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The Middle East, Oil and Volatility

Countries in the middle east are revolting against the status quo and looking for a better life.  If the citizens succeed, then this should be great news in the long run.  Unfortunately, the turmoil in the middle east can cause devastating dislocations in the price of oil which could really stifle the global recovery.  $100 oil and $4/gallon gas is very tough on the average consumer, but the new highly touted target of $200 oil could be devastating.

$3.70 + makes for pain at the pump

Egypt and Libya’s seizure in oil production would not be the catalyst that would send oil prices skyrocketing.  The silent bomb is the Suez Canal, the 120 mile canal in Egypt that directly connects the Red Sea to the Mediterranean, which means it connects the Oil Supply from Saudi Arabia and the Gulf to Europe and the United States.  Without the canal, ships have to travel around the southern tip of Africa which adds 6000 miles or 15 days of transit to Europe and 8-10 days to the United States.  How much oil ships through the Suez Canal?  5% of total sea borne oil transport.

So what else is in Egypt you ask?  The Suez-Mediterranean Pipeline, or SUMED pipeline.  A total of 2 million barrels per day travel through the Suez canal, but a larger total of 2.3 million barrels travel through the SUMED.

Sure, Libya and Egypt together only produce about 2.5 million barrels per day, but add in the 4 million barrels per day that could be disrupted from the closure of the Suez canal and/or the SUMED and we are looking at a pretty large economic event.

On top of these unknowns, we have the wild card of Saudi Arabia which comes in at #1 with over 10 million barrels per day of production.  If the Saudi population starts its own violent revolution, then we can truly be looking for record high oil and gasoline prices within days.

I guess this geopolitical backdrop just gives me a little bit of pause about being too exuberant about the recovery.  Warren Buffet might be looking through his rose colored glasses, or he might just be seeing his purchase of the more fuel efficient Burlington Northern trains as a godsend with record high diesel prices on the horizon.

Posted in Economics, Markets, Media, Politics.

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