Egypt Turmoil and Our Energy Supply: The Big Picture

Egypt’s turmoil looms large over the world’s energy markets, but not for the reasons you might think.  Egypt currently produces about 750 thousand barrels per day (BPD) of crude oil, which barely covers the country’s growing internal consumption.  Regardless of whether a shutdown is short- or long-term, Egyptian exports will not be missed on the world market.

But if there is an Egyptian revolution, the consequences may reach far beyond the Nile delta.

Global Supply and Demand

The global market for crude oil is balanced on a knife edge.  In round numbers, the world’s total consumption of oil is about 85 million BPD.  The market is in equilibrium when the total production capacity exceeds consumption by a million or two barrels per day, the slight excess supply covering for the hiccups that may occur in transportation or refining.

When there are more than a couple of million barrels per day of excess production capacity, prices can plummet, as they did in late 2008.  When all the tankers, pipelines, and tank farms are full, the incremental barrel has very little value.  Conversely, when demand outstrips supply, prices can skyrocket.  Refiners and other consumers bid up the price per barrel, rarely curtailing demand because oil is a uniquely valuable transportation fuel and chemical feedstock.
Oil’s recent low, about $32 a barrel, occurred just two years ago this month. Since that time, the price has steadily marched back into the $90 range, despite a protracted recession.  That’s a sign that there’s no real excess supply.  The lack of slack in the market means that we are vulnerable to supply interruptions.  An abrupt shortfall of supply could lead to price spikes that would be as dramatic as they would be painful.

Transportation: Tankers and “Choke Points”

About half of the world’s 85 million BPD of crude oil production makes its way to market in ocean-going tankers.  And at any given time, petroleum accounts for about half of the cargo tonnage at sea.  Getting oil from where it’s produced to where it’s refined and consumed is a huge international enterprise.

There are a handful of critical “choke points” in the oil lanes, where marine traffic is dense, slow, and vulnerable.  Listed below are the main choke points, along with the average daily flow of crude oil through each (2009).

· Straits of Hormuz (Persian Gulf)—15.5 million BPD

·  Straits of Malacca (Malaysia/Indonesia/Singapore)—13.6 million BPD

·  Suez Canal/SUMED Pipeline (Egypt)—2.9 million BPD

·  Bab el Mandab (Yemen/Djibouti, entrance to Red Sea)—3.2 million BPD

·  Bosporus (Turkey)—2.9 million BPD

·  Danish Straits (Denmark/Norway/Sweden)—3.6 million BPD

The Red Sea/Suez route is vital for the European market, which consumes about 15 million BPD of petroleum.  Persian Gulf oil and refined products bound for Europe would reroute around Africa, increasing transportation costs.  As oil is a global commodity, U.S. consumers would likely see their prices rise as Europe would bid up available supply alternatives.

A temporary closure of the Suez/Red Sea route might be likely if the Egyptian uprising turns out to be short-term and limited in scope.  A relatively orderly transition from the Mubarak regime to another regime with stable relations with the West may be our best outcome at this point.

If, on the other hand, we are witnessing the beginning of a general upheaval in the Islamic world, leading to Iran-style theocratic regimes in several states, the consequences for the West are much more unsettling.

Consider the list of choke points again.  Five of the six are bordered by Islamic states.  A hostile regime, or even a well-equipped terrorist organization, might wreak havoc on global energy markets.

It’s troubling that the Egyptian uprising was sparked by events in Tunisia, and in turn led to anti-government demonstrations in Jordan and Yemen.  Let’s hope it doesn’t spread any further.

U.S. Policy

The 83-year-old Mubarak has lost control of events in Egypt.  Preserving the status quo is not an option.  Our best outcome is an orderly transition, and one that does not involve the Muslim Brotherhood.

Domestically, policy makers need to face reality.

The U.S. Energy Information Administration (EIA) predicts our economy will consume more petroleum in 2035 than we currently use.  The Obama administration’s refusal to accept the strategic importance of oil as it advances “green alternatives” makes us ever more vulnerable geopolitically.  Wind and solar energy generate electricity.  They are neither transportation fuels nor oil substitutes.

Americans, living and working in the United States, know how to explore and develop our domestic oil and gas resources safely and with respect for the environment.  We are held at bay by a distrustful and hostile government in Washington.