Georgia on Our Minds

Story Highlights:

• Tensions are escalating in the former Soviet territory of Georgia.
• Geopolitical tensions are nothing new and don't have the long-term impact on markets folks fear.
• So, aside from the human impact, should folks be concerned?

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Tensions in the former Soviet territory of Georgia have escalated despite the signing of an apparently very fragile cease-fire. But geopolitical turmoil is nothing new, and over time than generally believed. So the question becomes, beyond the obvious human costs of the conflict, should folks be concerned?

The US was faced with "no choice" but to to the conflict, meaning two of the world's military heavyweights are facing a potential stare down. Today, President Bush pledged US support for Georgia, announcing plans to send Secretary of State Condoleezza Rice to Tblisi and for a "vigorous and ongoing" humanitarian mission to Georgia involving aircraft and naval forces. Ridiculous comparisons to the Berlin Airlift aside, even the remote possibility of an escalation involving the US and Russia is unnerving. Curiously, the US has actually come under fire for not doing enough to "prevent" the altercation in the first place. Ironically, such comments come after years of media haranguing that the US was doing too much "policing" of the world. Apparently, being seen as the world's superpower is a bit of a catch-22.

Then, of course, there's oil—about 1.2 million barrels a day of it. 1.4% of global crude supply flows through Georgia, most of it through the Baku-Tblisi-Ceyhan (or BTC) pipeline—the first pipeline in a former Soviet territory to bypass Russia. It was hoped to be the first of many projects intended to loosen Moscow's grip on the Caspian's oil wealth. But the BTC pipeline, along with other major pipeline and rail traffic in the Georgia, is now shut down due to violence. Has Russia successfully thwarted Georgia's attempt to become a competitive secure energy corridor in the region? If so, what are the consequences?

Maybe, and hard to tell at this point. Russia already supplies nearly a quarter of Europe's growing gas demand, and has been sealing new deals recently, diverting supply away from fledgling Western efforts in the region. But if Russia is flush with oil, they will probably want to do only one thing with it: sell it on the global market. It simply doesn't matter as much as folks think where their oil comes from. Oil is oil.

But what has been made more obvious is how much easier it is to interrupt the flow of oil than to bring new supply online. What's curious has been the market reaction, or lack of it, to the fighting. Considering only a few weeks ago any hint of supply interruption sent prices through the roof, the fact oil prices have mostly declined during the conflict (yesterday's increase was more likely in response to a decline in inventories than the fighting in Georgia) is confounding to some. Why aren't the markets reacting? Where did all the speculators go? The answer is that no one can predict short-term moves in energy prices. They are volatile (now maybe it's easier to see why they're stripped out of core inflation measures) and unpredictable.

But surprises in energy prices—or any prices for that matter—is business as usual for markets. If they were easy to predict everyone would win. So, what's the upshot of the troubles in Georgia? Probably not much. They may be on our minds, but they're not likely to leave a lasting impression on markets.

There hasn't been a time, almost ever, in the modern era where some kind of violence hasn't occurred somewhere. Remember, in just the last few years we've had Iraq and Afghan wars, North Korea detonating a nuclear bomb, a coup in Thailand, and violence and election turbulence in Zimbabwe, to name a few. None sank markets before, and the Georgian conflict isn't likely to either.