IEEJ: February 2011
Special Bulletin
A Japanese Perspective on the International Energy Landscape (29)

February 2, 2011

“Crisis in Egypt” and International Energy LandscapeKen Koyama, PhD
Director
Strategy and Industry Research Unit
Institute of Energy Economics, Japan

Anti-government demonstrations started in Egypt on January 25 and have
expanded with tensions growing. After anti-government protesters called for a protest
rally of one million people on January 31, large-scale demonstrations took place in thecapital city of Cairo and other regions on February 1. In the face of protesters’
resignation demand and criticism, President Hosni Mubarak first offered thenomination of Omar Suleiman as the vice president, a cabinet reshuffle, dialogue withanti-government groups and emergency economic measures. Simultaneously, thepresident toughened security through a curfew and the enhancement of safety at major
facilities in a bid to manage the turmoil, while refusing to resign. Through the state-run
television on February 1, however, Mubarak for the first time vowed to refrain fromrunning in the next presidential election coming in September this year, indicating hisintention to cede power. How the political situation would change in response to the newdevelopment is uncertain. Would Mubarak resign? How would he cede power? Could
anti-government movements escalate in response to future developments? Answers tothese questions are uncertain. The situation in Egypt is very volatile. Western medias
have begun to describe the situation as the “crisis in Egypt or Egypt crisis.”
There are various factors behind the crisis. The most important structural or
fundamental issue may be the presence of accumulated discontent and anger in
Egyptian society. President Mubarak has retained his dictatorship about 30 years since
his succession to Anwar Sadat in 1981, while the unemployment rate for young people
has risen to a very high level with wealth gaps expanding in the country featuring a
population of 80 million, the largest among Arab countries. These conditions haveallowed the magma of political, economic and social discontent to accumulate. As well,
the Jasmine Revolution has come in Tunisia. The overthrow of President Zine
Al-Abidine Ben Ali after more than 20 years under his dictatorship amid
anti-government movements in Tunisia has undoubtedly stimulated Egyptian society.
As the Internet and other modern information technologies have developed theirpotential to spread key phenomena regionally and globally at quick speed, the Jasmine
Revolution has rapidly spilled over to neighboring countries plagued with structural
discontent similar to Tunisia’s.
While how the Egypt crisis would develop in the future is still uncertain, its
influences over the entire international situation have attracted global attention. Thereare three angles for looking at the crisis. The first is how far the Egypt crisis will spread.
Anti-government demonstrations in Yemen, Jordan and Algeria as well as Egypt havefollowed the Jasmine Revolution. Whether the Egyptian turmoil would spread to
Persian Gulf oil producing and other Middle East countries with similar socialstructures is extremely important for the stability of the Middle East and the entire
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international situation. Second, the fate of the Egypt crisis will have great influences onMiddle East-linked international relations including the U.S. Middle East policy andthe Middle East peace problem. Under President Mubarak, Egypt, as a major pro-U.S.
Arab country, has been positioned as a cornerstone of the U.S. Middle East policy. ForIsrael, Egypt has been a major country adopting a rare pro-Israel stance in the Arabworld. It has also played a role in mediating Middle East peace negotiations. Therefore,
the fate of the Egypt crisis has the potential to change international relations andbalances of power in and outside the Middle East. The third angle is the impact of thecrisis on the international energy landscape that is closely linked to the first and second
angles.
How would the Egypt crisis affect the international energy landscape? Egypt
produced 740,000 barrels per day of oil (0.9% of global output) and 62.7 billion cubic
meters of gas (2.1% of global output) in 2009, indicating that as an oil producing country,
its global weight is limited. But the first point attracting global attention is that Egypt
controls the Suez Canal as a choke point for oil transportation. In 1956, then Egyptian
President Gamal Abdel Nasser’s decision to nationalize the canal, and Egypt’s military
clash with Britain, France and Israel led tankers to be blocked from passing throughthe canal. This is called the Suez Crisis. The canal has basically remained a key path forthe transportation of oil from the Middle East to Europe. According to the U.S. Energy
Information Administration, oil traffic through the Suez Canal totaled 1.8 million bpd
in 2009. The Sumed Pipeline, which links the Red Sea to the Mediterranean Sea via
Egypt, transported 1.1 million bpd in the same year. As a key path for thetransportation of oil from the Middle East to Europe, Egypt is among the oiltransportation choke points, which also include the Strait of Hormuz and the Straits ofMalacca. At present, the Egyptian turmoil has fallen short of affecting oil
transportation. On crude oil futures markets that play a central role in oil priceformation, however, expectations of market players about possible oil supply
interruptions can affect actual price movement. The markets may now be vulnerable tofears about oil supply interruptions for Europe from the logistics viewpoint, although
the global impact of the crisis as well is a matter of concern to market participants.
The second point for global attention is a concern about the potential impact of
the Egypt crisis spilling over to major Middle East oil producing countries. Although
there are no signs of such spillover, market players have no choice but to become
nervous in view of Middle East oil producing countries’ significance for oil supply in theworld. Such concern or fear has been reflected into crude oil price movement. OnJanuary 31, in fact, the benchmark West Texas Intermediate crude oil futures priceposted a substantial gain of $2.85/barrel from the previous day to $92.19/barrel, thehighest level since October 2009. In Europe, the benchmark North Sea Brent crude
futures exceeded $100/barrel to $101.01/barrel. These crude oil futures prices soared on
expectations about possible oil supply interruptions, despite the absence of actualinterruptions. This means that market participants have already viewed the Egypt
crisis as potentially important. Therefore, oil markets may fluctuate wildly dependingon the fate of the crisis. If some developments or information indicate oil supply
interruptions, crude oil futures prices may chase even higher ground. At the same time,
if present price hikes are interpreted as reflecting concerns over future supply
interruption and if there will emerge a shift in perception that the possibility of supply
interruptions is likely to be small despite the continuation of the political turmoil,
excessive price hikes may drop out. In any case, we may have to keep close watch on the2

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Egypt crisis and its spillover effects for the immediate future.
In addition to these effects as seen from macroscopic viewpoints, there are someeffects to which I pay attention from a slightly different viewpoint. Given the growing
anti-government movements and citizens’ discontent behind such movements, we may
fear that energy pricing system rationalization measures including the reduction ofenergy subsidies as considered in many developing countries including those in theMiddle East could come to a lull. Energy prices as well as food prices are significant forconsumers. Energy price hikes might have become more difficult particularly incountries that are dominated by low-income, unemployed and other socially vulnerable
people or that are attempting to stabilize society through pork-barrel spending on anaffordable supply of daily necessities. At least, such countries may grow more cautiousof raising energy prices. In countries that set energy prices at lower levels, energy
demand tends to increase substantially. Over the recent years, many developing
countries have moved to consider enhancing energy conservation policies andrationalizing energy pricing systems in response to rapidly growing energy demand.
But the political crisis in Egypt could make it difficult for developing countries toimplement energy demand conservation measures including the rationalization ofenergy pricing systems. Rather, financially rich countries may growingly favor energy
supply expansion policies. These future developments are still uncertain at present. But
we may have to closely watch influences of the Egypt crisis on the energy supply anddemand mix in the Middle East and other emerging countries.
Contact: report@tky.ieej.or.jp

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