The New Year starts with an 'energy crisis'

The impact on oil prices proved immediate as well with a jump in US light crude to $61.50, its highest since last autumn. Traders reasoned that if gas supplies fell then people would have to switch to oil, putting further pressure on tight oil stocks.

Commentators tend to expect a swift resolution of this 'energy crisis' as Gazprom has no gas storage facilities for its gas, which makes turning it off for long difficult. But the Russian side has certainly put the issue of subsidized gas pricing on to the agenda, and it is hard to believe that the Ukraine will get its gas at less than a quarter of world prices for much longer.

Indeed, from a client relationship standpoint, Russia's firm action makes sense. Why should Russia subsidize gas supplies to its neighbor and its entire industry?

What makes this a tricky issue is that by reducing the flow of gas to the Ukraine, gas supplies to France, Italy, Poland and other European customers are also hit. For the gas all goes through the same pipeline, and Russia is accusing Ukraine of continuing to take gas regardless, and effectively stealing it from the other countries.

The gas weapon?

The use of energy as a political weapon is nothing new. The Opec cartel of the 1970s permanently boosted the price of crude oil when it cut off supplies in response to the 1973 war in the Middle East.

Doubtless a European solution will be found for this European 'energy crisis', although the stability of Russian gas supplies will now be called into question. At the very least alternative pipeline routes, avoiding Ukraine will be demanded.

But this saga underlines how very vulnerable the world has become to interruptions of energy supplies. It is a reminder too that the forces which sent oil prices to $71 a barrel in late August last year are still at large.

There is a worldwide shortage of refinery capacity, and refined products are what the world needs, not more crude oil or more gas feedstock for that matter. It matters not one jot that oil producer countries are queuing up to invest in new refineries, as they take at least five years to plan, build and commission.

Watch for a real crisis

For the short-to medium-term the real 'energy crisis', has yet to emerge: a cold European winter is already putting pressure on energy stocks, which the Russian gas issue will hardly help to solve; and high economic growth rates in the US and China are also powerful drivers on the demand side.

So expect to hear more about the 'energy crisis' in 2006, even if this week's orchestrated media showdown between Russia and the Ukraine proves to be a charade.