Egypt: Why the price of oil is on a rollercoaster ride

MOSCOW, Russia — Turmoil in the Middle East reliably translates into one thing: turmoil in the global oil price.

As Egypt enters its second week of anti-government protests, the oil price has twice risen above $100, hitting a two-year high. If the unrest continues, it could soar even higher. If the unrest spreads to other countries, then all bets are off.

Egypt is neither a major oil producer nor one of the world’s top energy consumers. So why the concern?

In addition to worry over spreading unrest, it comes down to the Suez Canal, a 120-mile sliver of waterway that cuts through the country, connecting the Mediterranean to the Red Sea. Its opening in the mid-19th century revolutionized shipping, cutting transport time and costs and putting Egypt at the center of modern global trade.

Any threat to Egyptian stability immediately raises concerns over the fate of the canal. Past conflicts — with Britain in 1956 and with Israel in the 1960s and 1970s — forced Egypt to shut the key waterway, in one case for eight years, dealing a harsh blow to international trade.

Yet the circumstances this time around are entirely different and experts say concern is largely unwarranted: Since the canal is a key source of income for the Egyptian government, any leader hoping to secure the support of the people would have little interest in shutting it down.

“No one is going to want to lose that source of money,” said Hani Sabra, a Middle East and Africa analyst at Eurasia Group, a political risk consultancy. “In the short-term, the risk is actually quite limited — tanker traffic through the Suez Canal hasn’t stopped, this is one thing the military is keen on ensuring is secured.”

The military's firm control of the canal is a good sign for its unfettered operation. As evidenced during the daily protests across Egypt, the military continues to hold the trust of most people, unlike President Hosni Mubarak and his widely hated police. Although Suez was the site of some of the tensest protests at the start of the movement, there were no reports of ships or trading sites being targeted.

“We believe the Canal does not appear to be under immediate threat from the current political crisis in Egypt,” Barclays wrote in a research note Tuesday. “There are no indications that the protesters in Egypt have yet developed the intent or capabilities to carry out organized attacks on tankers like that seen in the case of the USS Cole,” it said, citing an extreme example when the American ship was attacked by terrorists while anchored in Yemen.

The Suez Canal provides the shortest shipping route from Asia to Europe, allowing ships to forgo the long trip around Africa’s southern tip. In 2009, about 8 percent of the world’s seaborne trade passed through the canal — mostly container traffic but about 15 percent crude oil and oil products. About 2 million barrels of oil traverse the canal each day, roughly 5 percent of the global amount in transit (another 2.3 million bpd go through Egypt's Sumed pipeline, which opened in 1977 in the wake of tensions with Israel).

Analysts were loath to speculate on longer-term implications of the current unrest. Although Mubarak indicated Tuesday night that he would not seek re-election in the country’s September presidential election, there was little sign that the hundreds of thousands of protesters would readily accept his concession. Who could replace Mubarak, and whether the next governing coalition would contain a radical Islamist element, remain even larger questions.

“If we talk about long-term implications, then it’s a much more complicated question,” Sabra said. “Egypt does have the potential to have a contagion effect on the rest of the region.”

“If other Arab regimes that have been considered stable for the past few decades start to fall," he added, "then it becomes a much more open question.”

For now, the greatest effect might be reflected in a fluctuating oil price, analysts say. Oil has risen 30 percent since September, thanks largely to increased energy use thanks to the global economic recovery and seasonal factors. The unrest in Egypt has briefly sent the oil price over the $100 per barrel mark, a psychologically important level. By Tuesday evening, it had sunk back down to $90.77.

“Unrest in Egypt has contributed to market uncertainty and created greater price pressure,” said a statement released by the International Energy Agency (IEA), which advises 28 industrialized nations, mainly energy consumers. It urged oil producers to “be sensitive to market signals and exercise flexibility in ensuring ample and affordable supplies,” a thinly veiled nudge to the Organization of the Petroleum Exporting Countries that it should consider increasing production.

IEA member states, which include the United States, together hold emergency oil stocks that could last 145 days, it added.

It also threw in its two cents about the Suez Canal: “While disruption to the Suez passage through the canal and pipeline could have an important impact on oil and gas markets, it does not currently appear likely.”

“A closure of the canal or pipeline would add considerably to the time needed to ship oil from the Middle East to markets in Europe and further westward, but would not remove the oil from the market,” it said, meaning unrest in Egypt does not have the same potential to disrupt the flow than unrest would elsewhere in the region.

More about the unrest in the Middle East:

The altered aura of the Arab state	Everything you need to know	Israel nervous as Mubarak teeters