Crude oil prices surged above $100 a barrel this week after the Egyptian military removed Mohamed Morsi as president, sparking massive protests from Egyptian Islamists. Industry analysts said energy markets were reacting to fear that the country's political crisis could disrupt oil shipments from the Middle East.
Gasoline prices in the U.S. were at their lowest point of the year heading into the Fourth of July weekend, but nervousness about Egypt's turmoil has been nudging up prices in some areas. Should Americans brace for sharply higher prices as Egypt's crisis unfolds?
If clashes between the military and Morsi's Islamist supporters spread, it is certainly possible that the world will feel the pinch. "Egypt may not produce much oil," says Talia Buford at Politico, "but it controls the Suez Canal, a key choke point for oil tanker traffic in the Middle East." More than two million barrels of crude are transported every day via a pipeline and shipping through the canal, which links the Red Sea and Gulf of Suez with the Mediterranean.
Any hint of shipping delays will ripple down to gasoline prices quickly. Even though U.S. oil production is climbing at a record pace, oil prices are still set by the global market. [Politico]
As luck would have it, the Suez Canal area is precisely one of the spots where tensions are highest. Egyptian troops were placed "on alert" in the Suez and Sinai Peninsula provinces on Friday after Islamist rebels angry over Morsi's ouster attacked military outposts there. As of Friday, ports and shipping through the Suez Canal had not been disrupted, but that didn't stop Brent crude from shooting to $107 a barrel in the biggest weekly jump of the year.
It is easy to understand why. As Julia Payne notes at Reuters, there are already plenty of reasons to be nervous about the reliability of shipments out of the oil-rich Middle East, and "the Egyptian uncertainty adds to existing supply worries."
Almost all physical crude grades consumed by Europe are now short including Russian, Iraqi, Libyan and African grades. North Sea supplies, which underpin Brent, are expected to be extremely low in the coming months...
Libyan ports and various fields have been plagued by worker protests, and its largest export terminal was shut late on Thursday. Port guards locked the gate over salary complaints, preventing workers from continuing operations. [Reuters]
Still, it's a bit early to panic. Jim Armitage at Britain's Independent is pretty confident that the breathless warnings that Egypt's unrest will send oil prices sky high are probably overblown. "In the real world, the big commodities houses were treating the rise as a short-term blip — one of the many price spikes that has gripped the market over recent months," Armitage says.
Of course, there is no denying that the "disruption of [Suez] supply routes would be bad news for the European and U.S. markets who use most of the stuff," Armitage continues, "but is extremely unlikely unless the political situation spirals catastrophically out of control."