Energy Market’s Early Reaction to Egypt’s Unrest
Geopolitical Risk Rises Again
The unrest in Egypt reverberated across oil markets to a degree, and a cloud of an unknown magnitude hangs over the Middle East North Africa (MENA) region once again. Some analysts expect oil prices, which have already risen to account for the high-octane volatility of Egypt’s political situation, to rise further. The Egyptian military’s crackdown on pro-Morsi supporters in mid-August has led to a significant death toll, with government condemnations ringing across the globe.
Brent crude oil prices have already risen by $10 per barrel since the military took over Egypt’s government in early July. However, conflict in Syria and unrest in Libya have also played a role in rising oil prices. WTI crude was trading at $107.33 per barrel, up 0.45 percent, and Brent up 0.34 percent, at $110.58 per barrel, on the morning of August 15th (GMT), after pro-Morsi supporters were just overrun. By the end of the day, Brent crude futures for September delivery traded at $111.11, the highest since March. A spokesperson for the Suez Canal, which transports oil from the Middle East to global markets, says oil transportation infrastructure security has been re-fortified. The Suez Canal and SUMED (Suez-Mediterranean) Pipeline are strategic routes for Persian Gulf oil and gas shipments to Europe and North America.
According to the Energy Information Administration, “the revolution in Egypt that started in 2011 did not have any noticeable effect on oil transit flows through the Suez Canal. In 2012, about 2.97 million bbl/d of total oil transited in both directions, the highest amount ever shipped through the Suez Canal.” However, attacks on the Arab Gas Pipeline, which transported natural gas to Jordan and Israel from Egypt, led to reduced gas exports in 2011.
Political strife in the Middle East nearly always adds to price volatility in oil markets. According to oil market research, each physical shock in oil markets, because of the inelastic nature of supply and demand, can yield up to a multiple of ten times the amount of oil held off or impacted by the market, in the short-run. Meaning a shock that was a 0.47% reduction to world supply, could conceivably yield a 4.7% price increase. This is a rough guide and varies according to the particulars of the case.
In 2012, Egypt’s total oil production averaged around 720,000 barrels per day. “Egypt produces something less than 1 million bbl/day of crude, of which about half comes from newer fields in the Gulf of Suez (less than 1% of total world production), so I don’t think that any jitters in the oil markets are directly related to Egyptian production per se,” notes Frank Kryza, author and expert in North African affairs and former oil executive. (Many of the new finds have been a result of U.S.-based Apache’s exploration.) “Rather they [the jitters] have to do with a possible conflagration of unrest and turmoil spreading from Cairo to other parts of the Middle East, home to the more significant producers,” Kryza says. “Egypt has been the bell weather of the Arab Spring and I suspect that other groups are gauging the degree to which their efforts can get traction by watching events in Cairo.”
Kryza believes oil markets are not going to overreact to events in Egypt. “The oil traders are more focused on the bigger producers,” says Kryza “but I suppose you’d get blips up and down of a few dollars per barrel whenever the headlines from Cairo look good or bad.” Egypt’s perils could impact the liquified natural gas (LNG) trade. In 2012, 1.5 trillion cubic feet (tcf), or around 13% of total LNG traded worldwide flowed through the Suez Canal.
The countries in the Southern Mediterranean, such as Tunisia, Algeria and Libya, which have parallel experiences with the Arab Spring, are most closely watching events in Egypt, suggests Kryza. “I can’t help but notice that when the Morsi forces are looking stronger, the Ennhada group in Tunisia (which is the pro-Islamic organization in Tunis) seems to get their energy levels up; and when the pro-secular forces seem to be doing well, it is the secular forces in the other countries that seem more vocal.”
That the price of oil hasn’t risen higher is notable. Do the markets believe that the re-casting of political power in Egypt towards the military and away from the Muslim Brotherhood is a positive step? The economist’s viewpoint might forecast a future value, but the political scientist and diplomat would have a more nuanced view of these developments. The Arab Spring and its reversals are unchartered waters of vascillating tides of human suffering.