Investment implications of political turmoil could span beyond oil

By DAVID MOON, Moon Capital Management, LLC
February 27, 2011

What, if any, are the investment implications to the political turmoil in Egypt?

The Egyptians have experienced some sort of political unrest since Moses and the ten plagues. More recently, the country has been governed in an official emergency status since Egyptian President Anwar Sadat was assassinated 30 years ago.

This is not new territory.

Violence, protests and general social malaise are fairly common in this area. Some people may think that the resignation of Hosni Mubarak and the rise of the Muslim Brotherhood signals the beginning of the end of the world, but folks have been predicting that for at least 2,000 years.

Despite being located across the Red Sea from oil-rich Saudi Arabia, Egypt is a minor player in the production of world oil supplies. Surprisingly, the Suez Canal is not as crucial for oil as you might imagine, as the largest supertankers can’t even squeeze through the 120-mile ditch.

In 1956, Egyptians sank ships in the Suez to block cargo transit through the canal. Europe experienced massive oil shortages. The US, which gets most of its Middle East oil via tankers sailing around the Horn of Africa, experienced none.

A real economic risk from the region, however, is the spread of protests throughout the Middle East and North Africa. Revolts have already toppled leaders in both Egypt and Tunisia. Libya may be next. New anti-government protests have also erupted in Bahrain, Yemen and Iran. Trying to head off their own problems, leaders in Jordan, Syria, Morocco and Algeria have taken proactive steps to attempt to buy social peace, while retaining power.

Combined, those ten countries account for 13 percent of the world’s oil production. Approximately 35 percent of the world’s production comes from the entire area. Egypt isn’t a major oil player, but combined, the areas of unrest represent a massive risk.

Each one percent imbalance in oil production/consumption results in an approximately $10 per barrel change in the price of crude oil. And each $10 per barrel of oil price increase places a drag on the US economy that reduces GDP by about 0.3 percentage points. Translated, a five percent reduction in world oil supply would have cut the 2010 US GDP growth rate by more than half.

Another possible impact from this unrest is a less obvious potential risk to food prices. Egypt accounts for 8 percent of global exports of urea, a key ingredient in the production of all nitrogen-release fertilizers. Tunisia controls 4.5 percent of the world’s phosphate rock production. More than 90 percent of all phosphate rock is used to produce fertilizers and animal feed supplements.

An interruption in the world supply of either of these key minerals could wreak havoc on food prices. Annual food price inflation in Egypt is already 12 percent and is expected to rise this year.

Possibly the most telling revelation from the Egyptian situation, however, is about the changing world-wide perceptions of the US. The US dollar and treasury bonds typically experience a “flight to safety” phenomenon in situations like this.

That has not occurred. It speaks volumes about the diminished financial strength of the US.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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