Egypt, Middle East Unrest Could Be 'Exceedingly Dangerous' For The Global Economy
With the crisis in Egypt showing little sign of abating, its effect on trade increasingly poses a threat to the global economic recovery.
The prices of oil and other commodities have been rising since the protests began last week, as purchasers fear trade channels could be disrupted. Speculation is driving a dangerous trend, one that could drain economies and consumers of vital resources, as gas and food become more expensive. But the real risk lies ahead, experts warn: If the unrest spreads to other countries, then the global recovery, which lately has been picking up steam, could face a major barrier.
World economies have in recent months shown promising signs of recovery. In the U.S., where high unemployment and falling home prices continue to impede progress, manufacturing and lending have picked up, and the stock market has enjoyed a steady rise.
But oil could change that.
"We can digest what's happened so far reasonably gracefully," said Mark Zandi, chief economist at Moody's Analytics. "If the trouble spreads over the Middle East, and the oil supply is significantly disrupted, that would be a problem."
The price of Brent crude oil, an industry benchmark, rose above $103 a barrel on Thursday. It's the highest value since September 2008, after a summer of record-high oil prices helped drag the economy into recession.
Egypt serves as a crucial link in the transport of oil. In 2009, Egypt's Suez Canal and Sumed pipeline conveyed 2.9 million barrels daily, according to the U.S. Energy Department. As fears of a blockage mount, the Egyptian army has increased security around the canal, and some shipping companies have ordered vessels not to change crews in Egypt. If the trade passages were blocked, ships would be forced to add 6,000 miles to their journey.
Though blockage hasn't happened and oil supplies haven't been disrupted, rising prices suggest buyers fear the worst.
"Right now I don't think what we're seeing is a permanent shock," said Gregory Daco, a senior U.S. economist at IHS Global Insight. "You'd have a permanent shock were the fundamentals to change, were supply and demand to change."
Further risk lies beyond Egypt's passageways. Just weeks after protesters in Tunisia took to the streets, demonstrations began in Egypt, and then in Yemen. Activists have organized in Syria, and the Algerian government has taken steps to defuse tension.
If the unrest spreads to oil-producing countries in the Middle East, the region's oil supply could be compromised. Such an event would likely drive the price of oil still higher, with potentially devastating consequences.
"If it went up to $150 and stayed there for the rest of the year, then all the benefit of the tax cut deal would be wiped out," Zandi said. "The economic recovery would probably remain intact, although the risks would be very high."
"If anything else went wrong, a double-dip scenario would look very likely," he added.
Oil-producers do have methods for dealing with a compromised supply. Abdullah al-Badri, secretary general of the Organization of Petroleum Exporting Countries, said this week that his organization could put millions more barrels on the market if need be. But there's no guarantee that would prevent inflation.
If the price of a barrel of oil were to rise by $10.70 -- or roughly 10 percent -- and stay there for a year, the American economy would lose 270,000 jobs, according to a new simulation produced by IHS Global Insight. After a year, the country's economic output would be 0.4 percent lower than it otherwise would have been. After two years of a sustained price increase, output would be 0.6 percent lower, the simulation predicts.
A higher cost of oil impacts Americans in myriad ways. It boosts gas prices at the pump, it raises heating costs and it deprives consumers of the money they would otherwise spend on other things. As transportation in general becomes more expensive, the cost of airplane tickets rises, and it becomes more costly to ship goods, which, again, hits consumers' wallets.
A dollar increase at American gas pumps tears more than 100 billion dollars from the economy each year, economists say.
"The oil price is woven into virtually the entire fabric of most economies," said Jeffrey Garten, a professor of international trade and finance at Yale, and a former undersecretary of commerce for international trade in the Clinton Administration.
As high prices would sap consumers' wealth, governments would be placed in a difficult position. A possible remedy, Garten suggested, would be to raise interest rates, in attempt to bring prices down. But in the wake of the recession, and in the years leading up to it, American monetary policy has been premised on the idea that low interest rates spur growth. Raising rates would likely stall lending, dealing untold damage to the economy.
"The thing about the global economy today is it is stretched very taught," Garten said.
"We always talk about inflation and eyes glaze over, but inflation at this particular time could be exceedingly dangerous."
The Egyptian unrest has affected the prices of other commodities as well, but oil prices stand out at the principal threat, experts say. Egypt is a major exporter of cotton, and trade with the U.S. accounted for more than 30 percent of the cotton export business during the first half of last year, according to Egypt's records. The price of cotton, which more than doubled over the course of last year, shot higher as protests began.
But cotton isn't oil.
"Cotton will have some impact, but cotton isn't that important for the U.S. economy," said Dean Baker, co-director of the Center for Economic and Policy Research, in Washington. "If people spend 10 percent more on clothes, they'll be unhappy, but it's just not going to be that big of a hit to their pocket book."
The potential pain likely won't be limited to the U.S. The current crisis, if it worsens, could have devastating effects in the Middle East, as investors move dollars out of the region. After protests began, the Swiss Franc and the U.S. Dollar have strengthened, a sign that investors are buying those currencies.
Much depends on the crisis' spreading. But already, the Egyptian unrest is moving global prices.
"The world economy is so interwoven that nobody really understands all the connections," Garten said. "It is very easy to underestimate what a little country like Egypt could do."
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First Posted: 02/03/11 05:47 PM ET Updated: 05/25/11 07:30 PM ET