Most of us have watched with a mixture of fascination and dread how the Egyptian disease of starving masses (most Egyptians are under 30) has spread to Libya where the Kaddafi regime has unleashed the army to cease the revolt. So far it appears that Libya may go the way of Egypt. Although Libya supplies oil to the world (about 1.8 million barrels a day) it represents less than 2% of the world’s oil and a disruption should have little effect. The Libyan economy is smaller than Egypt’s and except for some oil companies, a stop in the flow will have little effect on either the world or the US economy. Also, there is unrest in Algeria, Mauritania, Morocco, Jordan, and Syria, to name a few other countries, where the demographics are similar to Egypt and Tunisia and Libya and the effect on the world economy will be small. But before we explore the impact of the Egyptian revolution on the American Economy, enjoy a little humor from youtube:http://www.youtube.com/watch?v=XovagJwwGAE
The good news: unless you’re heavily invested in Egyptian stocks, there isn’t much of a connection between your portfolio – or U.S. economic growth – and the riots in the streets of Cairo. A recent article by Steven Clemons of the New America Foundation (http://www.newamerica.net/publications/articles/2011/how_outcome_in_egypt_could_affect_the_united_states_44092) traces a few effects, most notably a rise in the price of crude oil prices until the resignation of President Hosni Mubarak sparked a downturn. However, the Associated Press notes that prices at U.S. pumps have been over $3 a gallon since January, well before the protests started.http://news.yahoo.com/s/ap/20110211/ap_on_bi_ge/us_oil_prices)
A second, much smaller effect is increased risk premiums on shipping insurance throughout the Middle East. Beyond that, the transition has triggered some anxiety about two issues: whether the rioting will spread to neighboring Saudi Arabia and affect U.S. oil imports, and whether the government transition might affect commercial access to the Suez Canal. So far there have been no indications of interruptions in shipping traffic, and the Saudi situation seems to be stable.
Egypt represents a very small portion of U.S. foreign trade, with just under $10 billion of imports plus exports in 2010 – about a sixth of the trading volume that we have with Taiwan, and far below the $500 billion of yearly commerce between the U.S. and China or the U.S. and Canada. Cairo’s stock market (represented by the Market Vectors Egypt ETF in the U.S.) is down 20% this year, but that is unlikely to affect global markets very much. Egypt’s stocks have a market capitalization of $78 billion. (For perspective, Apple Computer’s shares, in aggregate, are currently selling for approximately $309 billion.) Meanwhile, whatever government emerges in Egypt will have a huge incentive to avoid extremism and chaos. More than 5% of the country’s total economy comes from tourism from the Western nations, and Egypt is one of the largest recipients of U.S. foreign aid.
Where the real fear comes from is that Iran, Kuwait, Qatar, Bahrain, United Arab Emirates and most importantly Saudi Arabia all have autocratic regimes that are vulnerable to the same forces. All of these countries have a majority, if not close to a majority, of their population 30 and younger. So far, the larger oil exporting countries with the exception of Libya and Bahrain have had few demonstrations because even with incredible corruption the vast wealth from huge oil profits and a small native population has permitted the autocratic regimes to spread enough wealth to allow the citizens to afford food and shelter even with rising prices. This situation is different in the other countries we mention above. But the fear of violent regime change with new governments that are anti West, similar to Iran, has sent a shiver through the world oil and stock markets. The transition of governments, and the possible rise of democracy in the Middle East is certainly something to watch, but this may be another example of a crisis sparking more fear than substance, similar perhaps to the Greek debt crisis last year. The situation, looking only from an investment view, is a reminder that in emerging markets investments, sudden political shifts can have more impact on returns than market fundamentals and those shifts can and will impact US markets..
Foreign trade numbers come from the U.S. census bureau:http://www.census.gov/foreign-trade/top/dst/2010/11/balance.html
Egypt’s 2011 performance and market cap:http://www.investmentu.com/2011/January/egyptian-stock-market.html
