Middle East crisis: another recession?

An anti-government protester covered with his national flag shows the thumb-up as he takes part in a protest in Cairo's Tahrir square on February 9, as Egyptians mark the 16th day of protests against the 30-year-regime of President Hosni Mubarak. Photo: AFP

The fact that globalisation due to integration of world economies is able to generate economic impacts in different countries is well known, but the phenomenon of self immolation having similar economic ramifications is unheard of. The recent protests across the Middle East had its roots in Tunisia when on December 18, 2010, Mohamed Bouazizi burnt himself when local police authorities seized his produce and publicly humiliated him. This caused a major uprising in Tunisia against unemployment and subsequently led to the fall of the 23-year-old regime of the ousted President Zine El Abedine Ben Ali. Due to similar conditions of high unemployment, high food prices and similar governments, 12 deaths have taken place till date through self immolation as the unrest continue to grip the Middle East and North African countries.
While the US and the EU are still battling the effects of recession, the Middle East crisis threatens to stall the pace of global economic recovery and fears of a double dip recession looms large. Egypt, which is now taking centre stage of the Middle East protests, has forced oil and food prices to inch higher. Oil prices, specifically the price of Brent, the reference for crude oil sales across the world, increased to $103.37 a barrel, the highest level since September 2008 amid speculation that the Egyptian crisis could have a contagion effect on the Organisation of the Petroleum Exporting Countries (OPEC).
Soon after the Tunisian protests, an unemployed Egyptian set himself on fire in Alexandria and what followed was a series of self-immolutions in the capital city of Cairo that rocked the 30-year-old regime of Hosni Mobarak. Egypt is a $200 billion economy and the largest country by population in the Middle East. Given its size, it's a major voice in the Arab world and any disruptions could be very significant.
In just 10 days of the political unrest, Egypt is estimated to have lost $3.1 billion as a result of the ongoing crisis and is slated to lose $310 million daily until the protests wane significantly. The world witnessed oil prices climb from $75 a barrel to $100 a barrel in just a week, as the Egyptian protests threaten to stall the shipments of crude oil along the Suez Canal and the Suez- Mediterranean pipeline.
Egypt at present produces close to 700,000 barrels a day, which roughly makes up 1 percent of the global oil output. Any shortfall in Egypt's ability to produce oil in the short run would be easily met by the members of the OPEC countries and have little impact on global oil production. Egypt however has control of the Suez Canal and the Suez Mediterranean pipeline, which saw close to 2 million barrels of oil being shipped every day. Both the Suez Canal and the Suez-Mediterranean pipeline oversee 2.5 percent to 4 percent of the global oil and gas shipments. As such, if oil traffic gets clogged in any manner like in 1956 or after the 1967 Israeli war for eight years, the results could put brakes on the world economy.
The Suez Canal and the pipeline are so important that the only alternative for ships would be the longer route around Africa's Cape of Good Hope. According to the US Energy Department, the costs for using the alternative route if the Suez Canal and the Sumed pipeline (also known as Suez-Mediterranean pipeline) were to close would be adding 6,000 miles to the vessel's journey. Such is the importance of the Suez Canal that crude oil prices could reach $200 a barrel if the Egyptian crisis leads to the closure of the Canal according to Rafael Ramirez, oil minister of Venezuela. This would easily surpass the earlier peak of $147 a barrel reached in 2008 and if oil prices were to reach that high, the world would witness another recession with catastrophic results.
While the possibility of the Suez Canal and the Suez Mediterranean pipeline being closed amid the rising tensions strikes fear among policymakers. Another major worry is the Egyptian crisis entering its second week and showing no signs of withdrawal either from President Hosni Mobarak or from Muslim-brotherhood led protestors.
If the unrest continues, there is a high possibility that the moderately affected Middle East countries, like Saudi Arabia, could see renewed protests and endanger oil supplies. Fierce demonstrations and street protests were staged in Jeddah, after an unidentified man burnt himself alive on January 21. A week later, thousands of demonstrators protested against poor infrastructure after floods ravaged Jeddah. Saudi Arabia accounts for 12 percent of global oil production and if it were to be gripped by violent protests, oil prices could very well go over the roof.
One country that will be watching the Middle East crisis closely is Bangladesh, especially because 90 percent of Bangladesh's oil demand is met from international markets.
Last year, Bangladesh Petroleum Corporation (BPC) imported 4.3 million tonnes of oil, which cost $2.6 billion to the exchequer. This year, BPC plans to import 4.5 million tonnes of oil at a cost of $3 billion.
However, oil prices having surged from $75 a barrel to $100 a barrel might cost BPC an additional $1 billion or even more. Bangladesh has over the years tackled such an upward spike in oil prices by passing subsidy burdens to the corporation. BPC, in turn, has incurred losses for the past five years and subsidies on domestic fuel prices have led to higher budget deficits and diversion of funds meant for education, healthcare and employment.
Policymakers world over are trying to gauge the economic impacts that the Middle East crisis might have on their economies as oil and food prices continue to soar. As politicians around the world look forward to a stable and peaceful Arab world, speculators try to understand whether the Egypt contagion would spread to the rest of the Arab world causing major volatility in oil and commodity prices. For Bangladesh, stakes are high as a lengthier turmoil could have a similar story back home.

The writer is a banker and can be reached at [email protected]