How Egyptian Unrest Could Unravel Economic Recovery

Analysts worry that protests in Egypt--especially if they spread across the region--could send oil prices soaring

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As anti-government protests continue to roil Egypt, some analysts are exploring the economic dimension of the unrest. Is rampant unemployment among recent college graduates fueling the uprising, or should we instead attribute the demonstrations to Egypt's economic isolation or the heightened expectations of its citizens following a period of economic growth?

Whatever the explanation, the protests have paralyzed Egypt's economy and sounded alarm bells about the effect of the political crisis on the global economy and the price of oil, which rose on Friday. While Egypt doesn't produce much oil itself, it controls the Suez Canal and the Sumed pipeline, both key routes for shipping oil from the Middle East to the West. The markets also fear that the tumult in Egypt could spread to oil-producing neighbors in the Middle East and North Africa.

Are these worries well-founded? What impact could events in Egypt have on world markets?

  • Economic Recovery Could Stall  British trader Jonathan Sudaria, as quoted by Reuters, explains that "traders are concerned that with already rising inflation and falling real incomes for consumers, a further rise in energy prices could really dampen any consumer confidence and prospects for growth." The Bipartisan Policy Center's Jason S. Grumet tells the New York Times that "if tensions in the Mideast cause oil prices to rise by $5 for even just three months, over $5 billion dollars will leave the U.S. economy. Obviously, this is not a strategy for creating new jobs."
  • World Could Experience 'Stagflation', argues Charlie Gasparino, referring to the toxic mixture of high unemployment and high inflation. Stagflation, Gasparino asserts, "begins with an exogenous event." In the 1970s, the Arab oil embargo of the U.S. and its Western allies sent the prices of oil-related goods soaring. Today, he says, Egyptian unrest could have the same effect.
  • New Fight Could Erupt in Washington Over Oil, asserts Politico's Darren Goode:

Congressional Republicans [have] quickly called for a greater push for North American energy production, including accelerating oil drilling in the Gulf of Mexico. Democrats will undoubtedly use high prices to pursue more conservation and oil-alternatives, such as with President Barack Obama’s call for a “clean energy” production mandate.

  • Spread of Protests Is Biggest Threat, maintains James Hamilton at Econbrowser. A closure of the Suez Canal wouldn't be as damaging now as it was during the Suez Crisis of the 1950s, he explains, because less oil passes through the canal today and the shipments represent a smaller percentage of global production. The bigger concern, according to Hamilton, is that turmoil will grip other oil-producing countries: "Iraq will be a huge factor in determining medium-term growth in world oil production, and Iran is twice as important as Iraq in terms of current production. And should we see the temporary cessation of Saudi production, it would be an event without historical parallel."
  • Market Isn't Declining Because of Egypt, contends Michael Santoli at Barron's: "In most market declines accompanied by worrisome headlines and unnerving TV footage, the news is merely an excuse and not a root cause of the selling." Instead, he says Friday's drops in the S&P 500 and the Nasdaq "showed a market succumbing to short-term fatigue, below-the-surface deterioration and some concerns about the loss of economic momentum in the States."
  • How Market Responds Is Critical, claims Ezra Klein at The Washington Post:

Dramatic reminders that events can turn very quickly (and, in particular, that oil prices can turn very quickly), derailing recovery and leaving those who bet on sustained growth holding the bag for the new workers or plants or car they just bought, do not help convince economic participants that they can trust in normalcy again ...

The potential upside is that if the market weathers Egypt easily, it might convince businesses and investors that resiliency has returned to the world economy, and they can act with more confidence.

This article is from the archive of our partner The Wire.