full-blown military conflict between Moscow and Tbilisi. Last week, Georgia claimed that Russian warplanes bombed the pipeline, though Moscow denied deliberately targeting it. In fact it was not just the BTC pipeline that was coming under fire.
The British oil company BP also had to stop using a railway line that exported Azeri oil through Georgia following reports of damage to the line. This railway track too carried between 50,000 and 70,000 barrels of oil a day. Georgian officials accused Russia of blowing up a key railway bridge on the line, severing the country’s main east-west rail route. The problems on the railway line compounded BP’s decision to shut down its Baku-Supsa oil pipeline, which runs through the center of Georgia from Baku in Azerbaijan to Supsa on the Black Sea coast.
This was all a serious matter, changing the very political geography of the region. Russia was already furious over Georgia’s overtures to the West. And the message is clear. Moscow cannot tolerate any intrusion in its oil rich own backyard. On the other hand, for the US and the West energy security is a vital issue. Hence the tug-of-war, resulting in disturbing the fine balances in the crude markets.
The recent conflict has been taken seriously in Washington for obvious reasons. The US says it needs to have a significant rethink of how it relates to Russia, canceling planned joint-military exercises and warning of serious long-term implications. The strategically timed signing of the US missile defense shield plan with Poland also needs to be seen in this very perspective.
But it is not just the US. Europe too has been realigning itself, according to the dividing line drawn out by the conflict. Energy is a serious issue indeed and cannot be taken lightly.
Angela Merkel, the German chancellor, went to Russia to serve President Dmitri Medvedev a stern warning before traveling on to Tbilisi where she notably switched her position on Georgian membership of NATO.
Germany, with France, had initially been the biggest roadblocks to Georgia’s bid to join NATO. Now, Germany is vocal in its support. NATO was also emphatic in its denunciation of the Russian moves. Jaap De Hoop Scheffer, NATO’s secretary-general, said on Tuesday: “There can be no more business as usual with Russia.”
And all this had some energy connotations, one cannot deny. Had there been no such Western interests in the region, would Georgia have been tempted to initiate the conflict in the first place? And secondly, would the Russians have moved in so swiftly afterwards? These are some basic questions, bringing us back to the moot point that there are issues much beyond the control of oil producers. Blaming the OPEC for the woes of the markets is not right, indeed. Geopolitics still carries considerable sway on the crude markets, one indeed cannot deny!