Oil Prices, Unrest and Aid

Second chances are rare in this world.  Still, over the course of the last month, Egyptians have possibly created just that. However, the long-term consequences of this “revolutionary repeat” remain unknown.

Economically speaking, in the short-term the political situation in Egypt will potentially manifest in greater price fluctuations for crude oil. Nonetheless, the degree to which recent events in Egypt will ultimately influence oil prices in unknown. Several experts highlight the complexity of oil price fluctuations. El Moiz Abunara of the Center for Oil Research and Development notes that, “Oil prices increased according to expectations, and the supply / demand relationship.  However, econometric models can’t show the whole picture.”

On June 23rd, the price of oil began to rise from below 100 USD/bbl to reach 106 USD/bbl on July 3rd, the day Morsi was removed from power. After two weeks of continuous protests between pro and anti Morsi supporters the price of crude oil continues to rise. As of this writing the Brent Price for crude oil was 109 USD/bbl.

While Egypt is not a major producer or exporter, domestic unrest in Egypt will factor into the global cost of oil given the strategic importance of the Suez Canal. According to data compiled by Platts, nearly one third of world’s crude oil transits this vital water passage. Kate Dourian, an independent energy analyst, stated that the sudden hike in crude oil prices “is partly because of the trouble in Egypt, but not totally because of it. It has nothing to do with Morsi stepping down, but fear over supplies passing through Suez.”

In the period following the removal of Mohamed Morsi, Sinai has become a battlefield with increasingly violent attacks on military forces as well as military targeting of the gas pipeline. Mosri supporters have blocked key roads and combatively engaged with the Egyptian army placing the entire Suez region on high alert. A recent report produced by The Washington Institute documents that “since Morsi’s ouster, militants loyal to the former president have made at least one attempt to fire missiles toward oil installations in the city of Suez, located at the canal’s southern entrance.

They have also assaulted customs offices in the Port Said free zone at its northern entrance.” The Egyptian Ministry of Interior recently announced the arrest of 25 individuals for allegedly plotting terrorist attacks on ships crossing the Suez Canal. The ministry claims that the militants are linked to Al Qaeda.

Commenting on the heighted security in the Sinai, El Moiz Abunura, Consultant at the Center for Oil Research and Development in Africa and the Middle East stated that, “At this moment, the changes in Egypt and its impact on oil prices are more dominant than any other conflict in the region including Syria and Lebanon.” In response to increased threats, the Egyptian army has implemented measures to increase security in Sinai.  Reuters reported on July 11th that US Navy vessels were patrolling the area from the Red Sea to the Hormuz Strait and up to the Suez Canal in order to add an additional element of security to the waterway.

While concerns over the Suez Canal are justified and likely reflected in slightly higher present oil prices, many argue that political unrest in the region has become the norm after the Arab Spring and that element of risk is already embedded in market prices. Mohamed Darwazah, Senior Economic & Risk Analyst for Medly Global Advisors stated that, “instability in the MENA region always adds a risk premium to oil prices…I believe the turmoil in Egypt is one of several factors that are keeping prices high.”

According to energy analyst Kate Dourian, oil traders are unlikely to take note of the political instability in Egypt until there is a significant threat of the turmoil spreading and destabilizing major GCC oil exporters, especially Saudi Arabia. However, perhaps not surprisingly in geopolitical terms, GCC countries have expressed overwhelming support for both the Egyptian military and the interim government. Saudi Arabia, UAE and Kuwait pledged aid packages (consisting of cash, energy products, and interest free loans) amounting to 12 billion USD in the wake of Morsi’s removal. On July 21st Egypt’s Central Bank announced the arrival of 3 billion USD from UAE, and the imminent arrival of funds from Saudi Arabia.

Altruism is not a likely explanation as numerous solicitations for economic aid from the Morsi government were recurrently stalled. The sudden generosity from the Gulf States is obviously an effort to contain the political unrest in Egypt and avoid regional spillover culminating in Arab Spring 2.0.  Moreover, by providing economic aid to Egypt’s interim government the Gulf states seek to contain the Islamist influence of the Muslim Brotherhood and ensure the survival of their Gulf monarchies. Mohamed Darwazah echoed this point stating, “Look how quickly the UAE, Saudi Arabia and Kuwait stepped forward to send aid to the interim government,” It is clear that “they recognized the Brotherhood as a threat to their ruling families.” Political Islam is NOT their friend.

Of course, the sudden outpouring of support from the Gulf countries can also be attributed to the broader market perception of the military as a stabilizing mechanism in Egypt’s political and economic landscape.  It is also likely a good time to invest in Egypt as the pound has likely hit a bottom in its recent fear induced spiral.  Movement in the Egyptian stock market also largely supports this assertion. The Egyptian Stock Exchange witnessed a 22 billion dollars increase on July 3rd, the day after Morsi was forced to step down.  The jump was the highest ever recorded.  Several analysts attribute market performance to an emotional response on the behalf of buyers. Concerning the jump in the stock market, Economic Analyst Mostafa Bahnassy stated that, “It was a euphoric feeling that took over the Egyptian stock market. Investors and traders gained confidence with the new government, hoping that increased investor confidence would translate to more money and more shares.”

The influx of Gulf aid and the stabilizing presence of the military have granted Egypt a brief economic reprieve. In fact, it would appear that Morsi’s removal has proved to be economically beneficial for Egypt. However, experts warn of long-term consequences that will result from recent events. Economic Analyst Moustafa recently stated, “the fundamentals of the economy are still crippled especially that there is no clear economic plan announced by the government, and no parliament is in session.”  It is important for several regional actors to keep in mind that they are subject to set of rules similar to those that governed the last year in Egypt’s history. The Gulf States, the Egyptian military, Tamarod, and secular liberals should recall that the rising expectations of the Egyptian people are not to be trifled with. The consequences of a failure to perform can be immediate, violent, and have a distant economic and political reach.

By: Sherif Ali Elhelwa


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