Analysis: Has oil gone M.A.D?

Economic mutually assured destruction? What do trends in high oil prices
mean for global geopolitical stability? Who can afford to disrupt oil
production or supplies? Importers cannot sustain higher prices and fear the
pain, exporters cannot afford the damage higher prices would do to their
export markets and inevitable demand side adjustment.

Given the mutual
interdependence of Russian and European markets, rumoured threats published today (Kommersant and the Telegraph in the UK) that Russia could cut some oil supplies to Europe as soon as Monday in response to European threats of sanctions seem unlikely to materialise, as do the sanctions themselves. Since August 8th and the outbreak of the current Georgia conflict, un-surprisingly there has been a Westward flight of money from Russia. Renaissance Capital suggest US$8-20bn has left the country August 8th to 15th and the flight continues in response to geopolitical destabilisation.
What do trends in high oil prices mean for geopolitical stability?

The world has witnessed a string of "oil wars" as concerns over energy
security rise and major economic powers vie to secure resources for present
and future. With oil prices now as high as they are however, and
threatening to shoot back up to their recent record levels and beyond at
the slightest provocation, the geopolitical situation seems to have grown
increasingly precarious, precarious to the point perhaps, where it is not
unreasonable to speculate that where oil has precipitated conflict, at
current prices oil may have a certain geopolitical stabilising affect -
after all with oil prices already at nose-bleed levels, the pain that would
inevitably be induced by any conflict in an oil region and the consequent
disruption to supply/production, seems likely to have an inhibiting effect
(not least of course for a major oil importing economy such as the US).
This is not a happy or a comfortable equilibrium however, since it is an
order bound together only by a principle of mutually assured destruction
(M.A.D) and increasing competition for resources will increasingly stress
this balance.

With ever more fractious power manoeuvres in eastern Europe, and the Arctic
increasingly crowded with a buzz of survey ships and submarines from all
sides of the circle fighting over where continental shelves begin and end
etc. it seems clear that, current bickering over who is starting the new
cold war aside, we are clearly returning to a cold war type geopolitics.
While things have clearly been brewing for some time, it is sobering to
speculate on the significance of the latest developments in the Georgia
conflict which apparently marks a clear aggressive shift in Russian foreign
policy: an ever more confident and assertive Russia has declared itself
"not afraid of another cold war" and Russia's representative to NATO Dmitri
Rogozin declaring that "There are two dates that have changed the world in
recent years: September 11, 2001, and August 8, 2008," Mr Rogozin explained
that the West has not fully grasped how the Georgia conflict has heightened
Russians' fears about being surrounded by NATO. "They are basically
identical in terms of significance. September 11 motivated the United
States to behave really differently in the world," he said. "That is to
say, Americans realised that even in their homes, they could not feel safe.
They had to protect their interests, outside the boundaries of the US. For
Russia, it is the same thing."

The undeniable economic interdependence of Russia and the west as suppliers
and markets is bound we must expect, to keep this a cold war and to keep
the situation from escalating beyond certain bounds, but given the shift in
Russian sentiment and confidence, there seems to be something of a question
mark over what to expect next from Russia which cannot be good for business
relations and this incident may well demonstrate how tied, in many ways,
Europe's hands are as they are forced to accept the situation.