With oil prices soaring past $100 a barrel on Monday, thanks to growing uncertainty about stability in the Middle East, the somewhat distant, feel-good, democracy-awakening story coming out of Egypt suddenly took on a more ominous, economic tone that could hit Americans where it hurts most—their wallets.
The prospect of significantly higher costs for driving, heating and running factories raised the specter of an economic slowdown just as the U.S. economy has been showing signs of finally recovering from the Great Recession. Of even greater danger, rising energy prices threaten to sap growth in Europe, where recovery is shallower, but even more urgently needed as the eurozone struggles to contain a sovereign debt crisis. A new recession in Europe, the world’s largest economic area, would send the dollar higher, dooming president Obama’s goal of creating desperately needed jobs by doubling U.S. exports by 2015.
The immediate threat of runaway oil prices remains slim. Egypt is an insignificant player in world oil trade and global petroleum stocks appear adequate to weather a prolonged storm. They currently stand at 145 days of imports. The International Energy Agency in Paris thinks 90 days are needed for market stability.
oil can drain up to 0.1 percent off the U.S. economy.
But oil spot markets are notoriously volatile. The price of a barrel of Brent crude oil, the global benchmark, has risen 44 per cent since August, beginning its assent long before the turmoil in Tunisia, Algeria and now Egypt, driven by expectations of rising demand as the world economy improves.
This oil bidding war threatens the very expansion it anticipates. The U.S. Energy Information Agency estimates that a sustained 10 percent increase in the price of oil can drain up to 0.1 percent off the U.S. economy. By this rule of thumb, recent petroleum price rises could cost the American GDP roughly $60 billion. This is far from a knockout punch to a $14 trillion economy. But it sets up the United States for a more lethal combination: higher interest rates and greater global instability.
The recent oil price jump could not have come at a worse time. U.S. energy prices had already risen 7.7 percent in December, 2010 compared with December, 2009. The situation is even more dire in the eurozone, where fuel prices were up 11 percent, according to figures released today by the Organization for Economic Cooperation and Development in Paris. If Middle East uncertainty fans even higher prices over the next few months, inflation hawks in the U.S. Federal Reserve and at the European Central Bank could well prevail, leading to interest rate hikes that could slow transatlantic recovery.
This is a particularly dangerous scenario in Europe, where economic prospects are already at risk thanks to the possibility of sovereign debt restructuring and bank insolvencies.
New troubles in Europe could also strengthen the dollar, making U.S. exports more expensive. American multinational corporations, that at times derive a healthy share of their profits from Europe, could also suffer. As could U.S. banks, which have little noticed but significant exposure in Europe.
So, much depends on the breadth and the length of any oil market disruption in the wake the Egyptian crisis. Egypt itself is an insignificant petroleum player. In 2008 it exported only 4.5 million tons of oil in a world market in which 1.95 billion tons was traded. Other producers’ oil does transit the Suez Canal and an Egyptian pipeline, spawning recent press speculation about the price impact if those facilities fall victim to the current Egyptian turmoil. But the International Energy Agency estimates that no more than 5 percent of annual global petroleum trade passes through Egypt. And even those supplies would not be denied Western markets; they would simply take longer to get there via the sea lanes around Africa.
If, however, unrest should spread to Saudi Arabia or the Persian Gulf oil producing states, petroleum markets, and the U.S. economy, would be in for a rough ride. The 1973 Arab oil embargo cut off 7.1 percent of world oil production and the 1979 Iranian revolution reduced available supplies by 8.5 percent. Disruptions of these magnitudes caused gas lines in the United States and threw the world into recession.
Oil market speculation about impending supply cutoffs should wane, however, if Washington can help ensure peaceful, democratic transitions in Egypt and possibly other countries in the region. To that end, it is not too early to begin to think about how the United States could economically bolster post-Mubarak Egypt.
The Bush administration considered signing a free trade agreement with Cairo that could have boosted the Egyptian economy by 2.8 percent, according to estimates in the 2005 book Anchoring Reform with a U.S.-Egypt Free Trade Agreement, published by the Peterson Institute for International Economics.* The idea was shelved because the Mubarak regime resisted democratic reforms. If a new, more representative Egyptian government grows out of the current chaos, it may be time for the Obama administration to revive this idea.
It is the prospect of long-term Egyptian and Middle Eastern economic and thus political stability that is the best insurance against rising energy prices.
*The Peterson Institute is funded by Peter G. Peterson, who also funds The Fiscal Times.
Bruce Stokes is Senior Transatlantic Fellow for Economics at the German Marshall Fund of the U.S.