Until a couple of weeks ago, geopolitical impact on oil price movements have been surprisingly mute. However on January 25, when demonstrations in Cairo and other major cities of Egypt erupted, the oil market immediately realised the potential risk.

Brent crude oil rose from just below $96 a barrel to over $102 and settled on Friday at $99.99 for profit taking and because traders may have believed that Egypt's president Hosni Mubarak may step down.

The uprising in Egypt is not expected to have a volumetric impact on the oil market. Egypt's production, at around 740,000 barrels a day is barely sufficient for its needs. However, the Suez Canal and Sumed pipeline play an important role in world oil and gas trade and the impact may become much more if the operations of either facility are affected.

In 2009, about 1.8 million barrels a day of crude and products passed the Suez Canal where about 55 per cent is from the Red to the Mediterranean Sea and the rest in the opposite direction. If the operation of the canal were to stop, such volumes will have to find longer and more expensive routes, perhaps around Africa as happened in 1956 and 1967, and this may drive prices higher.

The Suez Canal is also a major route for the export of LNG from Middle East producers to Europe. In 2009, 20 billion cubic metres of gas was shipped through the canal and the volume is believed to have increased in 2010.

The Sumed pipeline is a 200-mile twin pipe system extending from Suez on the Red Sea to Sidi Kirir on the Mediterranean, thus bypassing the Suez Canal.

The capacity of the system is 2.4 million barrels a day but is currently operating at 1.1 million due to lower demand in Europe and the rising availability of crude oil in the Mediterranean market from other terminals or producers. Similar to any closure of the Suez Canal, a closure of Sumed would force Arab Gulf producers to divert their shipping around Africa, therefore adding substantially to shipping costs, journey time and therefore oil prices.

Escalating prices

If this is so and both the canal and Sumed are still operating at the desired level then why are oil prices so sensitive to the event? Analysts believe that "traders are pricing in the possibility of escalation of protests across the Middle East" as is already happening in Yemen and Jordan with wide popular support in many other countries.

The Egyptian masses supporting the uprising have refrained from any disruptive action against public facilities, believing that their peaceful protests may eventually achieve their aims. But no one can foresee exactly how events like this evolve, especially if they go on for a long time or if they become more violent either by action of the government or by frustration or mounting determination of the protesters.

Such uncertainties will continue upward pressure on prices, and calls on Opec to be "flexible" are already coming from the International Energy Agency though no loss of volume or disruption of transportation has occurred. Personally I believe that Opec will not act if no substantial loss of volume in the market is observed.

Consumers can rely on their very high stocks to cool the market if they wish. IEA member countries together hold emergency oil stocks equivalent to some 145 days of net-imports.

While Egyptian oil and gas facilities were not at risk, the situation will certainly be viewed differently after the explosion in the gas pipeline south of the city of Al Arish, delivering gas to a junction with a sea branch to Israel and another branch to south Sinai and the Arab Gas pipeline to Jordan, Syria and Lebanon. Gas delivery to Israel is very sensitive in Egypt and there is a popular movement and a court order to stop the exports though the government is not implementing it.

Until now, it is not known who caused the explosion though the government blamed it immediately on foreign elements. If it is a deliberate act to stop exports to Israel, which is the widely believed scenario, the impact on the Arab importers has become "collateral damage".

Gas substitute

Israel imports about 40 per cent of its gas needs from Egypt which amounted to 1.7 billion cubic metres in 2009. Israel may be forced to substitute this gas by liquefied natural gas (LNG) or by other liquid fuels.

The popular uprising in Egypt is of major importance and its repercussions may not be limited to just the modest rise in oil prices so far. But most importantly let us hope it ends peacefully and positively for the Egyptian people.

 

- The writer is a former head of Energy Studies Department at Opec Secretariat in Vienna.