THE RISK OF EGYPT: OIL PRICES

Friday’s surge in oil prices due to the turmoil in Egypt and other parts of the Middle East was a wake-up call to the market that the economic ramifications could be wide reaching.  The protests in Egypt represent the people’s cries for a more democratic nation.  This is obviously a long-term positive and could have a wide ranging impact on the future of Middle Eastern politics and government, however, in the near-term this has the potential to disrupt a very fragile global economy.

The primary risk comes thru the potential for higher oil prices.  There is no telling how long the turmoil in Egypt will last and whether or not it will spread to other regions.  The risk here is that the uprisings will disrupt oil production and shipment in the Middle East.  The WSJ elaborates:

“In the short term, the biggest global economic worry remains oil prices. Egypt itself isn’t a big energy producer. But significant shipments of oil and petroleum products pass through Egypt each day on their way from the Mideast to European and U.S. markets.

About a million barrels a day of crude and refined products are shipped northward on the Suez Canal, according to estimates from the U.S. Department of Energy. A separate pipeline linking the Red Sea and the Mediterranean carries another 1.1 million barrels a day. Together, that is roughly 2% of global oil production.

If oil shipments through Egypt were disrupted, European supply—and global prices—would be “affected tremendously,” said Dalton Garis, an associate professor in petroleum-market behavior at the Petroleum Institute, an energy-research center in Abu Dhabi.

So far, oil flowing through both conduits appears unhindered. But a dusk-to-dawn curfew across the country had shippers operating in the canal warning customers over the weekend of potential delays and difficulty in contacting shipping agents and pilots and arranging for spare parts. Including the oil flows, about 8% of the world’s seaborne trade passes through the canal, according to Egyptian government figures.

“The protests have no effect on the shipping traffic,” Abdul Ghani Mohamed Mahmoud, a spokesman for the Suez Canal Authority, said Sunday. “Everything is going as usual,” he added. Officials at Arab Petroleum Pipeline Co., which owns the Suez-Mediterranean pipeline, couldn’t be reached to comment.

For now the impacts on the oil markets appear minimal, however, there is no telling how this situation could evolve.  Rising oil prices will have broad impacts as Europe remains mired in a crisis, the USA remains in a government driven recovery during a balances sheet recession and Asia battles inflation.  If oil prices were to continue rising into the seasonally strong summer months it would not be surprising to see prices approach the levels that Merrill Lynch has described as the “breaking point” for the global economy:

According to Merrill Lynch’s Sabine Schels, a commodity analyst, the breaking point for the global economy is when the size of the energy sector hits 9%.  With the sector currently at 7.8% Schels says the breaking point is $120 oil:

“Whenever the size of the energy sector in the global economy reached 9 percent, we went into a major crisis,” said Sabine Schels, a commodity analyst at Merrill Lynch.”It was in the 1980s and it was the same in 2008. Right now we are at about 7.8 percent and if you go above $100 per barrel to $120 per barrel, you get to that 9 percent level.”