A Yucky Situation at YukosYukos is at the heart of the volatility in the oil market. The irony is despite the soap opera-like circumstances the company's oil production has never wavered. Yukos controls 14.7 billion barrels of oil reserves. Last year it produced 591 million barrels or almost 20% of Russia's production. It continues to pump 1.7 million barrels a day, equaling 2% of the world's supply.Thanks to the efforts of Khodorkovsky Yukos as a company is a well-oiled machine. That's because he brought in senior managers from the West. As a consequence, Yukos is the most efficient producer in Russia.It should be noted that Russia has more oil production capacity than it does pipeline capacity. That means any potential short-term disruption in supplies from Yukos could likely be replaced by its competitors. Nonetheless, a disruption would not be good news.At this point it's impossible to say what will happen. One day the Russian government freezes the company's assets and the next it unfreezes them. The company continues to face the specter of bankruptcy if it can't pay its $3.4 billion tax bill. Worse yet, word is the government may tack on an additional $10 billion to the bill. If that's not bad enough, loan default notices are beginning to file in. So far, no one is demanding payment on any loans. In a positive development the Russian government has hired an investment banker to evaluate the sale of a key Yukos subsidiary. Many feared the government would sell off the subsidiary to a state owned entity for pennies on the dollar. For the time being, those fears have subsided as the likelihood of an above board sale has increased.The latest news has a Russian court turning down two appeals by the company. One was to stop the government from collecting the back taxes. The other was a request to allow the company to partially pay the tax claim by selling shares in Sibneft, a competitor Yukos had intended to merge with before Khodorkovsky's arrest. Can you say caught between a rock and a hard place? That's what you get when you mess with Mother Russia, or more accurately Father Putin.Regardless what transpires Yukos and Russia will continue to play a key role on the world oil markets. In total, Russia produced an average of 9.33 million barrels a day in July, slightly above its seven-month average of 9.05 million barrels a day. Those figures are 10% above the previous year's production and roughly equal the Saudi's average output of 9.26 million barrels. But the continued modernization of Russia's energy sector requires foreign investment. Witnessing the strong-arm tactics against Yukos has, to say the least, made foreigners antsy about further investments. In March, Russian's Finance Minister had forecasted this year the country would record its first net capital influx of $3 to $4 billion. But last week the Russian Economic and Trade Ministry said it expects capital flight in 2004 to be $8 to $12 billion, or about half of what it was in the Yeltsin years. The jitters have spilled over to foreign governments as well. In a rare alliance both the U.S. and China have expressed concern over the Yukos matter. China is second only to the U.S. in importing oil. It gets 150,000 barrels a day from Yukos or about 7% of its daily consumption. Stay tuned.