Oil Markets Churn Over Egypt’s Potential as Gateway for Revolt

A tanker carrying liquefied natural gas (LNG) passes through Egypt's Suez Canal in 2007. The man-made waterway is an important fuel conduit, but energy analysts think the world system can cope with lost or delayed supply. The spread of revolt is seen as a bigger threat.

Photograph by Dana Smillie, Bloomberg/Getty Images

Marianne Lavelle

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This story is part of a special series that explores energy issues. For more, visit The Great Energy Challenge.

World oil prices were trading at their highest level in three years this week amid the revolt in Egypt, which for decades served as a major petroleum transit route. But energy analysts believe the real risk is not a closure of the desert conduits—the Suez Canal and the Sumed Pipeline—but that the unrest gripping Cairo will spread to neighboring nations.

"The whole Arab world is watching what is happening in Egypt," said James Burkhard, managing director of the global energy consulting firm, IHS CERA. "It is adding a new layer of anxiety about the Middle East, which is the most important oil-producing region in the world."

The price of oil reached more than $100 a barrel this week for the first time since 2008, based on the benchmark Brent contract, which is widely used in Europe and Asia. In the United States, the benchmark price stayed lower, about $92 per barrel on the New York Mercantile Exchange, and was falling off slightly from last week.

Each dollar increase in the price of oil translates to roughly a 2.4-cent-per-gallon (0.6-cent-per-liter) hike in the price of fuel, although many other market conditions affect the actual price that consumers pay at the pump. Bloggers and some analysts have focused on the risk of oil shock posed by a potential closure of Egypt's Suez Canal, the 142-year-old man-made waterway linking the Mediterranean and the Red seas. But energy experts say the oil market is concerned about Egypt not as a commodity route, but as a gateway to further political instability.

Historic Highway of Oil

Egypt itself is not a world oil supplier; its 80 million people consume roughly all of the oil the nation produces. But its 120-mile (193-kilometer) Suez Canal for years served as a vitally important passageway for oil.

Of course, that was not the case in its early history, when the canal linked Britain and France with their far-flung empires; the canal opened in 1869 when ships still made their way through the passage by sail.

But in 1948, just as India won its independence from Great Britain, the canal gained a new role, "not as a highway of empire, but of oil," recounts Daniel Yergin, co-founder and chairman of IHS CERA, in his Pulitzer-Prize winning history of the industry, The Prize: The Epic Quest for Oil, Money and Power. By 1955, Yergin writes, oil accounted for two-thirds of all canal traffic and two-thirds of Europe's oil passed through it. Its strategic importance kicked off the Suez Crisis—an attack on Egypt by Great Britain, France, and Israel—after Egyptian President Gamal Abdel Nasser nationalized the waterway in 1956.

That crisis was resolved in part due to pressure from the United States, which opposed the attack, and deployment of a United Nations peacekeeping force. But the impact on the petroleum markets reverberated.

Over the years, the market moved to larger and larger oil tankers; although they could not make it through the canal and had to make the 6,000-mile (9,700-kilometer) trip around the tip of Africa to markets of the West, they could make up for lost time by moving bigger shipments of cargo.

The Suez Canal closed for eight years after the Six Day War between Israel and the Arab states in 1967—costing the world an estimated $12 billion in higher shipping costs, or $49 billion in today's dollars. As the canal was set to reopen in June 1975, National Geographic recounted how "the waterway had become a giant slag heap of war—blocked by scuttled and sunken ships, strewn with unexploded ammunition, abandoned by more than a million Egyptians who had fled their homes along its banks and occupied on either side by mortal enemies."

In addition to sweeping the canal for explosives, a dangerous endeavor in which at least 100 lives were lost, Egyptian officials worked to deepen and widen the canal to reclaim lost traffic. They noted at the time that tankers had grown so large that only one in four could make it through the Suez.

Today, only 16 percent of the cargo that passes through the canal is oil. Analysts estimate that between 600,000 barrels and 1 million barrels per day flow north through the canal. The Sumed Pipeline, which runs parallel to the Suez, carries a greater volume from the Red Sea to the Mediterranean—between 1 million and 2 million barrels per day.

In recent years, the Suez Canal has also become an important transitway for shipments of liquefied natural gas (LNG), but global supplies are considered to be strong enough to handle any hold-ups or stoppage in shipping.

As for oil, Burkhard of IHS CERA notes that the world has 5 million barrels per day of spare oil production capacity. Saudi Arabia alone, with 3.5 million to 4 million barrels per day of spare capacity, can ramp up to replace all of the oil shipped through the Suez and Sumed together, should either conduit face a disruption.

And in any case, Egypt serves as a passage for just a fraction of the 15 million to 17 million barrels per day of oil shipped out of the Persian Gulf. The U.S. Energy Information Administration (EIA) notes that volumes in both the canal and the pipeline have been declining. Piracy and security concerns around the Horn of Africa where cargo ships must travel to reach the Suez Canal have led some exporters to travel the extra distance around South Africa to reach western markets, EIA notes. And many shipments also are headed in the other direction to the Far East.

Does Oil Wealth Immunize?

The greater concern is the risk of "contagion," said Kevin Book of Clearview Energy Partners LLC in Washington, D.C., who sees certain Arab countries at great risk of upheaval: those with high unemployment, low per-capita GDP, a low median age and a relatively low level of active military troops. Book said Yemen stands out among Egypt's neighbors as a nation at risk for spread of revolt, with a per capita GDP of $2,600—far lower than Egypt's $6,200—and an unemployment rate of about 35 percent (compared to Egypt's stated rate of 10 percent).

Although Yemen produces even less oil than Egypt, it also is considered a potential choke point for oil transit, at the Strait of Bab al Mandab where the Red Sea meets the Gulf of Aden. Book said that any constraint on traffic there wouldn't mean a "supply meltdown," but higher prices for oil products.

But it is an open question whether revolt will spread to the monarchies and emirates that make up the large oil-producing nexus of the Persian Gulf. The biggest producer, Saudi Arabia, has a slightly higher unemployment rate than Egypt—at 11 percent. But the Kingdom's GDP per capita is about 4 times higher ($24,200). Paul Tossetti, senior energy adviser at the consulting firm PFC Energy, says oil wealth creates a fundamentally different picture for people living in Saudi Arabia, the United Arab Emirates, Oman, Qatar, and Kuwait.

"They have so much money they have been able to give their populations a bit more of a future than the highly populated countries that have very little in the way of oil," like Egypt, he says. He says PFC Energy views a spread of unrest to the Middle East oil kingdoms unlikely, "but that doesn't mean you won't see a demonstration here and there."