Why oil prices rise on Egypt unrest

Oil prices spiked above $102 a barrel Wednesday as protesters poured into the streets of Cairo and the Egyptian military ousted President Mohammed Morsi. Egypt is critical to regional oil transportation and has investors worried that protests could spread elsewhere in the region.

Manu Brabo/AP
Supporters of Egypt's Islamist President Mohamed Morsi rally near Cairo University in Giza, Egypt, Tuesday. Egypt's control of the Suez Canal is where it makes its presence known on global oil markets.

Unrest in a country lacking significant oil exports has startled global markets. 

Oil prices jumped as high as $105 a barrel in London Wednesday as protesters gathered in the streets of Egypt's capital, demanding the ouster of Egyptian President Mohamed Morsi. It's the first time oil has passed $102 a barrel in over a year.

Egypt isn't among the Middle East's major oil countries, but it controls the Suez Canal, a vital choke point in the worldwide distribution of petroleum resources. That, along with the threat of protests spreading elsewhere, has investors worried.

Production booms elsewhere may temper those fears, keeping price spikes at bay. But US drivers who have enjoyed a steady decline in gas prices over the past months may see that decline temporarily slow or even reverse. 

"In the bigger picture, there’s adequate oil supply to meet global demand, especially as we see increases in North America, Iraq, Russia, and the return of oil in Sudan," energy consultant Andrew Lipow, president of Houston-based Lipow Oil Associates, said in a telephone interview. "Should a new [Egyptian] government come in place and the unrest dissipate, then I expect them to fall as rapildly as they’ve risen." 

Egypt's oil production has steadily declined since the 1990s as maturing oil fields lose their luster. In 2012, it was the largest non-OPEC oil producer in Africa, putting it in 26th place among the world's top producers, according to the US Energy Information Administration. If anything, natural gas may play a bigger role in Egypt's energy future, due to recent discoveries of major reserves.

The country's control of the Suez Canal is where it makes its presence known on global oil markets. Oil flow was at 2.4 million barrels a day in 2008 but dropped by more than a third the next year, according to EIA, paralleling the decline in oil demand from the economic recession. Levels have rebounded since then, hitting 2.2 million barrels per day in 2011. 

Closure of the Suez Canal would mean tankers must go around Africa to bring the Middle East's quarter of world oil output and natural gas to European markets. That's an extra 6,000 miles. It's a shortcut oil producers would rather not see shut down.

The threat of disruption shouldn't weigh too heavily on US drivers gassing up for Fourth of July travels this week. Gas prices have seen a steady decline over the past months and many drivers can expect to find prices around $3.50 a gallon in many parts of the country. But if unrest abroad continues, or hurricane season ramps up, the favorable trend could change on a dime. 

"Should crude oil prices continue to rise, I suspect it will be passed to the consumer in the form of higher gas prices," Mr. Lipow said. "What we’re looking at would be an increase of price around 5 cents a gallon over the next couple of weeks."

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