Crisis in Egypt spurs fears of impact on global economy

Political turbulence in Egypt is casting a pall on world financial markets, driving up the prices of crude oil and food and creating new risks for the shaky world economy in the months ahead.

Oil prices on Monday reached their highest levels since 2008, and investors sold off both stocks and bonds of many developing nations, particularly in the Middle East. Those shifts came despite few signs that the Egyptian turmoil is having much direct impact on the world economy. Egyptian economic output is about the same size as that of Alabama, and while the country controls a crucial shipping channel, the Suez Canal, that key connector between Europe and Asia has so far remained open.

But the turbulence on financial markets shows how political upheaval in one place - first Tunisia, now Egypt - can set off hard-to-predict reverberations around the world, possibly undermining the global economic recovery. In this case, investors are most concerned that other Muslim nations, particularly those with autocratic leadership and vast oil reserves, will soon see their ruling regimes threatened as well.

"What's going on in Egypt has again reminded us that the world economy is not out of the woods, and that things we do not anticipate can have a significant negative effect on global markets and risk sentiment," said Rachel Ziemba, a senior analyst with Roubini Global Economics.

The economists' and investors' fear is that political developments could disrupt oil exports from Saudi Arabia or other nations, even temporarily. The price of oil rose to $92.19 on Monday, its highest level since October 2008, and up from $85.64 on Thursday, as investors priced in the higher probability of an interruption in oil supplies.

"There's not a huge risk to oil supplies from Egypt directly, but that could change if dissent spreads to other oil-exporting nations," Ziemba said. "The big issue is that the economic grievances present in Egypt are there across the Middle East. Will they spark unrest in the same way? It's hard to predict."

An analysis by economic consulting firm IHS Global Insight shows that every $10.70 increase in the price of crude oil, if sustained, would add 25 cents to the price of a gallon of gasoline in the United States and lead to 270,000 fewer jobs being created over the course of a year.

If political turmoil spreads further, it could undermine the confidence of investors in developing economies, which have been playing an increasingly important role. In recent years, investors have come to view developing nations as a potential source of high returns and relatively low risk, leading to a flood of investment into both major economies like China as well as "frontier" markets like those in sub-Saharan Africa.

"Now you have Tunisia, and Egypt and everybody is going to be a bit jittery. People will think twice. Stability can be a real mirage, as we have seen," said Todd Moss, vice president at the Center for Global Development.

Developments in Egypt could still prove encouraging. A smooth transition to a new government could pave the way toward further economic reforms. So far, Egypt has been adopting these reforms fitfully.

But this outcome is by no means assured. Egypt's last revolution, half a century ago, produced the widespread nationalization of private property under former president Gamal Abdel Nasser. Until the country's direction becomes clear, investors and business executives may move to the sidelines.

Moody's on Monday downgraded the country's investment standing, which will make it more expensive for Egypt to borrow money. Its stock market remains closed after dropping 16 percent in a day, and its $30 billion in foreign reserves could be stretched if the central bank decides it is necessary to try to prop up the value of a falling Egyptian pound.

International organizations also were trying to monitor more urgent concerns, such as whether the country has adequate supplies of wheat and other staples in reserve in the event that the current political paralysis continues. Egypt is heavily dependent on imports for these crucial products.

The greatest threat posed by Egypt's troubles for the global economy - absent a spread of popular revolt to other nations in the Middle East or beyond - is the disruption of shipping through the Suez Canal. But analysts are optimistic the canal will remain open, regardless of the fate of Hosni Mubarak's regime.

The Egyptian military "is aware of the importance of ensuring the smooth operation of the Suez Canal, which is not only a vital source of Egypt's foreign currency receipts, but also ensures the supply/movement of crude oil," said Ashraf Laidi, chief market strategist of CMC Markets in London.

irwinn@washpost.com schneiderh@washpost.com

View the original article here

Read More

Prices of crude oil and gasoline rise as violence in Libya upsets markets

Crude oil prices in New York broke through the $100-a-barrel threshold Thursday as violence in Libya continued to shake world financial markets and threatened to sidetrack the U.S. economic recovery.

But prices fell back later in the day, after a Saudi official said the kingdom would make up for any Libyan production lost as a result of upheaval there and the International Energy Agency said it was ready to release emergency stockpiles. President Obama also said the United States would be able to "ride out" the disruption in oil supplies.

After touching $103.41 a barrel, crude oil for April delivery ended up down slightly for the day, at $97.28 on the New York Mercantile Exchange. In Europe, the price of Brent grade crude oil, another important benchmark, hit $119 a barrel before dropping back to $114.

But the triple-digit petroleum price weighed heavily on stock markets for much of the day and heightened fears that high fuel costs could be a drain on consumers. Thursday's closing price was still about 50 percent higher than the price nine months ago and the higest level since September 2008.

For U.S. consumers, higher oil prices most directly affect drivers and truckers, who devour the vast majority of U.S. petroleum products. U.S. pump prices for regular gasoline jumped 4 cents a gallon overnight, to $3.23, an eight-cent increase in the past week and 55 cents more than a year ago.

"Coming just before springtime, the timing of the latest crude oil price spike is foreboding. If crude prices were to stay around $100 per barrel, we could expect to see the price for a gallon of unleaded regular rise to about $3.40 in the not-too-distant future," said John B. Townsend II, AAA Mid-Atlantic's manager of public and government affairs. "Motorists across the country are already spending in excess of$1.2 billion a day on fuel purchases, and that's likely to increase in coming weeks."

But oil is a component in the price of a vast variety of goods, including air tickets and food. Higher prices hit big users such as Wal-Mart, petrochemical firms and the U.S. military.

At FedEx, which every month adjusts its fuel surcharge on customers, chief executive Fred Smith said that higher fuel prices would have "not an enormous effect" but that "what's of much greater concern is the effect on the economy overall." He said high fuel prices were like a "tax imposed on the American economy" that would hurt people's buying power.

Because most U.S. oil is imported, money from gasoline sales is largely flowing overseas, inflating the U.S. trade deficit.

Adam E. Sieminski, chief energy economist at Deutsche Bank, said every $5 increase in oil prices could shave two-tenths ofa percent off global economic growth. "If growth was supposed to be 4 percent and ends up being 3 percent, that would be a nasty surprise," he said.

The price of crude oil has surged since Libyans began a revolt against leader Moammar Gaddafi last week, although it has been climbing for most of the past year.

Goldman Sachs analysts warned in a report that Libya's unrest created "significant upside risk" and reduced the ability of the Organization of Petroleum Exporting Countries to respond to further supply disruptions.

Some analysts argued, however, that the spike in oil prices was an overreaction to the political upheaval in North Africa and the Middle East. Michael Kouri, an analyst with UBS Securities Canada, said it was "a dramatic reaction since current disruption to crude supply at present is minimal."

Libya produces about 1.5 million barrels a day, or nearly2 percent of the world's supplies. Some of that oil is still moving, companies said. Repsol, a Spanish oil company, said production in the Libyan fields in which it is a partner was running at 160,000 barrels a day, down from 360,000. Eni chief executive Paolo Scaroni said in Rome that Eni's net production was 120,000, down from 280,000 barrels. Analysts also said more than 350,000 barrels a day of production comes directly from offshore platforms.

Moreover, world stockpiles of crude oil are substantial. The Goldman report noted that spare production capacity and inventories could cover more than 100 days of consumption even if Libya halted all exports.

But a trader at one major U.S. refiner said traders were worried about unrest spreading to Algeria or some other major oil-exporting country.

"What we don't want is for another oil producer to get involved in this," Sieminski said.

View the original article here

Read More

Oil spill commission questions BP's response plan

The two chairmen of the president's Oil Spill Commission, which is conducting an inquiry into the April 20 Deepwater Horizon disaster in the Gulf of Mexico, expressed skepticism Monday about claims from BP and government officials that initial underestimation of the flow rate of the Macondo well had no impact on the response to the spill.

"It's a little bit like Custer. He underestimated the number of Indians that were on the other side of the hill and he paid the ultimate price for that," said former senator Bob Graham, speaking at a news conference with his co-chairman, William Reilly.

The flow rate of the blown-out well sparked great controversy at the height of the crisis. The Coast Guard initially pegged the leak at 1,000 barrels a day, then upped that to 5,000 barrels, using both government and BP estimates. But the actual rate initially was 62,000 barrels a day, according to scientists in the government-backed Flow Rate Technical Group.

A persistent question is whether BP and the Coast Guard calibrated their initial response plans, at the surface and at the sea floor, to handle the smaller amount of gushing oil. Representatives of both, appearing Monday at a commission hearing at the Marriott Wardman Park Hotel, denied that they made such a mistake, saying they went all-out with every available resource.

"We literally threw everything at it," said Doug Suttles, BP chief operating officer for exploration and production. Coast Guard Capt. Edwin Stanton echoed those remarks.

But Graham said at the news conference that the commission has information suggesting that some of the deep-sea technology used to fight the leak, such as the "top hat" containment cap, was premised on a smaller flow.

There was also new information on how the erroneous flow estimate came to be early in the crisis. Ian MacDonald, a Florida State University physical oceanographer, testified Monday that BP's Regional Oil Spill Response Plan, a 567-page document dated 2008 that covers the Gulf of Mexico and is famous for its provision for saving walruses that do not live in the gulf, contains an incorrect statistical formula for estimating the size of a spill.

The formula in the BP plan underestimates the thickness of black oil on the surface of the sea by a hundredfold, MacDonald said. As a result, BP's "best guess" for the leak as of April 27 was 5,768 barrels, close to the 5,000-barrel estimate initially produced by the National Oceanic and Atmospheric Administration.

MacDonald made headlines early in the crisis when he said that his own scrutiny of satellite images of the slick produced a leak estimate of 26,000 barrels a day minimum. He told reporters Monday that he did not take evaporation into account, and thus the real flow had to be higher yet.

MacDonald said that most of the oil remains in the gulf. This oil "is a highly durable material that resists further dissipation," MacDonald concluded. Referring to the spill as a kind of uncontrolled experiment, he wrote in his prepared testimony that there could be long-term damage to productivity and biodiversity in the gulf: "[W]e must remember that this experiment was performed on an ecosystem that was already badly damaged" by overfishing, coastal runoff and low oxygen levels.

Doug Inkley, senior scientist with the National Wildlife Federation, said in a written statement citing MacDonald's findings, "From Day One, BP and the government have lowballed the volume of the oil in the water and minimized the current and future impacts of this disaster."

Earlier, Graham pressed Suttles about why the company overestimated its ability to handle a massive spill when it applied for a permit in 2009 to drill the ill-fated Macondo well in the Gulf of Mexico. Suttles said he was not involved in the creation of the company's Oil Spill Response Plan.

View the original article here

Read More