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Oil And Other Markets Get Increasingly Nervous Over Egyptian Crisis

Concern over the security of Egypt's Suez Canal has sparked a run on oil prices.
Anyone watching oil prices this week could be forgiven if they thought Egypt is a major oil producer.

As the crowds of protesters in Cairo grew from thousands, to tens of thousands, to hundreds of thousands, the price of oil shot upward.

The price of benchmark Brent crude oil this week surged to $100, up 5 percent since the beginning of last week, when violence spread from Tunisia to Egypt. It's the first time oil has gone that high in two years.

But if the surge in oil prices suggests the world is suddenly shorter of oil today than it was last week, that impression would be wrong. Egypt itself is not an oil exporter. In fact, the country is one of the Middle East's smallest oil producers, pumping around 750,000 barrels a day and using it almost entirely for its own domestic needs.

Suez Canal

So why has oil risen in price? One answer is simply Egypt's position on the map. As Simon Henderson of the Washington Institute for Near East Policy tells Voice of America:

"It's in a strategic position. The Suez Canal flows through Egypt and there is also a significant oil pipeline which stretches from the Red Sea to the Mediterranean Sea,” Henderson said. “So the oil markets are apprehensive of disruption here. So far there hasn't been any, but oil markets tweak up the price because of what they see as sensitivity."

For now, the canal -- which offers the most direct shipping route between Asia and Europe -- remains open. Britain's "Financial Times" reported today that a special Egyptian military authority has taken charge of the Canal Zone to guarantee the safety of shipping. That comes amid reports that several container companies have already begun instructing their ships to take the longer route around the tip of Africa in order to avoid trouble.

Similarly, the Egyptian military has stepped up security on its Red Sea-to-Mediterranean pipeline which is used to deliver more oil from the Gulf states to Europe than is the Suez Canal itself. The pipeline, which links a tanker offloading terminal on the Red Sea with a tanker facility on the Mediterranean near Alexandria, is capable of carrying 2.5 million barrels a day, mostly for the European market.

Risk Of Contagion

But Egypt's risky geographic location is not the only thing driving up oil prices. More importantly, there is fear that the unrest in Egypt could spread to the other Arab countries which are major oil exporters, such as the Gulf states.

David Knott of the Cyprus-based oil trade journal “Middle East Economic Survey” said it’s not so much the volume of oil missing that is the problem, but more the case of the Egyptian crisis possibly spreading.

“We have seen the government in Tunisia go, now it looks like Egypt might be going,” he said. “There are worries that the whole sort of political issue might spread like that and that would be a bigger problem in terms of oil supply and the broader (global) economy."

So far, the unrest in the Middle East, which began with Tunisia, has affected only non oil-exporting states. They include Egypt, Jordan, and Yemen. All of these states have large segments of their populations which are poor, unemployed, and frustrated with autocratic governments that have monopolized power for decades.

But it is other Arab states -- particularly in the Persian Gulf region -- which export most of the region's oil. And it is those states --with equally autocratic governments, but much wealthier populations -- that the global oil market is now watching intently.

Already there have been some surprises. Saudi Arabia, which virtually never sees protesters in the street, saw several hundred people in Jeddah last week against the lack of government response to severe flooding in the area. The protest, organized by activists using mobile phones much as in Egypt, was quickly suppressed by police who detained dozens of demonstrators.

Whether the massive rallies now going on in Cairo could really inspire mass movements in the Gulf is impossible to predict. So, too, is how much impact any such unrest would actually have on Gulf oil fields, which are mostly located far from population centers and whose revenue-generating ability is almost certain to be valued and protected by any new government. Still, even just the thought of instability is enough to give oil prices the kind of upward jolt already seen this week.

Similarly, just the thought of unrest is already making investors in many sectors other than oil more cautious about putting money into region.

Stock Prices Fall

Nervousness drove Middle Eastern stocks down sharply early this week as violent protests began in Cairo, with a drop of more than 4 percent reported in the regional business hub Dubai on January 30. Drops were also reported in other regional hubs like Abu Dhabi, Kuwait, Amman, and on the Saudi exchange. Egypt's stock market has been closed since the protests began after dropping sharply.

Over the last three days, most Middle East bourses have recovered as some investors have tried to take advantage of the lower stock prices. But Arno Maierbrugger, deputy business editor at the Dubai-based “Gulf News” said there is still much uncertainty in the air.

"What we have seen over the last two days is that investor confidence has been restored in the sense that people are stepping in, picking up some of the cheap shares, but at rather low volume, which means that foreign investors and institutional investors are still on the sidelines,” he said. “But the stock markets have gone up over the last two days throughout the region, which is surprising, but it all depends on how the developments in Egypt will continue and especially on what happens on (February 4)."

February 4 is expected to see the biggest protests yet in Cairo as it marks the start of the weekend in Egypt. The protests are scheduled to begin as mosques let out after Friday Prayers.