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Oil prices spike over Egypt unrest: How worried should we be?

Concerns over the disruption of the Suez Canal has inflated the price of crude oil to its highest point in over a year, but analysts say the spike is likely temporary.

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People are seen near a ship crossing the Suez Canal near Ismailia port city, 75 miles northeast of Cairo, June 13. Global oil prices have been kept low because of a decreased dependence on Middle Eastern oil, whose transport through the Suez Canal would be affected by turmoil in Egypt.

Reuters/File

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As the unrest in Egypt reaches a boiling point, tensions are not the only thing on the rise. So are oil prices.

Analysts say the recent violent clashes between supporters of President Mohamed Morsi and his opposition have driven the global price of oil up over $100 a barrel as investors fear that instability might spread regionally and affect the global supply, reports the Associated Press.

Egypt is not an oil producer but its control of the Suez Canal, one of the world's busiest shipping lanes that links the Mediterranean with the Red Sea, gives it a crucial role in maintaining global energy supplies. The Middle East accounts for about a quarter of the world's crude oil output and over 2 million barrels of oil are transported through the Suez Canal daily.

As investors fear potential disruption to that crucial supply route, the price for crude oil rose $2.20 this morning, bringing it to $101.80 per barrel for August delivery, reports USA Today, while on London’s ICE futures exchange, bent crude rose to $105.45. Those are the highest prices posted in more than a year.

The spike comes as Egypt faces its largest political crisis since protests in February 2011 drove then-President Hosni Mubarak from power. Now, millions of protestors have mobilized to demand the resignation of his successor, Mr. Morsi. Meanwhile, Morsi's party, the Muslim Brotherhood, has called for its supporters from all over the country to rally against the opposition. 

Violence and the threat of clashes between the two groups led the country’s powerful military to issue an ultimatum to Morsi on Monday, giving him 48 hours to reach a deal with the opposition. So far, however, he has been defiant, and many are bracing themselves for a showdown.

Despite the crisis, analysts are saying that the reaction is exaggerated and that the price spike won't last. Reduced global economic growth rates have slowed demand for oil while supply has remained high, tempering the price of crude oil, reports the BBC. The situation in Egypt should not affect oil prices for long.

Global oil prices have also been kept low because of a decreased dependence on Middle Eastern oil, whose transport through the Suez Canal would be affected by turmoil in Egypt. According to The Wall Street Journal, the boom in North American oil production has stabilized the global crude market. While North American oil has not lowered prices, it has served as a buffer against shocks in the global economic system.

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Crude prices have remained remarkably stable over the past year in the face of a long list of supply disruptions, from Nigerian oil theft and Syrian civil war to an export standoff between Sudan and South Sudan. The reason in large part is a thick new blanket of North American oil cushioning the markets. This has "moderated" the market effect of recent outages, said Adam Sieminski, administrator of the U.S. Energy Information Administration.

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