Will The Egypt Crisis Affect The World Economy?

It’s a connected world, where events do not occur in isolation. What happens in one part of the world can be felt elsewhere and often, gives rise to something else. The globalized world economy witnessed unprecedented growth over years – a growth that was virtually unconceivable without the free flow (almost) of capital, goods, and services across the borders. However, now appears to be a time when we are witnessing the worst effects of a global economy. Even a myopic view would confirm that the last couple of years have posed some of the biggest financial challenges of all times. The latest in the series is the Egyptian uprising. Apparently, its character is more of a political nature. Nevertheless, the guiding force behind the movement is the dire need for economic reforms, including the elimination of corruption prevalent in the Mubarak regime.

So, how does Egypt crisis impact the world? Egypt is a small economy with a GDP of approximately $216.8 billion at official exchange rate (The World Factbook (2010), CIA). In terms of GDP per capita, it stands at 136th position in the world. Tourism forms an important part of Egypt’s GDP and it is a small trading partner for most countries and an even smaller export destination. A possible weakening in its trading activity is very unlikely to affect the international markets dierctly. However, it is the same country that owns and maintains the Suez Canal, a key port that still handles a large traffic of commercial ships, larger than the Panama Canal. A prospect of closing down of the port means an additional roundabout journey of approximately 6,000 miles, equivalent to 21 days, and consequently, additional fuel consumption. It can prove to be a chokepoint for a number of raw materials and finished goods. The advent of larger ships, which cannot be accommodated at the port, has eased the pressure a bit and therefore, the impending effects of a closure are likely to be less dire than the Suez Canal crisis of 1956.

Of the total 35,000 ships crossing the Canal in 2009, almost 10% were oil tankers. Yet, it is significant to note that the total tonnage of oil through the port accounts for only 2.3%-5% of total oil shipments across the globe. Nevertheless, experts are divided on the possible impact on the already high crude oil prices. The Supreme Petroleum Council, Kuwait suspects that the prices could cross $110 per barrel unless there is clarity on Egypt’s future. Egypt’s footprint as an oil exporter has been reducing over years, such that it stood 67th among the crude exporting nations (89,300 bbl/day) in 2009. As the political stir against Hosni Mubarak first began, oil spiked only to subside in due course. Similarly, gold traded higher amidst the market uncertainty to end at $1,360.4 per troy ounce on February 12, 2011. However, with Mubarak stepping down after an extended period of denial, the current rally in both the commodities is more propelled by other factors, rather than the Egypt crisis alone. What’s supporting the prices is the fear of the stir reaching to other Middle East nations that, cumulatively, have the potential to adversely affect the crude supplies. As it is premature to speculate on how the events will unfold in Egypt and elsewhere in the oil producing nations, analysts are following a wait-and-watch policy.