Tuesday, August 20, 2013

Egypt as a window into to the near future - a post peak Gulf


 Here's  a pretty good article from the Atlantic showing some of the underlying factors in the current Egyptian unrest .  (and the future unrest in other MENA states)    It seems that people will put up with a military government for a long time, as long as food is cheap.  !!   ( And the experts have put a number on it - 210) 

  "According to the New England Complex Systems Institute, if food prices go over a threshold of 210 on the FAO Food Price Index, the probability of civil unrest is greatly magnified."

    Of course, governments can assure cheap food by subsidizing prices.  As long as they can afford it.  It helps to have a reliable source of revenue.  Like, for instance ,  the export of oil.

    But, a country can only export oil as long as production remains above domestic consumption.

"Since 2010, oil consumption--currently at 755,000 bpd--has outpaced production. It is no coincidence that the following year, Hosni Mubarak was toppled."

NB: For a quick review of the MENA net export situation here is a glance from Robert Hirsch's blog


Underlying growing instability is the Egyptian state's increasing inability to contain the devastating social impacts of interconnected energy, water and food crises over the last few decades. Those crises, already afflicting other regional states like Yemen and Syria, will unravel prevailing political orders with devastating consequences--unless urgent structural transformation to address those crises becomes a priority. The upshot is that Egypt's meltdown represents the culmination of long-standing trends that, without a change of course, can only escalate with permanent repercussions across the Middle East and North Africa (MENA), and beyond.
A major turning point for Egypt arrived in 1996, when Egypt's domestic oil production peaked at about 935,000 barrels per day (bpd), dropping since then to about 720,000 bpd in 2012. Yet Egypt's domestic oil consumption has increased steadily over the past decade by about 3 percent a year. Since 2010, oil consumption--currently at 755,000 bpd--has outpaced production. It is no coincidence that the following year, Hosni Mubarak was toppled.


The impact on Egypt's state revenues has been dramatic. Energy subsidies amount to $15 billion a year, about a quarter of the entire budget, driven largely by expanding consumption needs for a growing domestic population. Over the last decade, Egypt's gas use has almost doubled, nearly matching production, further limiting the country's exporting capacity and, thus, hard currency revenues , reserves of which have more than halved in two years. Around another $3 billion a year goes to food. In total, 10 percent of its GDP is spent on subsidies.
With state revenues declining, how had Egypt sustained levels of growth of around 7 percent in the two years preceding the 2008 global banking crisis--even winning praise from the World Bank, which described the government as a "top reformer"?
The answer is simple: Egypt had financed increasing expenditures through one core mechanism: borrowing. Over the last decade, government debt has averaged about 85.5 percent of GDP. In 2011, Egypt registered a balance of payments deficit of $18.3 billion . The situation has become unsustainable as the state is increasingly unable to service myriad debts, has desperately attempted to identify viable sources of new oil and gas imports, but cannot muster the capital to secure them.


As energy accounts for over a third of the costs of grain production (pdf), high food prices are generally underpinned by high oil prices. Since 2005, world oil production has remained on an undulating plateau that has kept prices high, contributing to surging global food prices. According to the New England Complex Systems Institute, if food prices go over a threshold of 210 on the FAO Food Price Index, the probability of civil unrest is greatly magnified.

Global wheat prices doubled (pdf) from $157/metric tonnes ($173/ton) in June 2010 to $326/metric tonne ($359/ton) in February 201 (the same month Mubarak fell) while half the population was dependent on food rations. That year, the FAO Index averaged about 228, the highest since FAO started measuring international food prices in 1990. The second highest average occurred in 2008--the same year Egypt experienced violent clashes over government-subsidized bread in different cities, leading to 15 people being killed and 300 arrests.
Since then, the index has hovered consistently above 210, and in May 2013 before Tahrir Square was flooded by millions of Egyptians, it was at 213. Although currently at 205, the Worldwatch Institute warns that food prices willtrend higher and be more volatile in coming years and decades. This is consistent with the last decade, over which the World Bank global food price index has increased 104.5 percent, at an average annual rate of 6.5 percent.
Perhaps the biggest driver of rocketing food prices in 2011, however, was the unprecedented impact of climate change in the world's major food basket regions, pushing up global cereal prices to record levels.
Droughts and heat-waves in the U.S., Russia, and China since 2010 led to a sharp drop in wheat yields, on which Egypt is heavily dependent.
That same year, Egypt's water shortages sparked tens of thousands of people to take to the streets in different parts of the country, primarily farmers protesting the growing inability to irrigate their farms--making tens of thousands of hectares of farmland impossible to cultivate. Egyptians in the 1960s enjoyed a water share per capita of 2,800 cubic meters (98,881 cubic feet) for all purposes. The current share has dropped to 660 cubic meters (23,307 cubic feet)--well below the international standard defining water poverty at 1,000 cubic meters (35,314 cubic feet).


But another major worry is oil production. New evidence suggests that the Gulf powers face the prospect of imminent production peaks. Leaked State Department cables show that the US government privately believes that Saudi Arabia's oil reserves may have been overstated by as much as 300 billion barrels--nearly 40 percent. By around 2020, Saudi Arabia will be unable to increase production , confronting instead a future of decline--indeed, its oil exports have already begun falling as it increasingly uses up production for domestic needs.
That in turn would mean a catastrophic loss of state revenues, not just for Saudi Arabia, but for the other Gulf powers which have much smaller reserves. The post-peak Gulf would not only usher in a world of extreme energy volatility--oil prices remain closely tied to production from the region--it would render these kingdoms highly vulnerable to the converging crises already at play in countries like Egypt, Syria and Yemen.
The implication is stark. If business-as-usual continues, Egypt today is very much a window into a near-future that would make dystopian science fiction look like high fantasy.

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