Middle East Department

Julio Espinoza

Middle East Department

US Department of State

Price of oil is to be instable in the short term but stable in the mid and long terms. This year, after the governance crisis in Tunisia that led to the resignation of former president Ben Ali on January15th, Egyptians went to the streets on January 25th asking for the resignation of Hosni Mubarak for the same reasons Tunisia saw a change of government: lack of transparency and democracy, human and civil rights violations, poverty and unemployment. After 14 days of resistance and a change of cabinet, Hosni Mubarak has stepped down in favor of president ad interim Mohamed ElBaradei. In two months Egyptians will vote for the new president of the country. The conservative (military), the liberals (ElBaradei followers) and the Islamists (Muslim brotherhood) are the key political players. See next tables.

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Economic Scenarios

Level of feasibility / Scenario / Evaluation / Recommendation
Probable / Stable price of imported oil
The Egyptian upheaval will not affect the price of hydrocarbons in the mid and long terms because less than 1 percent of the world’s oil supply is carried by the Suez Canal and Egypt is a marginal exporter of oil (it consumes 700 kb/b of a 740 kb/b production).
Prices had been increasing in recent months up by more than 25% since September 2010 as a normal trend in the winter season. The price went up again by the end of January up to USD 100 due to the instability in Tunisia and Egypt, but the price is now stabilizing and reaching the predictions for 2011. Today the international price of oil is of USD 87.5
The average price of imported oil over 2011 might be of USD 93 per barrel, which goes according to the forecast of the US Energy Information Administration. / Acceptable / Wait until the supply and demand adjust the price of oil. There is noting to do but let the market forces adjust themselves.
Possible / Slightly unstable international price of oil.
A closure of the Suez Canal and the Sumed Pipeline will not take any oil off the market because the markets would re-reroute (around Africa) and relocate available oil with slight price adjustments. This route would increase logistic time: 15 additional days for Europe and 10 days for the US. / Acceptable / Secure alternative routes to Europe and America
Unlikely / High price of oil.
A serious of revolutions in Middle East might threaten the supply of hydrocarbons. / Unacceptable. / Work with regional allies right now to prevent social upheavals by providing democratic and welfare concessions.

Political Scenarios (in order of feasibility)

Level of feasibility / Scenario / Evaluation / Recommendation
Probable / Democratization.
ElBaradei would win the coming elections and remain in power. The ElBaradei administration seems to be moderate and might bandwagon with the US and Israel and guarantee the flow of hydrocarbons as well as implement democratic reforms. / Acceptable / Work with ElBaradei followers to seize power if the military lacks of legitimacy.
Possible / Maintenance of the status quo by a military regime with a civilian face. The military is the strongest and most cohesive political player and if the liberals are not strong enough to seize power, the military might maintain domestic stability, peace between Israel and Egypt and the US-Egypt alliance against terrorism and rogue regimes in the Middle East. The military will assure the flow of hydrocarbons through the Channel of Suez by ship and pipeline. / Acceptable / Work with the military in order to seize power if the ElBaradei movement is weak.
Unlikely / Domino effect of nationalism and anti-Americanism.
The forbidden Muslim brotherhood would gain legitimacy and, after wining the elections, might pursue an ultra-nationalist and anti-American agenda, as the Islamist did in Iran after the Sha stepped down. Some other authoritarian allies of the US could follow suit because the populations of the Middle East finally arises against the oppressive regimes. / Unacceptable. / Work with the military and ElBaradei’s followers to prevent the Muslim Brotherhood from power.
Work with regional allies to grant democratic concessions in order to avoid more upheavals.

Sources:

International Energy Agency, Fact on Egypt: Oil and Gas, at http://www.iea.org/files/facts_egypt.pdf

Graham Allison, What Egypt Means for the U.S., at http://ht.ly/3PMhG

US Energy Information Administration, Short Term Energy Outlook, at http://www.eia.doe.gov/emeu/steo/pub/contents.html

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