International commodity markets are normally spooked by the mere sound of gunshot, but last week they shrugged off a war that could cripple European energy supplies. Last Tuesday, as Russian troops closed in on the Georgian capital of Tbilisi, and BP, the British oil company, announced it had suspended shipments of Azeri oil through Georgia for security reasons, the price of a barrel of crude slid to a four-month low near US$112 a barrel. It rebounded later that day, but only after US government data revealed declining US petrol inventories.
As Russia bombed Black Sea oil ports, blew up a railway and delayed the withdrawal of its troops from Georgian territory in defiance of a French-brokered peace treaty, crude resumed its decline, dipping below $112 a barrel on Friday and ending the week down 1.2 per cent. All in all, it was a remarkable display of investor nonchalance. Just a few weeks earlier, the merest hint of any oil supply disruption had sparked panic buying of futures contracts, sending crude prices spiralling upwards to an all-time record of $147.27 on July 11.
Unfortunately for energy consumers, the aftermath of Russia's military incursion into its neighbour's territory may be harder to ignore. At stake is the West's access to the largely untapped energy riches of Central Asia's Caspian region, an area with 49 billion barrels of proved oil reserves, 268 trillion cubic feet of proven gas reserves, and plenty of potential for further discoveries. The US, Europe and western energy producers have long coveted these resources. Ever since the collapse of the Soviet Union in 1989, international oil companies have flocked to the former Soviet states of Azerbaijan and Kazakhstan to develop Caspian oilfields under terms that initially were highly favourable to foreign investors. The US and European governments, meanwhile, strongly encouraged projects to develop export routes for Caspian oil and gas that would bypass the territories of their major geopolitical rivals, Russia and Iran.
Key to western strategy was the development of a South Caucasus transportation corridor from Azerbaijan, which had emerged as a US ally, to Black Sea and Mediterranean ports. Turkey's co-operation was essential, despite security threats to energy installations posed from Kurdish separatists. Not only could Turkey provide an overland conduit for Caspian oil bound for the Mediterranean, but with its powerful armed forces, it also effectively controlled the Bosphorus, the narrow shipping route between the Black and Mediterranean seas.
Equally crucial was Georgia, as the only potential South Caucasus transit state likely to co-operate with both the US and Turkey. Armenia, the only other geographical candidate, was a Russian ally and Turkey's traditional enemy. Two oil pipelines were planned and eventually built through Azerbaijan and Georgia. The first, completed in 1998, carried crude from oilfields near the Azeri capital of Baku to the Georgian Black Sea port of Supsa, supplementing rail shipments. The second and larger Baku-Tbilisi-Ceyhan (BTC) pipeline crossed Turkey to discharge its oil at Ceyhan, a Mediterranean export terminal.
In 2002, the US sent special forces soldiers to Georgia to train that country's army in anti-terrorism techniques - such as how to protect a pipeline from saboteurs. In 2003, Georgia elected a pro-US government led by Mikheil Saakashvili, a lawyer who was trained in the US, following its so-called Rose Revolution - the bloodless coup that ousted the state's previous autocratic ruler, Eduard Shevardnadze. To Washington and Brussels' delight the BTC Pipeline was completed in 2005.
But now the tables have turned. On Aug 7, Mr Saakashvili launched an ill-thought out military action to regain control of the breakaway province of South Ossetia, provoking a swift and powerful retaliation from Moscow, which claimed it was defending Russian nationals in the disputed territory. But there is ample evidence that Moscow had been spoiling for a fight. It may even have prepared for one by repairing its rail link to Georgia through Abkhazia, another separatist territory, in order to get its military equipment closer. Presented with a perfect excuse, Russia launched its attack, leaving no doubt about its military dominance in the South Caucasus region. Now, with both trans-Georgia oil pipelines closed and even rail shipments of crude suspended, Azeri oil exports must be dispatched through the only other available pipeline, running to the Russian Black Sea port of Novorossiysk.
The Kremlin has reiterated its intent to withdraw its troops from Georgia, which should mean that oil shipments through Georgia can resume. But BP, which operates both pipelines, may hesitate to reopen the taps without substantial assurances that the promised Russian withdrawal will be genuine and lasting. In any case, it is still repairing fire damage to the Turkish section of the BTC Pipeline, supposedly inflicted by Kurdish rebels a week before Russia invaded Georgia.
The timing and circumstances of the explosion that started the Turkish fire remain mysterious, and remarkably fortuitous for Russia. The Kurdistan Workers' Party (PKK) has claimed responsibility, but the Turkish government, usually quick to blame the PKK for mayhem within its borders, has said a malfunction was more likely. Could Ankara, dependent on Russian gas imports, have turned a blind eye to Russian sabotage?
Similar to US denials that invading Iraq had anything to do with oil, Moscow has rejected suggestions that its Georgian incursion was linked to energy. The Kremlin also denied bombing the BTC Pipeline, although eyewitness reports from foreign journalists in Georgia confirm it did so. Russia's motivation for invading Georgia may have been primarily political. But its foreign policy is intricately interwoven with its energy ambitions - especially Moscow's desire to establish a stranglehold on crucial flows of oil and gas to the West.
In Georgia, Moscow has made its political point while inflicting an economic cost on its opponents. If only due to the security concerns raised, new oil supplies from the once promising Caspian region will now cost more and take longer to develop.
The eventual effect on world oil prices, although apparently delayed, is predictable enough. Markets do not ignore fundamentals forever.
@Email:tcarlisle@thenational.ae