The Impact of Egyptian Unrest on Oil Markets

Q1: Oil prices have moved steadily upward in the past few weeks. How will the crisis in Egypt affect price movements?

There are a number of reasons for the upward price trend witnessed over the course of the past few weeks. These include revised forecasts of increased global demand based on indicators of economic growth; heightened seasonal demand for refined products given the cold weather in parts of the world; the strength of the dollar and investor moves to “value” commodities (e.g., gold, metals, oil, etc.); restrictions on supply sources, including little action on renewed drilling in the Gulf of Mexico; and perceived and real geopolitical tensions that could impact supply decisions and tanker movements.

In the case of Egypt, at this juncture the primary oil market concerns relate to ensuring the continuous operations of the Suez Canal and the Sumed Pipeline, which connect the Red Sea and the Mediterranean. To date, we have seen no evidence of work stoppages, strikes, or efforts to sabotage either of these key transit areas, and we believe that the Egyptian military will make every effort to ensure that oil and cargo passage remains unimpeded. That said, to the extent the perception of increased shipping risk in this area persists, we may well see an increase in insurance and/or tanker rates, which could also impact prices.

Q2: How would closure of the Suez Canal and/or the Sumed Pipeline impact oil and natural gas flows?

For starters, Egypt produces roughly 700 thousand barrels per day (mb/d) of oil, substantial volumes (2 tcf) of natural gas, and also is home to the largest refining sector in Africa and consequently exports refined product. Perhaps more significantly, however, is that its location and infrastructure facilities make it a key transit area for oil and gas movements both north and south. The fact that there is currently ample spare crude oil capacity in the world to offset any loss of Egyptian output is of little comfort due to the transit requirements of moving additional Middle East oil to European markets—hence the designation of the Suez Canal as a significant oil transit “choke point.” However, the presence of (global) spare production and refining capacity would, in time, allow for markets to adjust by altering supply routes and destinations to offset in-country supply losses.

The Suez Canal provides a vital transport link for all sorts of cargo (container ships, oil tankers, LNG vessels, and autos, etc.), connecting ports in the Mediterranean with areas in the Middle East and Asia. Crude oil and refined volumes (estimated at around 2 million barrels per day) move both north and south. Product volumes exceed the crude oil volumes, and northbound levels have decreased in recent years as a result of lower demand in Europe.

The 200-mile Suez-Mediterranean (Sumed) pipeline runs from Ain Sukhna along the Gulf of Suez to the Sidi Kerir terminal on the Mediterranean. Estimated capacity of the Sumed line is over 2.3 mmb/d, although current throughput is running at about half that rate. Consequently, spare capacity in the Sumed system would be able to offset (at least partially) losses in the ability to move oil northward in the event that movement through the canal was restricted or shut down. Southbound offsets could be made up by redirecting cargoes and replacing “lost” crude with new Middle East production, utilizing spare refining capacity (albeit less than optimally), and/or drawing down oil stocks.

Closure of either of these facilities, even on a temporary basis, would likely result in increased prices offered for specific crudes and refined products, at least until regional inventory volumes could be made available (to make up any deficits). Further, since both the Sumed Pipeline and the Suez Canal represent significantly shorter, and less costly, shipping routes than passage around the Horn of Africa, closure of either or both of these facilities would significantly lengthen delivery and return voyage times for cargo-laden carriers.

Frank Verrastro is senior vice president and director of the Energy and National Security Program at the
Center for Strategic and International Studies (CSIS) in Washington, D.C. Guy Caruso is a senior adviser at CSIS.

Critical Questions
is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2011 by the Center for Strategic and International Studies. All rights reserved.

Frank A. Verrastro
Senior Adviser (Non-resident), Energy Security and Climate Change Program
Guy Caruso
Senior Adviser (Non-resident), Energy Security and Climate Change Program