What if Vladimir Putin uses oil as a weapon?

Russia's war against Ukraine affects world markets again 1:52

New York (CNN Business) --

Russia faces the specter of full-blown financial collapse.

Punitive sanctions imposed by the West have sent the ruble plummeting to record lows, shut down the Moscow stock market and made Russian assets toxic on the world stage.

The White House even took aim at Vladimir Putin's financial strength, removing access to at least part of Russia's $630 billion emergency fund that was designed to cushion the economic blow of this very crisis.

• Russia-Ukraine War: Breaking News and Negotiations and Invasion

Now comes the big question: how will Putin, who is also facing Western sanctions on his personal wealth, react in what is rapidly turning into an economic war?

There is growing concern that Putin may retaliate by using not only natural gas but also crude oil as a weapon against the West.

"Russia's energy supplies are at great risk, either because they were held up as a weapon by Russia or taken off the market due to sanctions," Louise Dickson, senior oil market analyst at Rystad Energy, wrote in a report Monday. .

World oil supply was already not keeping up with demand.

If Russia, the world's second-largest oil producer, were to intentionally withhold supply, it would likely send crude prices soaring, dealing a heavy blow to consumers around the globe.

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JPMorgan has warned that oil would rise to $150 a barrel if Russia's exports were cut in half.

That would translate to an increase of about 41% from the recent high of nearly $106 a barrel.

US oil companies say they would not take advantage of the conflict in Ukraine 0:47

Gasoline prices would rise much more

That increase would also dramatically increase prices at gas stations.

The US national average for regular gasoline already sits at $3.61 a gallon, according to the American Automobile Association (AAA).

That's an increase of 8 cents in a week and 25 cents in a month.

Although the United States consumes very little Russian oil (Russian oil imports stood at just 90,000 barrels per day in December), this remains an interconnected and global market.

Supply shocks in one part of the world can affect prices everywhere.

• What will happen if Russia cuts off gas supplies as the conflict in Ukraine escalates?

"It's a wild card if Russia actually cuts those flows to try to inflict pain through commodities," said Ryan Fitzmaurice, energy strategist at Rabobank.

"If there are real supply disruptions, that will be the trigger for significant price increases."

There is no evidence at this time that Russia is cutting off oil supplies to the world.

And the West has made efforts to rid Russia's energy industry of sanctions in hopes of minimizing the impact on the market.

Putin may well decide that this is a weapon best left unfired.

Russia needs oil revenue more than ever

Not long ago, it was considered highly unlikely that Putin would use oil as a weapon.

Such a strategy risks further angering the rest of the world against Russia.

Worse yet, limiting oil shipments would jeopardize Russia's petro-central economy.

Oil and natural gas accounted for about 43%, on average, of the Russian government's annual revenue between 2011 and 2020.

However, the crisis between Russia and Ukraine escalated rapidly, leading to the worst fracture with the West since the Cold War.

And Putin's aggressive stance and comments surprised observers, leading some to question his mental stability and raising concerns about how he will respond to the latest sanctions.

Putin surprised over the weekend by putting his nuclear forces on high alert.

On Monday he lashed out at sanctions imposed by what he described as the "empire of lies."

Putin is also facing pressure from the oligarchs he relies on for support.

Russian billionaires Mikhail Fridman and Oleg Deripaska have broken ranks with the Kremlin in recent days, calling for an end to the war.

Oil price rises above US$100 a barrel 0:49

'I got really nervous'

Buoyed by the fact that Russia has a long history of providing reliable oil supplies, even during the height of the Cold War, Natasha Kaneva saw little risk of the country using its oil exports as a weapon.

But Kaneva, head of global commodities research at JPMorgan, no longer feels so sure.

"I became very nervous after listening to Putin's speech," Kaneva told CNN last week, referring to the Russian president's hour-long comments on February 21 in which he broadcast a list of Western grievances.

"For me, it was a defining moment. I felt like everything changed."

The JPMorgan executive believes investors are underestimating the risk of Putin weaponizing oil supplies.

"The market doesn't need any interruption," Kaneva said.

"We don't have any buffers. The price reaction will be non-linear."

None of this escapes Putin.

Neither is the fact that high gasoline prices are deeply unpopular in the United States, contributing to the worst inflation in nearly 40 years.

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  Because it is important

"Putin could seek to inflict significant pain on Western nations," Helima Croft, head of global commodity strategy at RBC Capital Markets, wrote in a note to clients on Sunday.

"And commodity prices may feel the impact of their countermeasures."

Mike Sommers, executive director of the American Petroleum Institute, an oil and gas trade group, did not rule out the risk of Russia withholding oil supplies.

"I think it's an ongoing concern, particularly as the West responds to aggressive action by Russia," Sommers told CNN in a phone interview last week.

"We would be concerned if he decided to cut supplies. No matter what he does, the United States will continue to produce in this volatile political environment."

The White House has warned Putin not to weaponize oil

Putin does not need to completely turn off the taps to punish the West.

Oil markets are so tight that just a modest decline in supplies from Russia could have a big impact on prices.

"Even if Russia cuts supplies by 10-20%, the price response would compensate Russia for the supply loss," Rabobank's Fitzmaurice said.

Even before the invasion began, the White House warned Putin against clamping down on his country's energy exports.

"If Putin decides to weaponize his energy supplies, that would be a huge mistake," Daleep Singh, US deputy national security adviser, told CNBC.

The Biden Administration official noted that Russia is "incredibly dependent" on the West as a consumer of its energy supplies.

"This is a long-term vulnerability for President Putin. If he weaponizes energy supply, that will only speed up the diversification of Europe and the West away from Russian energy," Singh said, adding that it would be a "big mistake." .

Conflict Russia - Ukraine