Risks to the Suez Canal Set the Stage for Falsely Hyping the Price of Oil

Over the past days, the airwaves and talking heads have been frightening us with somber predictions of what would happen to the price of oil should current events in Egypt shutter the canal. The oil boys and their allies can barely contain themselves in their appearances of concern and like minded predictions of calamity, such as today's Reuters report quoting Imad al-Atiqi, member of Kuwait's Supreme Petroleum Council -- "I expect oil to reach $110 during the first half of 2011... A huge amount of oil passes through the Suez Canal..." thereby ever nudging oil prices skyward with Brent Crude already surpassing $100 a barrel. Yet has anyone stopped to determine what the closure of the Suez Canal would actually mean to the oil market in dollars and cents?

In the shipping world the type of vessel that can transit the Suez Canal has its own designation, named a "Suezmax" category. The typical deadweight of a Suezmax oil tanker is about 240,000 tonnes.

Now, approximately 7.1 barrels of oil make up one metric tonne. Therefore, a 240,000 tonnes deadweight tanker carries some 1.7 million barrels of oil. According to the New York Times, "Taking cargo around Africa would add about 16 days time to delivering oil to world markets."

Calculating a per diem charter rate for a Suezmax tanker at $50,000 per day (and probably less), brings the additional cost of transporting a cargo of oil, lifting 1.7 million barrels around Africa, to $800,000 per voyage. More to the point, the additional cost per barrel of oil would be 47 cents per barrel. And these 47 cents would apply only to the some 1.8 million barrels of crude oil that are transported through the canal (an additional 2mm plus barrels can be transported through Egypt overland via the Sumed pipeline).

The additional cost of $800,000 for transporting these 1.8 million barrels around the horn of Africa, distributed over the world's daily consumption of oil of 85 million barrels, would settle out at just under a penny per barrel.

All said, the additional 16 days would be a problem if the oil market were in a state of hand to mouth. Fortuitously, oil stocks are bulging throughout the world and the sixteen days additional steaming time can be easily accommodated with ample leeway to alter delivery schedules factoring in these changed logistics.

Clearly, the closing of the Suez Canal to the oil trade would be a hindrance but hardly the disaster portrayed in the media and our friends at OPEC.