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By Jennifer Warren on Aug 21, 2013 with no responses

Tension in Egypt Triggers More Complexity

Geopolitical Risk Continues, Part Two

Macro-Globe-Map-Detail-EgyptTurmoil in Egypt continues to roil oil markets and confound Middle East regional stability. Goldman Sachs said Monday, August 19th, five days after the violence escalated, it expected tighter oil markets to propel Brent to $115 “in the very near term.” More interesting though are the shifts occurring in the geopolitical landscape of the broader Middle East.

Saudi King Abdullah publicly gave his approval and support for the military-backed government of Egypt. He pledged a $12 billion aid package along with the UAE and Kuwait, four times as much as the military and economic grants from the U.S. and the European Union combined ($1.5bn and $1.3bn respectively). The threat of political Islam vis-a-vis the Muslim Brotherhood is seen as potentially up-ending stability in the Kingdom. This high-stakes game of regional poker has just gotten more complicated. The outcome, which may occur in waves of violence and instability, could take many years to be realized.

A Risk Analysis

“The unrest in Egypt will likely remain a source of concern for the oil markets in the medium term,” according to Anthony Skinner, an expert on energy markets and the MENA region from the U.K.-based risk consultancy Maplecroft. “This derives largely from concerns over potential disruption to tankers going through the Suez Canal and also potential disruption to the Suez-Mediterranean (Sumed) pipeline, which transports 4.5m bpd of oil from the Red Sea.”

The military is committed to ensuring the safety of both arteries, suggests Skinner, but the oil market would take a significant hit were a larger-scale terrorist attack against energy interests to occur. He has observed the uptick in attacks against essential energy infrastructure since the Nile Revolution, and there is a distinct possibility that this negative trajectory will continue. “We have witnessed daily attacks or skirmishes in the Sinai Peninsula since former President Morsi was toppled by the Egyptian military,” says Skinner. “This has clearly played into the hands of militant Islamist networks such as al-Qaeda which maintain that the only route to political Islam – albeit an extreme interpretation – is through an armed struggle.”

The primary risk derives from the disruption of transportation versus Egypt’s production, notes Skinner. “Most of Egypt oil and gas production is offshore and so operations and production has not been affected. Energy companies including Shell have closed their facilities and asked staff to stay at home.” In 2012, approximately 7% of all seaborne oil and 13% of LNG passed through the Suez Canal, a 101-mile link between the Red Sea and Mediterranean. The Sumed pipeline is a strategic route for Persian Gulf oil and gas shipments to Europe and North America.

Reverberations and Root Causes

The increased tensions from Monday’s assault on unarmed Egyptian soldiers reversed the near-immediate calming of aggressions, writes The Times of Israel. Negotiations, that could have provided some shades of grey, were possible. But black-and-white diplomacy is back. Even Washington is engaging in it, though at times the colors are indistinct.

This is a time to look at all of the chess pieces on the board, and carefully consider one’s move. Right now the Western media and some governments are aligning with the democracy pieces, while Saudi Arabia appears to be trying to keep a region from falling into utter chaos through the ruling kings, queens and knights. Markets are at the mercy of the game for now until the game board is removed. Relative to energy markets, remember Saudi Arabia is the largest OPEC oil producer, with roughly 12% of the globe’s proven reserves in 2010. Seventy percent of the world’s proven reserves are located in OPEC countries; OPEC Middle East has 55%, with OPEC Africa 8% and OPEC Americas 8%.

On another related note, Nafeez Mosaddeq Ahmed, executive director for the Institute for Policy Research and Development, offers that Egypt’s resource depletion — oil, water, and food — is part of the larger story of root consequences leading to the strife. His Atlantic article details how Egypt is one domino in a chain that could drive the MENA region toward more upheaval. The energy-water-food nexus is a global challenge, hurting and inflaming some countries worse than others. In the case of Egypt, the match that lit the fire was politics. Countries with more stable political situations can weather and cope with resource scarcity better than those with volatile politics.

Part One is here.