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Middle East Protests Unnerve Business -- but Oil Prices Over React

The protests that brought down the Tunisian government and that challenge Hosni Mubarak's long grip on power in Egypt continue to spread through the Middle East. Jordan saw a few thousand on the streets over the last three Fridays and now King Abdullah II has fired his government.

The activity is clearly spooking businesses. There are plenty of reasons for companies to be wary and take precautions. And yet, some of the reaction, especially in the oil markets, may be overdone.

The signs of impending worry are widespread. A number of international businesses have halted operations in Egypt. At least one corporate executive for Google (GOOG) has gone missing. The yen is up on concerns that the protests will spread. Financial markets throughout the Middle East have declined.

Oil disruption unlikely
Concern is sensible, and yet some reactions are extreme. For example, oil prices have topped $101 a barrel for the first time in two years, although they are currently steady. Why? Because the markets are worried that unrest in Egypt could disrupt oil shipments through the Suez Canal. However, Simon Rose, CEO of Dahlman Rose & Co., an investment bank for the shipping industry, took a different view in an interview with Bloomberg:

Rose said that the Middle East produces about 20 million barrels of crude a day. The Suez Canal accounts for transportation of 700,000 to 1 million barrels, while the Sumed pipeline in northern Egypt moves another 1.5 million to 2 million barrels per day. At most, that is 15 percent of the region's oil, and only 2.5 percent of world oil supplies.

According to Rose, the Suez Canal is far more important to container and dry bulk shipping than to oil, and shipping rates haven't moved equivalently to jump in oil prices. And shippers, who would feel a direct effect, aren't anywhere near as worried as oil traders, suggesting that the petroleum market's reaction is overdone. In the meantime, oil companies like Exxon Mobile (XOM) enjoy soaring profits, even though the global economy is still shaky and there are ample stockpiles of crude.


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