Geopolitical events in Egypt impacting Financial Markets: Thoughts from Economists

By: Joseph A. LaVorgna

Geopolitical events in Egypt appear to be impacting financial markets. However, as an isolated event we expect it to have little impact on the US economy. The dollar value of Egyptian GDP (as of 2010) was $214B USD for a
population of roughly 85 million people. Annual exports to Egypt from the US over the past several years have been roughly $5B-6B, so the direct implications from stalled demand should be relatively small.

The main risks as we perceive them are threefold:
1) a disruption of oil exports through the region;
2) geopolitical contagion into petroleum producing areas which would lift oil prices; and
3) heightened risk aversion.

While Egypt is not a major oil producer, a significant amount of oil flows through both the Suez Canal (2 million barrels per day) and the Sumed pipeline (3 million barrels per day)—or about 6% of daily oil production.
Any disruption would be temporary, since crude could be rerouted around the Horn of Africa. While WTI crude prices are up $3-4 per barrel today, prices are still about $3 below their high for the year ($92.87 per barrel). Near current levels, we do not expect oil prices to pose a significant risk to the economy; we would become more concerned about an oil-shock if prices approach $125 per barrel. However, we do not believe this would happen unless there was more significant spillover in the region, and our best guess is that these incidents will remain contained. In conclusion, we think there are only minimal marginal risks to the economy from the unrest in Egypt .

Distributed by IntelBuilder Social Media Platform