Sean O'Grady: Egypt's troubles look likely to give us all a new 'oil shock'

Analysis: In many ways events in Egypt are reminiscent of the Iranian revolution of 1979

Monday 31 January 2011 01:00

Whatever the purely political impact of the unrest in Egypt proves to be, it is pretty much the last thing a fragile world economy needs now. It will trigger more inflation, higher interest rates to tame it, falls in stock markets and a further hit to standards of living.

The effect on China, in particular, could be especially dramatic, as the country has such an insatiable appetite for fossil fuels.

Already the turmoil in Cairo is turbocharging spiralling oil prices, up 4 per cent at the end of last week. Oil is again flirting with the $100 a barrel "psychological barrier", and further rises are sure to accelerate inflation here and drain even more spending power from the Western economies.

The Governor of the Bank of England, Mervyn King, has warned that inflation would hit 5 per cent, and the recovery is visibly stalling. Higher interest rates – when we least need them – suddenly seem more likely.

It is anyone's guess as to where all this will lead – the $200 barrel of oil and 10 per cent UK inflation? That's probably alarmist, and the effects are essentially unknowable in detail; but they will not be good.

Although Egypt produces no oil, some 2 per cent of global oil supplies pass through the Suez Canal or the parallel pipeline linking the Red Sea to the Mediterranean.

In addition, some 8 per cent of the world's traded goods also pass through the Suez Canal, which has been a vital conduit for trade since it opened in 1869.

Indeed, so important was the canal to the British and French that they staged their own illegal – and disastrously bodged – invasion of the canal zone in 1956 to prevent the Egyptian dictator, Abdel Nasser, from having his foot on the throat of the European economy.

War then and in 1967 closed the canal, in the latter case for eight years, forcing container ships to go all the way around Africa via the Cape of Good Hope. It would be an expensive detour for Japanese cars, New Zealand butter and Korean televisions destined for British consumers.

There is also the possibility that the revolutionary examples of Tunisia and Egypt could spread to the resource-rich nations of the Maghreb – Algeria (natural gas) and Libya (oil), or even the Gulf states.

A fundamentalist regime in Cairo would also threaten peace in the Middle East generally, again something that always makes oil more expensive. As a footnote, there is also cotton, which has also seen massive inflation in recent months. Egypt is a major producer.

In many ways events in Egypt are reminiscent of the Iranian revolution of 1979, the last time the world suffered a severe "oil shock". Then, the price doubled to almost $150 a barrel – adjusting for inflation – a peak that was not seen again until the brief spike in 2008.

Although the loss of Iranian oil was the main cause, and not comparable to now, the panic-buying on commodity markets and sense of economic doom certainly is. It is not a happy precedent.

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