Worrisome Economic Consequences from the Unrest in Egypt - Suez Canal and the price of oil are the real issues

The Peterson Institute for International Economics recently posed the following question:  "What will the instability in Egypt mean for the Middle East economies, and more generally for the world economy?" Their answer: "It is always difficult to predict such matters with certainty. But on the face of it, the direct costs of even a sharp decline in the Egyptian economy would not amount to much. Egyptian GDP is about $215 billion, a mere decimal point in the world GDP of $58 trillion. While Egypt is certainly a large country in the Middle East, at least in terms of the size of the population of 85 million, its GDP is less than 10 percent of the combined GDP of the Middle East and North African countries. Based on these numbers, one would be hard pressed to make the case that even a complete collapse of the Egyptian economy, which is highly unlikely, would have serious ramifications for the region, let alone the world economy.

The price of oil is the real issue. Many observers believe that a possible shutdown of the Suez Canal would seriously disrupt oil supplies, causing a sharp jump in world oil prices. But only about 2–3 million barrels a day transit through the Suez Canal, a drop in the ocean of global supplies. Total world supply of oil is 88 million barrels a day, so the temporary loss of 2–3 million barrels daily is not particularly worrisome. Besides, the oil coming through the Suez Canal would not really be lost. It would simply need to be rerouted via the Horn of Africa adding a little to the price because of the higher shipping costs. Despite these facts, oil prices have jumped significantly in the last few days, with Brent crude on the ICE Futures Europe Exchange rising from $95 a barrel on January 26 to $103 a barrel on February 3.

Even though the Egyptian turmoil may be a "black swan event", it appears the markets have started to reprice the risk of a disruption, and therefore both spot and futures prices have been moving up. An oil price spike of the kind seen a few years ago, when the oil price hit a record high of $147 a barrel in July 2008 would have very serious consequences for the world-wide economic recovery. (At that time, there were heightened concerns over oil consumption going up in Asia, fears of supply problems in some parts of the world, all of which gave rise to speculation in the markets.) However, the probability of a supply disruption, with significant amounts of oil being taken off the market, seems small in the near term.

Speculation, and particularly momentum trading, can push up prices even though the fundamentals would point otherwise. This is the real danger now. It is doubtful that the fragile world economy could take the hit of such a large spike in oil prices. In that sense, what is happening in Egypt has to be of concern to the world."

It can therefore be expected that if the emphasis of the protests move from Cairo and other cities in Egypt to the Suez Canal, the military will certainly not remain as passive as they have been these past two weeks. Those who remember the past history of Egypt will certainly agree with that prediction.

EU-Digest