Desert sands blowing into the gears of the economy

THE LAST time Egypt unsettled international markets this badly was in 1973. On 6 October of that year, the Egyptian army mounted a shock assault on the Israeli occupied Sinai Peninsula. After initially losing ground, the Israeli army rapidly recovered, fighting back until a ceasefire was agreed on 25 October.

The war, though relatively small, sparked off the Arab oil embargo, which increased the price of oil fourfold in a little less than a year. The result was fuel rationing in much of the West, as well the inflation that brought to an end the prosperity of the previous twenty years.

This week’s disturbances are not at all comparable to the events that started the energy crisis of 1973 – at least not yet. But they have injected a dose of uncertainty into the world’s economy just as things seemed to be settling.

The FTSE 100 declined by 0.3 per cent yesterday, after losing 1.4 per cent on Friday. Though oil companies gained, the travel company TUI lost around 3 per cent of its value while British Airways lost around 2 per cent. The French bank Societe Generale lost 2.26 per cent of its value. BP conversely was up 1.17 per cent, while the price of Brent crude oil briefly hit $100 a barrel for the first time in over two years.

And yet gold prices – which of late have had a habit of jumping during crises – fell, while most tourists in Egypt are reported to be continuing their holidays safely. If they are successful in toppling the 30 year-old Mubarak regime, Egypt’s protesters will have achieved a remarkable geopolitical feat, but they will not necessarily upset the world’s economy. Egypt remains relatively small, oil poor and unconnected economically to the rest of the world. So traders might well ask, why all the fuss?

The primary concern is oil. Egypt is not a major oil supplier, but the Suez Canal handles 8 per cent of the world’s trade and over 2m barrels of oil a day. If the disruption led to a closure of the canal, which has remained open since 1975, that could lead to an impressive hike in the oil price, as well as significant disruption to the broader economy.

More worrying even than that are the implications for other Arab nations. Until last week, Egypt’s regime was considered relatively stable and unlikely to be threatened. The frank dismissal of that notion has led to worries that other regimes, including the Saudi Arabian one, could also be at risk. Middle-Eastern countries are less important to the oil market now than they were in 1973, but they still account for 30 per cent of global oil production – so if the Egyptian instability spreads, it could well lead to an oil price panic.

However, few are predicting either of those events at the moment. As analysts at Barclays Capital report, the closure of the Suez Canal would likely require the Egyptian military to undertake, which Middle East experts consider unlikely. The analysts also observe that with a much greater proportion of African and Middle Eastern oil now consumed in Asia, a closure of the canal would be less devastating than it was.

So what should traders do to limit their exposure and even to make a profit? As Manoj Ladwa, senior trader at ETX Capital argued: “Markets are overdue a correction anyway – Egypt is just a catalyst towards that.” Goldman Sachs called the markets reaction to the Egyptian crisis overblown, but nonetheless gave a bullish outlook for the oil price. For the moment then, traders would seem well advised to go short on stocks then and long on oil. Companies with large exposure to Egypt such as TUI, Societe Generale or France’s Lafarge, are unlikely to see their share prices recover while unrest lasts. Given the possibility of a much deeper crisis in Egypt, they may yet fall further.

But no-one is sure what will happen at the moment. Consequently, the most important thing is to keep watching the news. The lesson of Middle-Eastern geopolitical history is that things can go badly wrong very quickly.

In 1881, an Egyptian Army Officer called Abdul Urabi launched a coup against the Ottoman Khedive. Fearing a loss of control over the Suez Canal as well as losses on the debt used to finance its construction, Britain mounted an invasion, starting an occupation that lasted until 1952.

Britain was kicked out of Egypt in 1952 by a group of army officers led by the Arab nationalist Nasser. In 1956, Nasser nationalised the Suez Canal, leading Britain and France, together with Israel, to mount an invasion. The war was stopped by American pressure on Britain.

● 1967 - THE SIX DAY WAR
In June 1967, fearing an attack by Egyptian and other Arab troops, Israel launched a pre-emptive air attack that crippled the Egyptian air force on the ground. The war established Israel as the region’s pre-eminent military power, but it also led to the shutting down of the Suez Canal for the next eight years.

The Yom Kippur war followed the six day war and was the last time Arab armies attempted to take on Israel on the battlefield. It led directly to the 1973 energy crisis and to permanently higher oil prices ever since.