Is $100 WTI Inevitable for 2011?

At the end of 2010, Wall Street predicted $100 oil.

Predictions can be self-fulfilling, and the mantra was that the global recovery would bring back high oil demand growth and with it, higher prices. Investors searching for a return should look to oil as a “sure-bet.”

And sure bet it turned out to be, thanks to demonstrations in Egypt.

There has been some confusion about why events in Egypt are bullish for oil prices. It is true that Saudi Arabia uses Egypt’s SUMED pipeline to move some of its crude oil to European customers. But that volume is both relatively small and easy to reroute. Estimates are that oil transiting through SUMED and the Suez Canal prior to the Egyptian unrest was about 2 million barrels a day (b/d).

In 2009, about 1.8 million b/d of crude oil and refined oil products transited the Suez Canal. The Canal’s shallow depth means it cannot service large oil tankers and thereby oil movements from the Red Sea are supplemented by shipments via the SUMED pipeline, which averaged 1.1 million b/d in throughput in 2009. Oil is 16 percent of the Suez Canal’s traffic, and canal revenue represents 3 to 4 percent of Egyptian GDP, a far smaller component to Egypt’s economy than tourism and worker remittances.

Egypt’s own oil production is similarly small at 525,000 b/d in 2009, and the country is a net oil importer.

Thus, the oil “effect” of the Egyptian crisis is really one related to the fear of political “contagion.”  Oil markets are jittery that civil unrest could spread across to the Persian Gulf, home to 25 percent of world oil production.

The idea that civil demonstrations could spread to oil producing countries is not completely without foundation. Kuwait’s mishandling of a civil demonstration against its government late last year stimulated an unsuccessful impeachment hearing against the country’s Prime Minister.

A few years earlier, a conflict involving local youths turned into a riot in the seaside city of Jedda, Saudi Arabia. Civil unrest was seen in Jedda in 2009 in the aftermath of a local mishandling of flood relief.

For those of us old enough to remember, unrest in Iran first gained momentum in the fall of 1978 when the country’s oil workers went out on strike in sympathy with protesting students. The ensuing cutoff of Iranian oil exports oil supplies caused a 20 percent jump in oil prices by year’s end. The Shah fell in January 1979, leading to the largest oil crisis the world had seen up to that point and a major economic downturn in the West that would last for years.

For now, there is no immediate evidence that oil traders are correct to bet on a “contagion” effect to important oil producing states of the Persian Gulf. The lessons of Arab history are that social, cultural and political movements rarely remain in Egypt. Gamal Abdul Nasser’s Pan-Arab socialism took hold in Egypt in the early 1950s. Iraq’s King fell in 1958; Syria’s socialist Baath party took office in 1963; Yemen’s revolution came in 1962 and Libya’s revolutionary Muammar Qaddafi rose to power in 1969. On the other hand, throughout that period of turmoil, the rulers of Saudi Arabia, Kuwait, the United Arab Emirates and Qatar, with their then small populations, remained firmly in power as traditional monarchies.  The question is – have times, given social media, rising unemployment and social problems in the Gulf, changed or not?

Thus, for the time being, until the fate of the Egyptian people is known, oil markets will likely remain on edge.