Will the unrest in Egypt cause oil prices to go up even higher?

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Answered by: Elseline, An Expert in the Matters Category
After over a week of protests, things have not yet taken a turn for the better in Egypt. As people watch what is happening in Egypt from around the globe, the concern quickly becomes, how will this impact our lives?

Now, granted, many of the questions in the media in the U.S. focus around the stability of the region, especially the continuation of peaceful relations with Israel. But for others, this question hits closer to home: will the unrest in Egypt cause oil prices to go up even higher? With most in the U.S. now paying over $3.00 a gallon for gas, this would not be a good thing. Especially not in light the hard hit many households have taken due to the economic crisis.

Egypt is home to the Suez Canal and the Suez-Mediterranean Pipeline, and the Canal provides the main gateway for oil being shipped between the Middle East and the West. If the Canal is shut down or passage through the canal is otherwise compromised, crude oil prices can and will skyrocket. Ships would have to travel around the Horn of Africa to the south, adding over 6,000 miles to the journey.

Some of the older generation will recall the Suez Canal crisis in 1956 and then during the Six-Days War in 1967 and the Yom Kippur War in 1973. Use of the canal was indeed compromised during the Suez Crisis, and the other wars mentioned above. This hit the Western economies who were and still are so dependent of foreign oil, very hard. In the days when my father was growing up, they would have car-free Sundays in the Netherlands, a policy implemented to conserve energy. These types of policies, along with alternate transit ideas, where implemented all over the Western world as direct result of the Suez crisis in 1956 and later crises in 1967 and 1973.

So is that a real danger now? With the current WTI Crude oil price at $89.12, and Brent Crude oil at $99.82 dollars a barrel, prices have gone up over the past week, peaking at $103 a barrel in the Brent crude oil index. (Interestingly enough, if one looks at the prices of crude oil even over last month, the one that has changed significantly in price is Brent Crude oil, whereas WTI has remained within a somewhat stable range throughout the month).

And to be sure, there is a direct correlation between conflict or instability in the Middle East, and crude oil prices, as seen over the past decades. However, just as quickly as oil prices can rise, they also fall. Take the incredible peak of $145 a barrel for WTI Crude oil in June of 2008. By December, that price had already fallen back to $30 a barrel.

The unrest in Egypt can cause instability in oil prices, and it is something the average consumer in the U.S. can and should watch for. However, jumping the gun and saying that the domino effect of instability in the region will cripple the oil market in the long-term, is somewhat presumptuous. Right now, the outcome of unrest in Egypt is anyone's call, and we should avoid fear and instead be wise and alert in watching events unfold.

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