Unrest Unsettles Global Markets

By NELSON D. SCHWARTZ

Published: January 30, 2011 e

On Wall Street, it’s what’s known as an exogenous event — a sudden political or economic jolt that can’t be predicted or modeled but sends shockwaves rippling through global markets.
Investors have largely shrugged off a series of these unexpected jolts recently, such as the sovereign debt crisis in Europe, but the situation in Egypt has the potential to cause more widespread pain, especially if oil and other commodities keep surging or the unrest spreads to more countries in the Middle East.
While Egypt’s banks and stock market were closed because of the protests there, other Middle Eastern markets shuddered in trading Sunday, with shares in Dubai falling by 4.3 percent, paralleling a 3.7 percent decline in Abu Dhabi and 2.9 percent fall in Qatar.
Last week, the Dow Jones industrial average nearly surpassed the closely-watched 12,000 level, but the index fell 166 points in late trading Friday as the protests in Egypt intensified and oil prices rose 3.7 percent to $89.34 a barrel.
With the United States economy seeming to gain a foothold only recently — new government data released Friday showed the economy grew by 3.2 percent in the fourth quarter of 2010 — a sustained rise in oil prices could choke off growth, analysts said. It could also undermine the more general optimism that lifted the Standard and Poor’s 500 index by 1.5 percent in January, following a 12.8 percent jump in 2010.
“A one-dollar, one-day increase in a barrel of oil takes $12 million out of the U.S. economy,” said Jason S. Grumet, president of the Bipartisan Policy Center, a Washington research group. “If tensions in the Mideast cause oil prices to rise by $5 for even just three months, over $5 billion dollars will leave the U.S. economy. Obviously, this is not a strategy for creating new jobs.”
Until now, the rising stock market in the United States has defied several other outside threats, including the threat of food inflation, interest rate increases in China, and the continuing sovereign debt troubles in Europe, said Sam Stovall, chief investment strategist of Standard & Poor’s equity research group.
“But as is usually the case, a boxer never gets knocked out by a punch he’s looking for,” Mr. Stovall said. “This could be what triggers the decline. Geopolitical events are very, very hard to model.”
Egypt is not an oil exporter — nor is its stock market a regional heavyweight. As the home of the Suez Canal and the nearby Sumed pipeline, though, it is one of a handful of places classified as a World Oil Transit Chokepoint by the United States Department of Energy, and events there can have an outsized impact on energy prices. According to the department’s figures, about 2.9 million barrels a day passed through the canal and the pipeline in 2009 — about 3 percent of global production.
As a percentage of world oil demand, that may not sound like much, said William H. Brown III, a former Wall Street energy analyst who now consults for hedge funds and financial institutions.
“But prices are determined at the margin and that’s a lot of oil in markets these days,” said Mr. Brown, who estimates that global spare production capacity stands at about 2.5 million barrels, the bulk of which are in Saudi Arabia.