Yesterday I wrote that one reason why we should watch the growing instability in Egypt and elsewhere is that there is potential for Israel's peace treaties with Egypt and Jordan to be disannulled. Today I want to highlight another reason why we should pay close attention to the ongoing situation: the risk for an oil shock.
The concern that many Arab leaders have is that the instability that originated in Tunisia and is now in Egypt could inspire uprisings throughout the region, including in their own respective countries. The uprisings in Tunisia and Egypt may provide an example to people living under oppressive regimes throughout the region that they can force their leaders to implement reform or even leave if they protest for change. The concern that many leaders have for their own futures (political and personal) is reflected in the recent concessions they’ve made:
- King Abdullah II replaced his prime minister and has asked his new prime minister to institute reform. The new Jordanian Prime Minister is currently in negotiations to include the Jordanian Muslim Brotherhood in the new Jordanian government.
- Yemen President Ali Abdullah Saleh announced that he would not run for reelection in 2013 and that his son would also not run.
- Syria’s leader Bashar al-Assad acknowledged that there is a need for reform in this recent statement: “If you didn't see the need of reform before what happened in Egypt and Tunisia, it's too late to do any reform".
- Algeria’s President Abdelaziz Bouteflika announced that he would soon end the “state of emergency” that has been in place in Algeria since 1992.
We should watch to see whether Arab leaders' fears are realized and the type of instability seen in Egypt spreads throughout the region, including key oil producing countries of the region.
- Algeria: There are major protests scheduled in Algeria on February 12. Algeria is responsible for supplying more than 2.0% of the world’s oil or 1.881 million barrels per day.[1]
- Libya: There is a report that there are protests scheduled in Libya on February 17. Libya is responsible for supplying approximately 2.0% of the world’s oil or 1.652 million barrels per day.[2]
- Yemen: There were major protests in Yemen today involving more than 20,000 people. Yemen is responsible for supplying 0.4% of the world’s oil or 298 thousand barrels per day.[3]
- Saudi Arabia: Saudi Arabia is responsible for supplying 12% of the world’s oil or 9.713 million barrels per day. [4] Given Saudi Arabia’s important role in supplying the world with oil, they are perhaps the most important country to watch (other than Egypt). There are no reports of major protests being planned in Saudi Arabia (where public gatherings are banned) yet but there might be in the near future if uprisings elsewhere succeed in bringing down oppressive regimes or succeed in bringing significant change. Interestingly, a new academic study published in the Journal of Conflict Resolution (perhaps the most prestigious academic journal in the field of International Relations) predicts that Saudi Arabia is likely going to see a coup soon since its citizens are very dissatisfied with the lack of democratic freedom in the country.
Oil prices increased by more than $3 or 4% last Friday after people became concern that the unrest in Egypt would result in the blockage of the Suez Canal, which is a vital seaway where 1.8 million barrels per day of oil and refined petroleum products travel through. The blockage of the Suez Canal would not lessen the amount of oil produced in the Middle East, but would significantly prolong how much time it takes for oil to travel to the West from the Middle East.
The concern that 1.8 million barrels of oil per day could take longer to reach its destination in the future helped oil prices to rise by 4%. Imagine how much more oil prices could increase if the production of several million barrels a day was threatened by the type of instability currently seen in Egypt…
- There would probably be an “oil shock” where oil prices skyrocket to a level that causes major economic and financial damage worldwide. The price of gasoline and diesel would skyrocket and you would probably see a lot of inflationary fears. The pain would probably be so bad that the unrest would be on everyone’s minds rather than just on the minds of those who are concerned about what’s going on in the Middle East.
- Therefore, we should watch ongoing events in Egypt and elsewhere to see whether this instability transforms into something that threatens the global economic and financial system via an oil shock.
The current instability in Egypt and elsewhere may not affect your daily life directly at the moment, but the potential for it to affect your life in a very direct way exists if the instability spreads to key oil producing countries. The situation is still very fluid so don’t be surprised by anything…
Related Article: Which Countries May be Next to See Instability if Food Prices Continue to Rise?
References
[1] “BP Statistical Review of World Energy”. London: BP Jun 2010. Pg 8
[2] Ibid.
[3] Ibid.
[4] Ibid.
