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How Political Unrest in Egypt affects India and Crude Oil prices?

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The political unrest in Egypt, which is into 10th day of anti-government mass protests, has evoked response from world over including that from Uncle Sam too. The US has asked Egyptian President Hosni Mubarak to immediately initiate the process of orderly political transition and make way for a peaceful democratic regime in the country.

Little wonder that prolonged Middle East geopolitical events could have a substantial impact on the global trade balance. Most of such investor concerns relate to the flow of oil through the Suez Canal, an important transit route across Egyptian territory, which could be disrupted if the crisis doesn’t subside soon.

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It is estimated that more than 1.7 million barrels a day of crude oil crosses the Suez Canal and the Suez-Mediterranean (Sumed) pipeline – that transports crude from large non-navigable tankers alongside the Suez Canal to empty tankers off the coasts. Trade analysts indicate that the Sumed pipeline transports twice the quantity of crude as compared to Suez Canal.

The political turmoil in Egypt and the fear of the closure of the Suez Canal has already pushed the oil prices close to $100 a barrel for the first time in 2 years; and aviation fuel prices even higher. Moreover, political observers fear that if the protests continue, the unrest might spread to other countries fraught with similar situation such as Algeria and Libya.

Unfortunately, for India, the high global crude oil prices have come at a time when the economy is plagued with spiralling inflationary concerns. Even today India imports 3/4th of its oil requirements from the oil-rich nations.

On the other hand, the government is also involved in cushioning the impact of surging crude prices by freezing diesel rates (while it had decontrolled petrol prices last year) and sharing subsidy burdens along with other state-owned oil marketing firms. This might further hit the fiscal position of the Centre.

Right now, Indian government is in no-man’s land! If it raises diesel prices – it will further aggravate the on-going pricing pressure and invite opposition’s political wrath. If it initiates no action, it will add more subsidy burden from the rising crude prices and deteriorate country’s fiscal balance.

However, the recent surge in crude oil prices is mainly on account of fears of supply stoppage through the Suez Canal route. But, a notable fact over here is that it is Sumed pipeline which is more exposed to the danger of disruption, being situated closer to the areas of unrest. If the Suez Canal route is frozen, then the only way left for the crude shipments is to divert to Cape of Good Hope.

Let me build-up a scenario over here: If oil shipments get effected, it will have two different effects on global crude prices. As oil flows in only one direction (from Red Sea to West), there will be less oil flowing to west. So prices of oil in west might rise further. At the same time, as reserves built up in Red Sea, more oil will flow to east to decongest the canal route. So, oil prices will come down in East.

Do you feel Hosni Mubarak will succumb to political pressures this week itself?

  1. Abi Majoka says

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  2. Abi Majoka says

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  3. Abi Majoka says

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  4. Abi Majoka says

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  5. Abi Majoka says

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  6. Abi Majoka says

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  8. Abi Majoka says

    tell me abut this.

    1. Abi Majoka says

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  9. Altaf Rahman says

    Absolutely true Viral,

    How ever I am worried that the markets are not following the natural deamd supply principles.

    My concerns are as follows :

    1) Crude prices not falling in India as per demad supply principle. Crude prices should go down in East. As the Suez canal risk rises, more oil should flow to east (India, China, Japan, Korea etc). But crude is gaining overall. I dont understand. why?

    2) Gold should gain in times of crisis. But gold is subdued. It is said that Gold is the asset to turn to in times of crisis. This is a transition time in one of the major country in a crucial goegraphical location in the world. Still Gold is subdued. why?

    Just my two paisa :)

  10. Altaf Rahman says

    As an after thought, the Crisis in Egypt will effect another sector i.e. shipping.

    If risk increases and shipping has to be diverted via South Africa, the length of journey will increase, so is the factor of utilization of shipping hours and business for shipping.

    Ofcourse this is in short term only. Again ofcourse it is only my guestimate based on demand supply principles.

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