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Forget oil, Egypt has severe implications for global food prices

by Dylan Lobo on Feb 02, 2011 at 00:01

Forget oil, Egypt has severe implications for global food prices

Oil has surged through the $100 a barrel mark on fears over the stability of oil flows through the Suez Canal, but behind the scenes a far bigger problem is building up in agricultural commodities.

This week marked the first time oil breached the $100 mark since October 2008 and with little sign of the problems in Egypt subsiding and fears of contagion across the Middle East, there’s every chance the price of oil could continue to rise in the near-term.

However, quantifying the impact Egypt has had on the price of oil is not clear cut. As far as Capital Economics is concerned, the price of oil would have hit this level sooner or later due to the pick-up in global demand since the lull last summer.

Yet analyst Julian Jessop does not believe that oil prices are sustainable at this level as Opec has plenty of room to increase supply to offset shortfalls in Egypt’s oil exports. While he accepts that oil prices will rise sharply if there were any serious disruption to production elsewhere in the Middle East, he feels like this is an unlikely scenario and expects oil to drop to around $75 in 2012.

Although Jessop is sanguine about the impact on oil, he is far more concerned about the impact events in Egypt will have on agricultural commodities. He points out that the increases in agricultural commodity prices are different because they mainly reflect supply shocks, which have been compounded by export bans and hoarding.

Jessop illustrates how the problems in the Middle East exacerbate this situation. He said: ‘Extreme weather conditions last year damaged crops in many parts of the world, notably harvests of wheat and sugar.

‘The resulting increases in food prices have contributed to social unrest in many countries, including in Egypt. Governments in the rest of the Middle East and elsewhere, fearful of contagion, are responding by restricting exports of agricultural commodities and/or increasing imports to add to precautionary stockpiles.’

Jessop believes the problems in Egypt set a dangerous precedent for commodities and the impact this has on the global economy could be severe.

‘Even if the crisis in Egypt eases soon, the actions taken by governments elsewhere to prevent similar uprisings in their own countries could maintain the upward pressure on global agricultural commodity prices for even longer,' Jessop says.  

‘This is of course another headwind that the global economy could do without, and another reason to expect the recovery ultimately to disappoint.’

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