Egypt, Oil, and the Economy

Last Updated Jan 31, 2011 6:12 PM EST

Many people are wondering how the events in Egypt might impact the US economy. One of the better analyses I've seen on this so far is from Jim Hamilton at UC San Diego: Geopolitical unrest and world oil markets, by James Hamilton, Econbrowser. Professor Hamilton has spent considerable time investigating the link between oil prices and macroeconomic changes, and he is a world expert in this area.

He begins by noting a series of popular uprising this month in Sudan (Jan 9-Jan15), Lebanon (Jan 12), Tunisia (Jan 14), Iraq (Jan 17-Jan 27), Egypt (Jan 29-?), and Yemen (Jan -?). Fortunately, as he notes, these are not major oil producing countries (see the table in his post for exact percentages produced by each country):

...For the most part, the popular uprisings so far have been in the "have-nots" of the Arab world, with modest levels of oil production relative to the members of OPEC. Of the countries facing a likely immediate transition of power, the most important in terms of oil markets is Egypt, with 2/3 mb/d of its own production and another million barrels of oil being transported each day through the Suez Canal plus 1.1 mb/d crossing Egypt via the SUMED pipeline.
He then reviews evidence from the Suez crisis in 1956-57 showing how severe the shock from oil flow disruptions can be:
In my recent paper surveying historical oil shocks I discuss the Suez Crisis of 1956-57 in detail. In that episode, sunken ships blocked traffic through the canal for a considerable period. Pumping stations for the Iraq Petroleum Company's pipeline through Syria were also sabotaged. At its peak, the episode removed about 10% of global oil production, a bigger percentage disruption than any subsequent oil shock. It took half a year for production from the Middle East to get back to normal, though there was enough excess capacity elsewhere in the world to bring global production back up to the levels at which it had been before the crisis within 3 months. ...

My paper notes this description of what the original Suez Crisis meant for Europe at the time...

A closure of the Suez Canal at the present time would not be as economically damaging as the original. For one thing, there is less oil going through the canal today (1 mb/d in 2009 compared with 1.5 mb/d in 1956), and that flow is a significantly smaller fraction of the world total (1.1% today versus 8.8% then).

There's a description of the dire consequences for Europe in Professor Hamilton's discussion. The important question is, could this happen again?:
I think the bigger worry for oil markets would be that the process may yet spill over into other key oil-producing countries. Iraq will be a huge factor in determining medium-term growth in world oil production, and Iran is twice as important as Iraq in terms of current production. And should we see the temporary cessation of Saudi production, it would be an event without historical parallel.
For the moment we are okay, but the danger has not yet passed. if oil production or delivery is interrupted, or if the unrest spreads to other key oil-producing countries, all bets are off.