The Egypt effect may be more pronounced for food than oil
Commodities and the Middle East
THE tide of unrest sweeping Egypt has whipped up waves in the oil market. Anxiety often has a role in determining the price of black gold and traders, with plenty to fret about, sent a barrel of oil above $100 for the first time in two years on January 31st. Fears abounded that the upheavals in Egypt might disrupt the passage of tankers through the Suez Canal and, worse still, that the popular uprisings in Egypt and Tunisia might spread across the Middle East.
So far the concerns seem overblown. Egypt is a small producer and actually imports a little oil. It is better known for its role as a transit route. Over 4% of global supplies of oil—after the lows of 2009 that equates to nearly 4m barrels a day now, according to Barclays Capital—are transported through the country, either by ship on the Suez Canal or along the SUMED pipeline (see map). Crude and refined products travel both ways on the canal (along with many other goods). But there is little hint that Egyptian authorities have any intention of disrupting this trade or that protesters have the means to prevent the oil from moving, even if they wanted to.
If the canal shuts down, the pipeline has the spare capacity to take much of the displaced crude northward. Even a total halt would be far from catastrophic. There are plenty of spare tankers that could shift Gulf oil the long way to Europe around the Cape of Good Hope—putting a couple of weeks and some added expense on the journey. Some rebalancing of global flows might lessen the impact of plying the longer route: Gulf oil bound for Europe could be dispatched east and African oil bound for Asia sent to Europe instead.
The world is in any case in a position to take some pain. It has decent stores of oil. As Adam Sieminski of Deutsche Bank points out, OECD inventories, with enough to cover 59 days of consumption, are relatively high compared with the historic average of 55 days. But the amount that China, the world’s second-largest importer, has in reserve is unclear.
A far bigger concern in oil markets is that the troubles in Tunisia and Egypt could spread more widely in the Middle East, given the same mixture of unemployment, inequality and autocratic government that has underpinned the unrest in Egypt and Tunisia (see article). But even if similar problems did arise in the Gulf, Algeria or Libya it is far from clear that the spigots would be turned off. The most recent war in Iraq disrupted Gulf oil supplies for only three weeks.
Events in Egypt may turn out to have a greater impact on other commodities, notably food. High food-price inflation has cut spending power across emerging economies (see article), where keeping bellies full accounts for a much larger share of income than in rich countries. The high cost of food is one reason that protesters took to the streets in Tunisia and Egypt. The price of bread has shot up since last summer when a drought in Russia, one of the world’s largest wheat suppliers, hit harvests and prompted an export ban.
Analysts at Goldman Sachs point out that countries in the region may feel the need to head off political instability by spending to stockpile grain. Saudi Arabia, Algeria and Jordan have all stepped up efforts to build stockpiles. This could raise the pressure on other countries to hoard wheat, pushing prices even higher. In the short term this might even result in lower oil prices if OPEC countries pump more out of the ground to raise cash to assuage uppity populations.
Irrespective of events in the Middle East, however, the pressure on oil prices is likely to grow. The market has recovered very strongly from the lows of 2009 thanks to bumper growth in emerging markets and a decent recovery in America. As Francisco Blanch of Bank of America Merrill Lynch points out, OPEC has not yet responded with extra supply to tame prices. It regards oil, priced in dollars, as a currency that the Federal Reserve is debasing with its “quantitative easing” money-printing, and would rather leave it in the ground for now. Even if OPEC eventually makes use of its spare capacity the world’s thirst for oil could start to outpace supplies in the next two years. Then $100 a barrel could look like a bargain.
from PRINT EDITION | Finance and Economics