Egypt – Is it the Tip of the Iceberg?

Over the past few weeks, there has been much media coverage over Egypt. We see daily images of people protesting in the streets, and then almost a ceasefire when it comes to prayer time. Once prayers are said then it is back to protesting.

Egyptians have grown tired of Hosni Mubarak and the National Democratic Party. Egypt has been in a state of emergency since 1967, which was when the president was given unilateral control. Firstly Nasser, then Sadat who was assassinated in 1981 and then Mubarak. From his privileged position Mubarak, like the recently deposed Tunisian President, managed to accumulate almost unprecedented wealth for themselves and their families.

The real question is why are the people revolting? Is it really because they just don’t like the president or is it because of the massive increases in the price of food staples? Realistically it is both of these. Simply changing the head of state is not going to have a major impact on the price the locals pay for food. Egypt is a country where unemployment is now staggeringly high, with much of the population unable to pay for the necessities of life, and a currency that is under intense pressure. Unfortunately there seems little that can be done to lower commodity food prices particularly grains while the West continues down the biofuel route where unprecedented amounts of cropping land now grow crops for biofuel rather than grain for human and animal consumption. Egypt is reported to be the world’s largest importer of wheat.

For Western Countries this is a real recipe for disaster when their closest ally is now in a state of anarchy. This is why the western countries care. The way forward is an orderly transition of power to a new president that is politically acceptable to the Egyptian populous as a whole and also to the Western Powers that be.

Egypt is important for a number of reasons. The primary reason is for its role in providing stability to the middleast. Egypt and Jordan seem to be able to coexist with Israel. It has a very large military, with some pretty impressive equipment, much of which has been donated by the United States. Egypt of course has the Suez Canal. This is not really as important as it used to be, as increasingly more oil and freight is being carried by massive ships that are far too big to use the canal.

Most people’s vision of Egypt is historical. Images of pyramids, the sphinx, Cleopatra and the pharaohs come to mind, and there is also the biblical importance. This vision is what stimulates tourism which is the major driver of the Egyptian economy. Egyptian tourism died within days of the first protests.

When it comes to the global economy, the major concern about Egypt is the production and distribution of oil. Egypt is not a large oil producer, ranking only 29^th in terms of world oil production. The issue of contagion is the major concern. Egypt is not the only county in the region with an autocratic rule and great income inequality. Many of the states around the Persian gulf suffer from this as well. Because of this there is a high chance of a spike in oil prices.

An International Energy Agency study in 2004 found that even a $10 per barrel increase in oil prices had the potential to cut US real GDP by 0.3%. If oil prices rise to $145 per barrel (oil peaked at this level in 2008) the US economy would take a hit of 1.5%. This would halve GDP growth, something that really needs to be avoided for world economies to grow.

So in conclusion, while we continue to have unrest in Egypt which could develop into a major Middle East problem, there is a strong possibility of a global economic impact.