Egypt Fallout Goes Beyond Oil, Food Prices

Sunday, 06 Feb 2011 12:52 PM

 

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The turmoil in Egypt is causing economic jitters across the globe, pushing up food and oil prices so far, but bigger worries are ahead.

Will popular uprisings and revolution spread to Egypt's rich autocratic neighbors, managers of much of the world's oil supply? Will the U.S. see its influence in the region decline and that of Iran and other fundamental Islamic governments surge?

While those are open questions, there's no doubt the crisis has meant new risks for shaky economies and put a cloud over financial markets.

Instability in the Middle East, if prolonged, could jeopardize fragile recoveries in the United States and Europe. It could limit job creation and fuel inflation.

"If the turmoil is contained largely to Egypt, then the broader economic fallout will be marginal," said Mark Zandi, chief economist at Moody's Analytics. "Now, obviously, if it spills out of Egypt to other parts of the Middle East, the concern goes to a whole other darker level."

Protesters have topped the government of Tunisia, with more modest effects in Yemen and Jordan.

"The real worry, I think is if these protests continue indefinitely and there isn't more reassurance about stability in Egypt and in the broader region," said Shadi Hamid, a researcher on Gulf affairs at the Brookings Institution's Doha Center in Qatar. "We're going to see a continued decline in the regional economy and that will, of course, have an effect on the U.S. economy."

Hamid suggested the Obama administration's position of first supporting Mubarak and then raising the pressure on him to leave immediately was not helpful. "There is a real danger here that the Obama administration will be remembered as resisting change," he said.

The unrest already 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. Analysts expect prices to stay above $3 a gallon — the highest since 2008 — and probably go higher until the conflict in Egypt is resolved and Mideast tensions ease.

Oil prices hovered at about $90 a barrel over the past week. Some analysts predicted the Egyptian crisis will lead to $100 per barrel prices sooner rather than later.

Traders worry the unrest might spread to oil-producing countries in the region and even affect shipments through the Suez Canal. Egypt is not a major oil producer, but it controls the canal and a nearby pipeline that together carry about 2 million barrels of oil a day from the Middle East to customers in Europe and the United States.

So far, traffic through the canal has been unimpeded. But it's high on everybody's worry list. It was blockaded by the Egyptian military for eight years after the 1967 war with Israel and shut briefly during the Suez crisis of 1956.

"I think the major fear regarding the Suez Canal revolves around the power vacuum that's being created by this uprising," said Jeff Sica, president of SicaWealth Management in Morristown, N.J. "The prospect for the Suez Canal being controlled by an unfriendly regime would further devastate the economy."

The likelihood of the canal being shut or blockaded seems remote. It is a huge source of revenue for Egypt that the government will not want to lose, no matter who is in charge. Still, just the possibility could spook financial markets if tensions escalate.

Rising food prices helped fuel the popular uprising in Egypt. Unrest in Somalia and other Arab nations also appears to be driving food prices even higher. Some nations in the region, including Saudi Arabia and Algeria, have indicated they may begin increasing their stockpiles of wheat and other grains.

Hoarding can lead to more hoarding, and political strife can accelerate the process. Egypt is the world's largest importer of wheat.

Iranian leaders have much to gain from the Egyptian turmoil. Not only is Mubarak the most anti-Iranian of American allies, but rising oil prices have clear economic benefits to Tehran.

"Hundred dollar-a-barrel oil for the Iranians does a lot to take down the pain of the sanctions that we're putting on them, so they must be sitting there rubbing their hands with glee at the moment," said Martin Indyk, a former U.S. ambassador to Israel.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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