The Egypt crisis – A Pandora’s box?

Renee Horne –London       6 February 2011

Weeks ago it was Tunisia reaching boiling point, now the news flashes around the world see Egypt overheating, with Sudan hot on its heels. Is this a Pandora’s Box slowly opening with a domino effect for the rest of the world?   During recent research on this question, a prominent political economist said “Ahh, but let us not forget the Suez Canal”.  Yes, the canal is the highway of super tankers, with strategic importance since it’s opening in 1856; it serves as the shortest ocean link between the Indian and the Mediterranean, and it was used during times of war and peace, as a conduit for military ships and petroleum. There have been bitter fights over the Suez Canal. Let’s not forget 1956, when notably Russia, the US, the UK and Israel invaded after Cairo’s efforts to nationalise the Suez and then the eight year blockade by the Egyptian military after the 1967 war with Israel. However, since 1988, despite notable interruptions, ships carrying any flag may use the canal.
Today its strategic importance still stands, as many using this canal as their superhighway stand to lose millions. This is due to ships finding an alternative route i.e. around South Africa which will take at least 15 days of the voyage time which may result in delays or cancellations of export orders and higher freight costs. The Suez Canal handles 8 per cent of the world’s seaborne cargo and 2 per cent of the world’s oil and it is crucial to Russia, the US, much of the EU, Israel, China and India.  These statistics may not seem much, but the unrest in Egypt coupled with the possibility of regime change and thoughts of a Suez Canal closure have been met with nervous questions about whether the geopolitical risk is the new threat to the global economic and financial market recovery.

The Canal bottleneck

The Suez Canal link provides Egypt with revenue of close to $US5bn. Despite the Egypt crisis, it still remains open at least for now; however Denmark's AP Moller-Maersk, the world's largest shipping group, has closed some facilities, including a canal terminal.  The concerns are that whoever replaces Egyptian President, Hosni Mubarak, could be more inclined to resort to a Suez Canal blockade reminiscent to that of 1967, which could create the 21st century’s worst bottleneck and geopolitical crisis. Reactions to a potential Suez Canal closure have been varied across the globe. While, the recovery in  the US economy has been more important in the West, this week a US admiral stated that the US would respond, “Diplomatically, economically and militarily” if there is to be any closure of the Suez Canal, but added that such event would be inconceivable. A recent news flash indicates that the UK’s  Royal Navy added its voice stating that “The [Suez Canal] is a significant issue, we as military men or anyone worth their salt should be talking about it, I can see a doomsday scenario.” The Suez Canal is vital for the EU to import liquefied gas from the Middle East via the Suez Canal. While the US and the UK have been vocal, China remains reticent, even censoring news about what’s happening in Egypt. The Suez Canal closure will be bad news for China, as its super tankers filled with Chinese made goods heading for Europe could be hampered.   India sees the entire crisis, as an “internal affair”, but stands to lose a lot if the canal is closed. About a fifth of India's exports are routed through the Suez Canal valued at about $US40bn which may be affected. Currently many in India are arguing that their businesses are being affected as shipments are now being put on hold for fears of looting.

The Spook of the oil shock?

With about one million barrels of oil per day passing though the Suez Canal, global players are spooked that the Egypt unrest could potentially disrupt oil supplies. The fear is that the Egyptian crisis might hamper traffic through the Suez Canal; hence oil tankers will take the longer route avoiding the Suez Canal. This means the journey of oil to the US and European countries would take an average of fifteen days longer, driving oil prices upwards.  But there’s already an oil shock, world oil prices rose in Asian trade, New York's main contract, light sweet crude for March delivery, was up 37 cents to $89.71 per barrel, while the benchmark Brent oil price pushed up above $US 100 a barrel for the first time since 2008 as investors weighed the possibility for supply disruptions.   The unrest has affected U.S. energy prices. The average price for a gallon of regular gasoline in the U.S. was $3.12 on Friday up 2.4 cents just in the past week and recent duty and VAT hikes have seen the UK edge ever closer to the £6 a gallon mark. Analysts expect US prices to stay above $3 a gallon, peaking since 2008 and will continuously rise until the conflict in Egypt is resolved.  While Egypt is a minor player in global oil producing, accounting for a mere 1 per cent of the global oil output last year.   It all boils down to the Suez Canal; the country controls the 120-mile Suez Canal and the 200-mile Suez-Mediterranean pipeline, which together convey 2.5-4.5 per cent of the global demand. While any short-term disruption would probably have a marginal impact on oil output, the impact may magnify through changes in the pattern of world trade.

Food for thought  

One can argue that when oil prices are spiked, the knock on effect is the increase in food prices.  But it appears the increase in food prices was a partial catalyst for the unrest in Egypt. Many Egyptians argued that they could not feed their families, and now there have been more food price rises, bringing Egypt to an economic boiling point. The economy is taking a beating with a $US192m per day loss, due to the closure of many factories and major cities. Egyptian banks have been shut for a week, and many are expecting massive withdrawals when banks open this week. And this not only affects the Egyptians. British banks have close to a $US10bn exposure to Egypt’s banking system. Economists have begun to revise the country’s estimated economic growth rate for 2011 from 5.3% to 3.7%. Since tourism accounts for 6% of the GDP which is likely to decline since travellers are shunning the destination for obvious reasons.
So the price of food is to some extent behind all these events and Egypt is not the only player disgruntled about the food prices, it is a common frustration with large scale protests in Tunisia, Jordan and Yemen. Investors are uneasy, as this could spread to oil-rich countries, sparking a Middle East economic catastrophe which could ultimately send economic shockwaves throughout the world. Indeed, if you take bread from a person’s mouth, it’s bound to cause dissent. The food for thought here is with the rising food costs are we heading for global demonstrations and further economic agony?