Trouble in Egypt spells trouble for global energy market

Although Egypt is hardly one of the Middle East’s primary producers of oil, now that the country finds itself in the midst of a political-military meltdown, we should begin to consider the short-term and long-term effects on neighboring countries and the global market.

Egypt controls the Suez Canal and Sumed Pipeline, two key sources of export/import. Luckily, experts are saying that a hiccup in the flow of oil through the country seems unlikely – good news for foreign investors.

However, those investors are keeping a close eye on Cairo, the Egyptian capital, where further violence could scare private equity right out of the country. What’s worse – violence could spread like a disease to neighboring countries, sending the entire Middle East spiraling out of control.

“In addition to the human toll, the violence and political turmoil in Egypt is beginning to affect investor sentiment," says Russ Koesterich, a chief investment strategist at BlackRock, the world's largest investment management corporation.

Investors are appreciative of the role Egypt’s $538 billion economy plays in keeping the volatile territory at bay. The worst case is a straight closure of the Suez Canal, which links the Mediterranean and the Red Sea. The canal transported 13% of the country’s liquefied natural gas (LNG) and 7% of sea-traded oil last year. A closure of the 101-mile long canal could send oil prices skyrocketing again - not only in the Middle East, but all across the world.

Another scenario involves terrorism. Sabotaging a single point along the 200-mile Sumed Pipeline, for example, would cut a strategic route for oil and gas exports to Europe and North America. The pipeline carries approximately 2.5 million barrels a day – that’s a lot of oil to just go missing from the global market.

The energy industry is also on the watch for terrorist plots against key instillations. Threats could force them to shut down and evacuate employees. That wasting time means wasted money. And who ends up fitting the bill? Why you, of course. Higher rates, premiums – you name it.

Few people even care to consider what happens if the Middle East goes completely crazy. Think Hollywood apocalypse. First the collapse of domestic governments. Ripples across the global market. Food and gas shortages. Terrorism the likes of which we’ve never seen. Nuclear retaliation.

Sure, you might think this all sounds a little paranoid, but in the globalized 21st Century, a single falling domino can topple the entire chain. Hopefully Egypt won’t prove to be that first domino.