Knowledge Centre Archive
Oil, Water, Food and Money: A Macro View of Political Tensions
Ongoing political turmoil in Egypt led to the temporary closure of that country’s stock market and banking system and sparked a short-term flight-to-quality move in the bond markets (with investors buying U.S. Treasury securities) reminiscent of the eurozone crisis. Moody’s cut the country’s credit rating to Ba2 from Ba1, moving it one notch further into speculative territory. Regional unrest (Algeria, Ivory Coast, Lebanon, Jordan, Morocco, Oman, Sudan, Syria, Tunisia and Yemen) has raised questions about implications for financial markets.
Oil is the primary fuel of the global economy. Even the prospect of a disruption of the flow of this precious commodity can cause prices to rise dramatically. Although Egypt is not a significant exporter of oil (it consumes nearly as much as it produces), the deteriorating political environment caused oil prices to rise, as Exhibit 1 shows. From a low of $85.64 on January 27, futures prices jumped to $92.19 on January 31 before tapering off. The rise came despite the fact that the flow of oil from producers to consumers continued with no interruption.
In addition to oil, food prices are a significant factor in many of the countries experiencing social unrest and political upheaval. a senior economist for the United Nations’ Food and Agriculture Organization (FAO) warned that the political instability caused by rising prices could intensify if importing governments were to increase food demand.