Unrest Reverberates in Global Economy

The turmoil in Egypt is reverberating around the world, battering stock markets, driving up oil prices and raising questions about whether the rising cost of crude could slow the global economy.

The Egyptian stock market is expected to be closed Monday, after shares fell 17% late last week. Most Persian Gulf markets fell Sunday, with Dubai tumbling 4.3% and Oman 3%. The Saudi Arabian stock market ended up 2.5% after sliding 6% on Saturday. Prices for U.S. benchmark crude futures leapt $3.70, or more than 4%, to $89.34 a barrel on Friday. In Asian trading early Monday, U.S. oil futures were trading up 87 cents, or 1%, at $90.21 a barrel.

The Egyptian economy is relatively small, with total output of just about $217 billion last year. But the nation carries outsize importance as home to the Suez Canal, a key shipping route for oil and other products between the Red Sea and Mediterranean.

Apart from oil, about 8% of the world's seaborne trade passes through the Suez canal, according to Egyptian government figures. Over the weekend, a dusk-to-dawn curfew across the country caused shippers operating in the canal to warn customers of potential delays.

Canal traffic has continued unhindered through the protests. But if the violence in Egypt spreads to its oil-producing neighbors, crude prices will likely top $100 a barrel, which would damp an economic recovery gaining momentum in many countries.

"The biggest fear out there is if there's any kind of suggestion that there could be instability, political problems or unrest with Saudi Arabia," said Tom Kloza, chief oil analyst at the Oil Price Information Service in Wall, N.J.

Anti-government protests in Egypt have affected world financial markets, with US stocks suffering the biggest one-day loss in six months. Video courtesy of Fox News

J.P. Morgan economists estimate that a 10% increase in oil prices, if sustained, would slow global GDP growth by a quarter-percentage point. They expect global output to rise at a 3.6% annual rate this quarter.

"The principal concern is that civil unrest spreads to Middle Eastern and North African oil producers, producing significant reverberations in financial asset prices and confidence," J.P. Morgan said in a research note.

For the U.S., the surge in oil prices comes just as the economy appears to be growing at a pace, which, if sustained, could bring down unemployment in the months ahead. Several European economies are growing more slowly or even contracting due to the continuing effects of the financial crisis.

About a million barrels a day of crude and refined products are shipped northward on the Suez Canal, according to the U.S. Department of Energy. A separate pipeline across Egypt carries 1.1 million barrels a day between the Red Sea and the Mediterranean. Together, that is roughly 2% of global oil production.

Closing the Suez Canal would force ships to seek other routes, adding about 10 days to the time it takes for Mideast oil to reach the U.S. and 18 days for the trip to Northern Europe. That alone would push up crude prices even if supplies were adequate due to emergency reserves around the world.

Oil markets barely budged, however, through the summer of 2009 during sweeping antigovernment protests across Iran, one of the world's largest oil producers. The different market reactions underscore how the global supply-and-demand picture has changed in the past 18 months. After falling sharply in 2009 during the global downturn, crude demand picked up in recent months because of the improving health of the U.S. economy and rapid growth in China and other developing economies. This has made markets much more sensitive to the threat of supply disruptions.

Although Egypt's oil output isn't sizable, the country is a significant exporter of natural gas. Some of that goes by pipeline to neighbors inthe Mideast. But most of Egypt's gas exports are nowshipped as super-chilled liquefied-natural gas, aboard tankers bound for U.S. and Asian markets.

So far, oil and gas field operations appear unaffected by the unrest. But international oil companies have closed their Cairo offices. A Royal Dutch Shell PLC security official said some expatriate staff had left the country.

Egypt also is the world's largest buyer of wheat and a significant cotton exporter. On Friday, wheat futures fell more than 2% in Chicago in part on worries that regime change in Cairo could hurt Egypt's ability to pay for wheat. The government's official wheat buyer said Sunday it had no plans to change orders. Lower wheat prices would hurt U.S. farmers, but benefit global consumers who have been hit by rising food prices.

Cotton prices, however, could rise if Egypt's exports are curbed by the lack of security and curfew. Global cotton prices are already at their highest levels in about a century and a half.

Egypt also is host to one of the region's most globalized financial markets, making the country's equities a popular play among emerging-market investors.

"Emerging markets investors, if they are benchmarked, are going to have the exposure [to Egypt] … and they are going to be hit," said Eiji Aono, head of research for NCB Capital, a Riyadh-based investment firm.

In recent years, Egypt saw a surge in foreign direct investment as the government, with the aid of the International Monetary Fund, shifted state-owned companies to private control and adopted other market-oriented policies. Egypt's economy grew 5% to 7% annually over the past few years, in part due to its increased attractiveness to outside investors. But that growth has slowed since the global financialcrisis and the nation remains gripped by chronichighunemployment —particularly among the nation's youth— and disparities in wealth.

"The recent growth was not equitable regionally and in terms of populations," said Samer Shehata, a Georgetown University professor of Arab politics. "The growth came at a very high price, which is record levels of consistently high inflation. For ordinary Egyptians, things have gotten worse, not better, in the last five years."

—Shereen el Gazzar,
Tahani Karrar-Lewsley
and Nikhil Lohade in Dubai
contributed to this article.

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