Monday, January 31, 2011

Egyptian Unrest: Three Scenarios for Oil and Gasoline Prices

In the last week, Egyptians have taken to the streets of its major cities. This will cost you about 10 cents a gallon more at the pump -- around $3.21 a gallon for regular -- for the next few weeks after a 3% spike in crude prices in the last week. But it could be worse.

Although oil prices have risen -- futures are up from $89.11 a barrel on Jan. 24 to $92.19 on Jan. 31 -- the amount of oil that flows through Egypt's Suez Canal is tiny. According to the New York Times, only 2.6% of the world's crude flows through Egypt's Suez Canal -- and it's so narrow (only 1,000 feet wide at its narrowest) that tankers cannot fit through it. So the oil that travels through Egypt's pipelines -- mostly to India and to some Asian markets -- represents 2.9 million barrels a day, slightly more than the 2.5 million in global spare energy capacity.

But even though there's unrest in Egypt, it does not mean that the oil will stop flowing through the Suez Canal, according to Goldman Sachs. However, it also does not put an end to the uncertainty in the region because Egypt is not the only country in the oil rich region with a young population full of angry unemployed people frustrated with an authoritarian monarchy/dictatorship. For example, Saudi Arabia -- that controls 25% of the global oil supply -- is not exactly a bastion of democracy.

So if you're an investor, or just concerned about how much of your paycheck is going to gasoline in the months ahead, the uncertainty surrounding the political situation in the Middle East is worth considering. While there are many possible outcomes, we can frame them with these three scenarios (figures in parentheses represent my very rough estimates if oil prices -- in dollars/barrel  -- and gasoline prices -- in dollars per gallon -- under the various scenarios):
  • Middle East Total Chaos ($300, $10). This worst case scenario would result in Saudi Arabian government losing control of the populace. CommodityOnline suggests that this scenario is not likely because so many large countries are pouring money into the Kingdom and that the population is getting enough of a share of that money to keep it calm. However, the Saudi government is probably quite concerned that unrest nearby could inspire the average citizen.
  • Middle East Moderate Chaos ($150, $5). Under this scenario, the Egyptian unrest leads to a change in leadership which inspires other countries in the Middle East to send frustrated citizens into the streets seeking a change in leadership. For example, The Daily Beast suspects that Jordan could suffer a revolt. However, the country is run by a relatively reasonable monarchy and it's not a big oil player. So the biggest danger of instability in Jordan would be extending the period of oil market volatility.
  • Middle East Swift Resolution ($86, $3.08). Under this scenario, the situation in Egypt is resolved with a relatively peaceful transfer of power to a new leader and the price of oil returns to where it was before -- around $86 and $3.08 a gallon.
Who knows which of these scenarios is most likely. My hunch is that the Egyptian situation will resolve itself peacefully with a new leader -- possibly Mohamed ElBaradei -- taking over in the next few weeks. But if this happens, the successful leadership changes in Tunisia and then Egypt will certainly inspire those in other nations to take to the streets to get their share of the revolutionary fun.

The really threatening issue for the rest of the world is what would happen if Saudi Arabia turned out not to be able to keep its populace under control. Instability there would really throw the global economy for a major loop -- particularly if control of its oil resources fell into the hands of leaders who strongly oppose the West.

While I hope that the Egyptian situation is resolved peacefully over the next few weeks, I would not be surprised to see "success" there -- as viewed by the average citizen in the Middle East -- inspiring more unrest.


Blogger MMS said...

Just read your post on the "Egyptian Unrest".....I agree with what you have said but wonder why you did not address what if any impact domestic oil drilling/supply in the United States has had/will have on future pricing?

Crude oil prices have risen substantially over the last year, and a whopping 11% you pointed out in your piece in the just the last month.

Are we planning to open up our reserves and/or stepping up oil production domestically to avoid a catastrophic hit on our economy?

I can't imagine oil at $200-300 and shipping those dollars to a region that would probably only use those dollars to destroy America, which at the $300 level things would not be nice, to say the least!

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