How Resource Shortages Sparked Egypt's Months-Long Crisis

The country has battled water shortages, rising food prices, and declining oil production, and it's fueling the current conflict.
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People argue at a petrol station during a fuel shortage in Cairo. (Mohamed Abd El Ghany/Reuters)

With more than 600 people killed and almost 4,000 injured from clashes between Egyptian security forces and Muslim Brotherhood protesters, the country's democratic prospects look dismal. But while the violence is largely framed as a conflict between Islamism and secularism, the roots of the crisis run far deeper. Egypt is in fact on the brink of a protracted state-collapse process driven by intensifying resource scarcity.

Since the unilateral deposition of President Morsi, the army's purported efforts to "restore order" are fast-tracking the country toward civil war. The declaration of a month-long state of emergency--ironically in the name of defending "democracy"--suggests we are witnessing the dawn of a new era of unprecedented violence with the potential to destabilize the entire region.

Underlying growing instability is the Egyptian state's increasing inability to contain the devastating social impacts of interconnected energy, water and food crises over the last few decades. Those crises, already afflicting other regional states like Yemen and Syria, will unravel prevailing political orders with devastating consequences--unless urgent structural transformation to address those crises becomes a priority. The upshot is that Egypt's meltdown represents the culmination of long-standing trends that, without a change of course, can only escalate with permanent repercussions across the Middle East and North Africa (MENA), and beyond.

A major turning point for Egypt arrived in 1996, when Egypt's domestic oil production peaked at about 935,000 barrels per day (bpd), dropping since then to about 720,000 bpd in 2012. Yet Egypt's domestic oil consumption has increased steadily over the past decade by about 3 percent a year. Since 2010, oil consumption--currently at 755,000 bpd--has outpaced production. It is no coincidence that the following year, Hosni Mubarak was toppled.

oil production and consumption in egypt

With Egypt's oil production well past its peak, its exports since 1996 have increasingly declined, despite inputs from new gas production. In 2009, oil exports had dropped by 26 percent (pdf). According to Jean Laherrère, a petroleum geologist formerly with the French major Total S.A., two-thirds of Egypt's oil reserves have likely been depleted, and annual decline rates are already at around 3.4 percent.

egypt oil

The impact on Egypt's state revenues has been dramatic. Energy subsidies amount to $15 billion a year, about a quarter of the entire budget, driven largely by expanding consumption needs for a growing domestic population. Over the last decade, Egypt's gas use has almost doubled, nearly matching production, further limiting the country's exporting capacity and, thus, hard currency revenues , reserves of which have more than halved in two years. Around another $3 billion a year goes to food. In total, 10 percent of its GDP is spent on subsidies.

With state revenues declining, how had Egypt sustained levels of growth of around 7 percent in the two years preceding the 2008 global banking crisis--even winning praise from the World Bank, which described the government as a "top reformer"?

The answer is simple: Egypt had financed increasing expenditures through one core mechanism: borrowing. Over the last decade, government debt has averaged about 85.5 percent of GDP. In 2011, Egypt registered a balance of payments deficit of $18.3 billion . The situation has become unsustainable as the state is increasingly unable to service myriad debts, has desperately attempted to identify viable sources of new oil and gas imports, but cannot muster the capital to secure them.

The heyday of growth, in other words, was achieved at a heavy social cost that is now being paid on the streets in blood.

Increasing energy consumption, of course, is tied to an expanding population, which has grown exponentially by 21 percent since 2000 to about 80 million people.

egypt populaiton

Rapid population growth and continued economic mismanagement has meant that youth represent about 25 percent of the population--but more than half of them suffer from poverty and unemployment. Economic mismanagement, much of which was quietly championed by the IMF and the World Bank (though they have now belatedly noticed that much of the policies they previously encouraged are now deeply problematic), has caused a widening of overall poverty while enriching mostly Egyptian elites.

With some 40 percent of the population living on $2 a day or less, and rates of illiteracy and unemployment hovering around a third of the population, it was only a matter of time before economic grievances translated into political outrage. The trigger factor, though, was food--on which a quarter of Egyptians spend more than half their incomes.

As food subsidies have declined in the context of declining state revenues, local food prices have shot up. Once upon a time--in the 1960s--Egypt was completely self-sufficient in food production. Encouraged by international financial institutions to foster its export capacity, Egypt is now a net food importer, importing about 70 percent of its food (paywall), and thus, vulnerable to global food price fluctuations.

As energy accounts for over a third of the costs of grain production (pdf), high food prices are generally underpinned by high oil prices. Since 2005, world oil production has remained on an undulating plateau that has kept prices high, contributing to surging global food prices. According to the New England Complex Systems Institute, if food prices go over a threshold of 210 on the FAO Food Price Index, the probability of civil unrest is greatly magnified.

Global wheat prices doubled (pdf) from $157/metric tonnes ($173/ton) in June 2010 to $326/metric tonne ($359/ton) in February 201 (the same month Mubarak fell) while half the population was dependent on food rations. That year, the FAO Index averaged about 228, the highest since FAO started measuring international food prices in 1990. The second highest average occurred in 2008--the same year Egypt experienced violent clashes over government-subsidized bread in different cities, leading to 15 people being killed and 300 arrests.

Since then, the index has hovered consistently above 210, and in May 2013 before Tahrir Square was flooded by millions of Egyptians, it was at 213. Although currently at 205, the Worldwatch Institute warns that food prices will trend higher and be more volatile in coming years and decades. This is consistent with the last decade, over which the World Bank global food price index has increased 104.5 percent, at an average annual rate of 6.5 percent.

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Perhaps the biggest driver of rocketing food prices in 2011, however, was the unprecedented impact of climate change in the world's major food basket regions, pushing up global cereal prices to record levels.

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Nafeez Mosaddeq Ahmed is the executive director for the Institute for Policy research and Development.

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