Oil Prices Hit 14-Month High As Violence in Egypt Peaks

The price of crude oil hit a 14-month high on Tuesday. The news comes on the heels of violence following a coup that saw the Egyptian military remove President Mohammad Morsi from power. 

The Arab Spring has shined a spotlight particularly brightly on Egypt, earning the Muslim Brotherhood the first opportunity to perform in the post-Mubarak Revolution. They failed to share power and adequately advance democracy in the Middle East's most populous country. Now, they are out of power.

At least 51 people died in clashes between pro-Morsi protesters and military forces in Cairo this past week, where President Morsi is reportedly being held under arrest. The Muslim Brotherhood has called for its supporters to continue protesting the military intervention, a decision that threatens more violence.

While it would be callous to use protester deaths as an economic indicator, it is important to consider the repercussions of violent political upheavals that have baffled political scientists and worked over the price of commodities for the past two-and-a-half years. World oil (and ultimately energy and food) prices generally rise due to increased demand or uncertainty over supply. More detrimental to global economic growth than high oil prices is when those prices rise too rapidly.

The swift escalation of violence in Egypt threatens to disrupt the Levant and North Africa, regions already politically fragile. Egypt is the first country to sign a peace treaty with Israel, and is a leader in the Arab world culturally, strategically, and economically. It's unclear how long the U.S. can keep providing economic support to a country that is undergoing a coup. The U.S. gives Egypt $1.5 billion annually, a practice that is illegal under U.S. law while a coup is underway in the country receiving the aid.

Turmoil in the Middle East can quickly drive up the price of crude oil worldwide. Political insecurity is not the only reason that prices increase, although it can be a serious catalyst for global economic uncertainty. Oil shocks have stymied the world economy for decades, with many originating from problems at the wells, OPEC meddling, or rapid increases in demand. Significant shocks can lead to recessions.

Egypt is not a substantial oil exporter itself, although it controls the Suez Canal and SUMED pipeline. Both of these are crucial legs in crude oil’s journey from the Middle East to western markets. The recent increase in oil price is not only a product of the coup — increased demand, especially from the U.S., has played a small part as well.

Egypt — and other countries throughout the region — must continue struggling to find a recipe for creating the bedrock that allows for peaceful democracies to take root and grow. Until they do, expect volatile oil and gas prices. The Egyptian military is the unchallenged arbiter of power, while the world waits for a truly Egyptian moment. Let's hope they are benevolent until then. The past week gives us reason to remain skeptical.