The Suez on the knife’s edge

Spearhead Analysis – 28.08.2013

By Enum Naseer
Research Analyst, Spearhead Research

The Suez on the knife’s edgeThe world has been there before, more than once, and if history is a good indicator of the future, we could be driven to the edge of disaster again, taken back to the years of Russou-Japanese wars (1904-1905) and WWII. A possible closure of a major geopolitical chokepoint: the Suez Canal in Egypt is not entirely a schizophrenic dream.

The international community is anxious and with good reason. The potential tremors in case of such an event will have devastating effects on the global economy which despite its ‘resilient dynamism’ is still not strong enough to withstand such a blow. The 101-mile man-made link between the Red Sea and the Mediterranean along with the 200-mile Sumed pipeline is a strategic trade route for oil and gas shipments to the West from the Gulf region that saves up to nearly 2,700 miles of transit. Closure would mean having to travel a considerable distance southwards parallel to the length of Africa and sailing past the Cape of Good Hope to reach the Atlantic waters: the cost and shipping time will shoot up significantly.

The ripples will go even as far as the subcontinent where there is an appetite amongst the more bourgeoisie classes for imported high-end products coming from the West through the canal. For Egypt itself too, the Suez Canal is crucial: it helped earn $2.4 billion during the first half of 2013. Nearly 3% of the world’s oil supply (2.5 million barrels) goes through every day and almost 8% of global trade transits the canal.

Even speculation spells disaster when it comes to hypothetical crises in the Suez region. The triggers of global anxiety and panic are beginning to take shape and there is talk of darker times ahead for the oil markets as Brent hit a four-month high of $111.53 on August 15, 2013 owing to concerns that violence in Cairo could affect the Suez Canal. “Bloodshed and unrest in Egypt and the disruption of oil supplies from Libya have put a floor under oil prices,” said Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.

Naysayers in the debate continue to argue that a complete closure of the canal and pipeline is not likely. This argument is substantiated by the fact that despite all the chaos and violence in Egypt, the USS Truman carrier strike group has recently transited the Suez Canal into the U.S. 5th Fleet area of responsibility in a manner that was “routine” and “safe” according to navy officials.

For a former U.S. intelligence officer, Cedric Leighton (who helped train Egyptian military officers), an “an outright civil war” would send the alarm bells ringing. Leighton also emphasized that it is very likely that the government will be successful adding that “it will probably get worse before it gets better”.

Geopolitical strategist at Barclays (BCS), Helima Croft has stated that the closure of the canal would be at the military’s discretion and that the institution would not “deprive Egypt of that hard currency and further antagonize the West”. She opines that the Suez will remain open adding, however, that there are legitimate concerns regarding “one-off attacks”.

Yet however far-fetched or unlikely it is considered, the situation instead of self-correcting could in fact easily spiral out of control. In hoping for the best, thus, it would be naïve to not prepare for the worst on the premise that a complete blockage of the canal has not happened in the past 38 years and will not happen even in the face of war. The narrative of continuity of the trend is flawed: access was restricted twice prior to the nationalization of the canal by Nasser. Post-nationalization too, history could surprise us with its characteristic predictability as the same thing might happen albeit for different reasons.

Between normalcy and chaos in the Suez region stands the threat posed to stability by Sinai-based Islamic insurgents. The militant activity has quickened the pace of its operations post the military coup. Even with Morsi no longer in power and the Muslim Brotherhood’s claims of not contributing to the increase in violence following his ouster, the Egyptian wing’s will to reassert its influence as part of a larger movement through one means or other has not died down.

Another heavily debated possibility is that the military government could use the canal to blackmail the West for more aid. Although this cannot be completely ruled out either, it can be argued that Egypt has more to gain by allowing the free and unrestricted movement of goods through the Suez. There are geopolitical interests at stake too that make the equation more complicated: a tussle between the West and the Gulf has ensued as both are picking opposing sides (at least from the looks of it), vis-à-vis the ideal form of government in Egypt with the former also strongly condemning the use of violence by the military regime.

These dooms day scenarios could shift the locus of attention to the South China Sea which would gain significance as a Pacific Fleet conduit to South Asia where establishing and expanding bases would become a top priority. Yet these are hypothetical scenarios and as of now, the crisis has not entirely gone out of control. Hopefuls still argue that businesses are not worried by the current events: maritime insurers are by and large, relaxed (Lloyds of London is one such example).

A tempest may be in the making or it could just be another false alarm. As for now, Egypt finds itself on the knife’s edge struggling to maintain its balance as the world looks on.  A dearth of clarity is heightening global angst and is likely to spread like wild fire given the volatility of the Arab region.  The global economy is at stake, one wonders if the remaining components of “trifecta”, the shale oil boom and the South China Sea together can help insulate it against these shockwaves.