Tuesday, February 1, 2011

Why the West (the US) Cares So Much About Egypt: Part I The Suez Canal (Oil)

As a key chokepoint for trade in the region, the 192-kilometre canal is being closely watched
Egypt's Suez Canal still open for business

It is clear, by their words and behaviours, that the West has much greater concern for events in Egypt, than they did for those in Tunisia (with the possible exception of France). As time goes on, and the Egyptian protesters persist, oil prices are rising, and the pundits are talking more openly about a major concern--the fate of the Suez Canal: Will it stay open? Who will control it? How will it affect Western, and particularly the US, economies?

Though he has almost never been mentioned, the subtext is: What if a new Nasser tries to nationalize the Suez Canal? How would that affect us? Completely unstated is: What if the money from the Canal were to go to the Egyptian people, voting in a democracy? Would the Egyptian people protect our interests? How do we make sure they do?

Listening to American reporting on the Egyptian "crisis" and how "we will manage it" is a frustrating experience, for me at least. One of the many frustrations is the tenor of discussion as if Egypt were a state of the United States of America. The attitude is the same as if they were discussing how to manage unfortunate events in any other state, Texas, Massachusetts, California, Washington, Alabama. The US are not the only ones concerned, but they are the only ones using this type of nationalist discourse--while carefully claiming they are not.

I found the above graphic and the Q & A below useful backgrounders to the importance of the Suez Canal to current events in Egypt--for the West.

Q&A: Suez Canal
Graeme Wearden
guardian.co.uk, Tuesday 1 February 2011 15.20 GMT

Egypt's Suez Canal allows ships travelling between east and west to avoid the 6,000 mile journey around Africa. Photograph: Anonymous/AP

Q: Why is the Suez Canal important to the world economy?

Opened in 1869, the Suez Canal allows ships travelling between the east and the west to avoid the long journey around the Cape of Good Hope, cutting routes by an average of 6,000 miles. Although the latest generation of huge supertankers cannot traverse the canal fully-laden, it remains one of the world's most important waterways. Around 8% of global sea-borne trade passes through the canal.

The SuMed pipeline runs close to the canal, connecting the Ain Sukhna terminal on the Gulf of Suez to Sidi Kerir on the coast of the Mediterranean, and is just as important as the canal. SuMed transports oil, partly from very large tankers that need to offload some of their cargo before they can fit into the canal.

Q: How crucial is the canal to Egypt's economy?

Charges paid by ships travelling between the Mediterranean and the Red Sea are a key source of revenue, along with tourism, exports, and taxes on the earnings of expatriate workers. Total earnings from the canal were almost $4.8bn (£3bn) in 2010, up 11% as the global economy recovered.

Egypt has owned the canal since 1956, when Colonel Gamal Abdel Nasser nationalised the Suez Canal Company – prompting the Suez Crisis.

Q: How much oil travels through Suez?

Around 2.4m barrels of oil are shipped through the canal each day while the SuMed pipeline carries 2.5m a day. That's around 5.5% of world output, according to the latest official forecasts.

Map - Suez Canal Photograph: Graphic

Q: Has the canal been affected by the protests against President Mubarak?

Not yet. Egyptian officials have repeatedly insisted that the canal and SuMed both remain open. Extra armed troops have been deployed along the length of SuMed – more than doubling the number of sentry points to 30. There are currently 65 ships passing through the canal, up from 40 yesterday. Oil tankers typically make up around 10% of traffic.

Q: So why did the oil price break though $100 yesterday?

Because oil traders are very nervous that the protests are going to spread beyond Egypt and across the Arabian peninsula – and probably won't be reassured by the dismissal of the Jordanian government today. Oil prices have been rising for the last couple of months, as the economic recovery pushes up demand and eats into spare capacity. The oil price is also notoriously susceptible to geopolitical uncertainty.

Q: But could shipping through the canal be hurt by the crisis?

Several analysts believe some level of disruption cannot be ruled out. Risk analysis firm Maplecroft suggested today that "concerns persist that the canal may come under attack by militants or even demonstrators".

Barclays Capital, which does not believe the canal itself is under immediate threat, suggested that "some individual ships docked in port might be at risk of attack if the situation deteriorates further".

There have been local reports of major disruption at the ports of Alexandria and Damietta today, due to widespread staff shortages – this could potentially be mirrored in Suez, which has already been the scene of protests against Mubarak.

Workers in the area have complained that their wages are unfairly low, compared with the value of the goods transported through the canal. Reuters also reported yesterday that some ships have been unable to get navy escorts to protect them from pirates, leading to delays.

Q: What would happen if the canal closed?

Sailing around Africa would add around two weeks to journey times, which could lead to some short-term supply issues – and potentially nudge up prices.

A long-term closure would have major implications for the world economy. The canal was shut between 1967 and 1975 following the Arab-Israeli War, which left Egyptian troops on one side of the waterway and Israel's forces on the other. World trade declined steadily through most of this period, according to research by James Feyrer, Professor of Economics at Dartmouth College.

Barclays Capital has also analysed the impact of the eight-year closure, and discovered that Asian countries suffered the most.

"Much of the exports earmarked for Asia found their way into western European markets, which in turn were attempting to cope with both the obstruction to oil transport from the Middle East and a brief Arab oil embargo … The overall impact of the total eight-year closure was largely negative. Deliveries to Asia, in particular, suffered the most."

Analysts point out that the eight-year closure prompted shipmakers to build larger oil tankers, as they were not constricted by having to fit into the 24 metre-deep, 205 metre-wide canal.


Your comments, thoughts, impressions?

Coming up:
Why the West (the US) Cares So Much About Egypt: Part II Israel
Why the West (the US) Cares So Much About Egypt: Part III The Domino Effect


Countrygirl said...

What i fear most is the possibility of an islamic takeover something similar happened in Iran 30 years ago and we can see the result.

Under Mubarack civil rights were a joke just imagine under an islamic party (Muslim Brotherhood)with the mentality anchored to the middleages, it's scary to think that the majority of egiptians thinks it's ok to kill someone just because he/she want to change religion.

If the economy of the west could suffer from the closure of the Suez Canal just imagine of what could happen to much weaker economies.

Wendy said...

The world watches and waits. This is a good topic and well done post, Chiara. Countries in North Africa are in crisis mode and we can only hope sanity prevails in Africa and in the Middle East.

Chiara said...

Countrygirl and Wendy-thank you both for your comments. I think we are all glued to events and hoping for the best, though not sure or necessarily agreed on what that might be and how it is to come about.
I hope you also find Parts II and III interesting and of value.

Susanne said...

Very informative! Thank you!


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