LUKoil Cuts Oil Supply to Germany

Right now as I am writing this, Nymex crude oil has just dropped back down $99.94 a barrel after briefly surpassing $100. Many analysts are pointing toward several contributing factors behind today’s commodity rally, including a refinery outage, the dramatic Exxon-Venezuela asset freeze battle, a broken pipeline in Nigeria, and even today’s news that the private Russian oil producer LUKoil has suddenly cut off supply to Germany allegedly due to a price dispute. What’s going on here? Lukoil’s Vagit Alekperov (left), President Vladimir Putin (center), and U.S. Senator Charles Schumer (D-NY) (right) in 2003. Proximity to power is not enough of a reason to jump to conclusions. (Photo by Stephen Chernin/Getty Images)

There is not a great amount of reporting available yet regarding this supply cut, but it appears that Sunimex, Germany’s monopoly crude oil importer, failed to reach an agreement on prices with Lukoil, which delivers one quarter of the country’s consumption via the Druzhba pipeline. The Druzhba has been controversially shut down in the past during other disputes, and there were even plans at one point to build an artery around Belarus.Last August, our energy correspondent Tom Nicholls predicted that the Druzhba shutdown was part of Lukoil’s efforts to squeeze a higher price out of Sunimex, and that the company has “carefully shaped a corporate strategy that fits with the Kremlin’s strategic goals.“The confluence of $100 oil, Kosovo’s declaration of independence, and another supply cut from Russia to Germany will be hard for many to ignore (even though we should). As far back as Nov. 14, Robert J. Samuelson theorized that $100 oil is not the result of any temporary price spike, but rather the beginning of a “new geopolitical era when energy increasingly serves as a political weapon.“The Telegraph has already elliptically jumped to the conclusion that the Lukoil cut-off is Russia’s gesture of punishment in wake of Kosovo’s declaration of independence, and perhaps a warning to Germany that they should think twice before recognizing sovereignty (although Frank-Walter Steinmeier has already said that Germany would do so).This is hasty and likely incorrect, in my opinion. Lukoil is the last big independent oil company left in Russia, and relatively free to operate without overt government interference in its daily business affairs. Although the Azeri president of Lukoil, Vagit Alekperov, has shown himself willing to follow the Kremlin’s orders, it would be highly doubtful that the company would cut off oil supplies to Germany just because the government wanted to prove a point. Gazprom, Rosneft, and Transneft are the Kremlin’s preferred machinary for influencing events abroad – though it has in the past been successful in mobilizing privately held corporations to lobby on their behalf.Lukoil’s price dispute experience with Sunimex has all the appearances of being a problem of market failure: for once it is a private Russian company to be a victim of monopoly and lacking competition. However even if the Kremlin weren’t behind the supply cut, the news still creates pressure pushing crude toward $100 barrel … for now.