The Rising Influence of Rising Affluence

[DewDiligence]

2% of World Oil Supply Passes Through Egypt

http://online.wsj.com/article/SB10001424052748704832704576113822189671908.html

›Egyptian Unrest Has Repercussions in Global Economy

JANUARY 30, 2011, 12:40 P.M. ET
By CHIP CUMMINS

The violent clashes and looting in Egypt spawned by the standoff between protesters and President Hosni Mubarak are threatening economic repercussions across the region and around the world.

Egypt's economy is relatively small—the fourth-largest in the Mideast, with a gross domestic product last year of just under $217 billion, according to International Monetary Fund estimates. But the country plays an outsize economic role as home to one of the world's most important trade and energy thoroughfares, the Suez Canal.

Anti-government protests in Egypt have affected world financial markets, with US stocks suffering the biggest one-day loss in six months. Video courtesy of Fox News

Egypt is also the world's largest buyer of wheat and a significant cotton exporter. And it hosts one of the region's most globalized financial markets, making the country's equities a popular play among emerging-market investors.

In the short term, the biggest global economic worry remains oil prices. Egypt itself isn't a big energy producer. But significant shipments of oil and petroleum products pass through Egypt each day on their way from the Mideast to European and U.S. markets.

About a million barrels a day of crude and refined products are shipped northward on the Suez Canal, according to estimates from the U.S. Department of Energy. A separate pipeline linking the Red Sea and the Mediterranean carries another 1.1 million barrels a day. Together, that is roughly 2% of global oil production.

If oil shipments through Egypt were disrupted, European supply—and global prices—would be "affected tremendously," said Dalton Garis, an associate professor in petroleum-market behavior at the Petroleum Institute, an energy-research center in Abu Dhabi.

So far, oil flowing through both conduits appears unhindered. But a dusk-to-dawn curfew across the country had shippers operating in the canal warning customers over the weekend of potential delays and difficulty in contacting shipping agents and pilots and arranging for spare parts. Including the oil flows, about 8% of the world's seaborne trade passes through the canal, according to Egyptian government figures.

"The protests have no effect on the shipping traffic," Abdul Ghani Mohamed Mahmoud, a spokesman for the Suez Canal Authority, said Sunday. "Everything is going as usual," he added. Officials at Arab Petroleum Pipeline Co., which owns the Suez-Mediterranean pipeline, couldn't be reached to comment.

On Friday, U.S. benchmark crude futures leapt more than 4% after tens of thousands of protesters confronted security forces across Egypt.

By contrast, oil markets barely budged through the summer of 2009 on the back of large antigovernment protests across Iran, one of the world's largest oil producers. The different market reactions underscore a very different global supply and demand picture in just the last 18 months. After a sharp drop in the wake of the financial and economic downturn, crude demand has picked up recently. That has made markets much more sensitive to the threat of supply disruptions.

Apart from Egypt's role as an energy transporter, fear that unrest could spread to bigger oil producers could exacerbate worries.

Algeria, a big oil and natural-gas producer, has been racked in recent weeks by anti-regime protests similar to those buffeting Egypt. The most recent regional unrest began in Tunisia, culminating in the ouster of that country's longtime autocratic leader earlier this month, and has also rocked Yemen. Saudi Arabia and the rest of the energy-rich Persian Gulf have been spared demonstrations so far, but Arab leaders appeared over the weekend to be increasingly concerned about spillover.

On Saturday, Saudi Arabia's king blasted Egyptian protesters and voiced support for Mr. Mubarak. In a statement Sunday, the state-run Saudi Press Agency reported that King Abdullah bin Abdulaziz al-Saud spoke to U.S. President Barack Obama by phone and told him that "Egypt's stability and the safety and security of its brotherly people cannot be bargained."

While Egyptian oil output isn't sizable, the country has quickly become a significant exporter of natural gas. Some of that goes by pipeline to neighbors in the Mideast. But most of Egypt's gas exports are now shipped as superchilled liquefied natural gas, aboard tankers bound for U.S. and Asian markets.

So far, oil and gas field operations appear unaffected by the unrest. Regional gas producer Dana Gas PJSC's chief executive, Ahmad al Arbeed, said Sunday that the company was continuing routine operations.

But international oil companies have shuttered their Cairo offices. Both BP PLC and Royal Dutch Shell PLC offices were closed Sunday, security officials at the companies said. A Shell security official said some expatriate staff had left the country.

Other commodity markets can be extremely sensitive to Egypt. The country is the world's biggest wheat purchaser and a top cotton exporter.

On Friday in Chicago, wheat futures fell more than 2%, in part on worries that regime change in Cairo could hurt Egypt's ability to pay for wheat. The government's official wheat buyer said Sunday it had no plans to change orders.

"We will purchase the usual quantities," said Nomani Nasr Nomani, vice chairman for the General Authority for Supply and Commodities. Mr. Nomani said wheat cargoes were being unloaded normally in Egypt's large ports, including Alexandria and Port Said.

Meanwhile, cotton exports could be hit if the lack of security and the curfew curb output in coming days. Global cotton prices are already at their highest levels in about a century and a half.

And global-equities investors are girding for a hit. While Egypt's stock market is smaller than many other Mideast bourses, it's one of the easiest in the region for foreigners to access. It is closely followed by international investors, and is included in the MSCI emerging-markets index. The Saudi market, while much better-capitalized, is still considered a frontier market.

The Egyptian stock market has been shuttered since the unrest.

"Emerging markets investors, if they are benchmarked, are going to have the exposure [to Egypt] ... and they are going to be hit," said Eiji Aono, head of research for NCB Capital, a Riyadh-based investment firm.‹