Money Matters, Simplified.
Egypt turmoil triggers oil price hike
by Anter Prakash Singh - February 1, 2011 - comments
Crude oil prices are bound to increase further if the ongoing political turmoil continues for some more time. The global economy will be hit hard if the Suez Canal is closed, even temporarily.
The ongoing political turbulence in Egypt has already shown its effect on the global economy, as the crude oil prices are surging.
Egypt is not a major producer of oil but it controls the Suez Canal, an important route for the oil tankers and other cargo ships on their way to Europe from Persian Gulf.
Traditionally, Egypt never was a significant player in the world economy but the present political mayhem has triggered fears of long term damage to the economy if the crisis deepens in this region.
Effects of crisis
The price of the U.S. crude oil traded in the New York Mercantile Exchange hovered around $90 per barrel on Monday and the price of Brent Crude in London trading rose to $101.01 per barrel.
Meanwhile, the West Texas Intermediate crude oil, the U.S. benchmark crude closed at $92.19 on Monday, with a hike of $2.85 or 3.2 percent, the highest since October 2008.
Overall, crude oil prices have surged by about 8 percent.
Gasoline prices are expected to rise if crude oil sticks to the present levels. Analysts predict that with every $10 increase in the price of crude oil, gasoline prices will rise by 25 percent per gallon.
This could hit the U.S. economy hard as it is still coming out of one of its worst crisis and it could also result in increase in global inflation and hamper economic growth.
Till now there are no reports of any disruption in the movement of cargo ships and tankers at the Canal, but the Egyptian authorities have warned of possible delays.
No disruption in movement of cargo so far
When it comes to oil production, Egypt is a minor player but it controls the 120 mile Suez Canal, which the greatest transit point for world trade.
It is estimated that every day, nearly three million barrels of oil passes through the Canal or through the overland pipe lines in Egypt.
That comes to about 3.6 percent of the total crude oil production of the world.
Till now there are no reports of any disruption in the movement of cargo ships and tankers at the Canal, but the Egyptian authorities have warned of possible delays.
Fadel Gheit, senior energy analyst at the Oppenheimer & Co, said, “The Red Sea is rally nothing more than a lake and Saudi Arabia is on the other side. What happens if oil supplies are disrupted? We could be talking $150-a-barrel oil, fed by pure speculation.”
Bruce Bullock, executive director of Maguire Energy Institute of Southern Methodist University agreed with Gheit. Both the experts suggested that the oil can be re-routed around the horn of Africa, but the cost would escalate.
They also agreed that the Canal closure, if happens would only have a temporary effect.