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Crude calculations

10 April 2012 By Kevin Allison, Christopher Swann

Higher oil prices are yet another force pushing the euro area’s economies apart. They hit gross domestic product three times harder in Greece than in Germany, according to data from Moody’s Analytics. Ireland and Italy are big losers, too. With Iran worries driving prices higher and sovereign debt fears flaring up again, governments may be even more tempted to tap strategic petroleum reserves. But that won’t guarantee lower prices.

The rising price of crude has been among the best predictors of global recessions, preceding downturns in each of the past four decades. In the euro area, the pain is not spread evenly. While a $10 increase in the price of a barrel of oil subtracts just 0.28 percentage points from German growth a year later, the damage to Ireland and Italy is twice as large, according to Moody’s.

Hapless Greece, which imports four times as much oil per unit of GDP than France, suffers most of all with a 0.8 percentage point slowdown in growth. The effect is magnified in sunny countries, since tourism suffers when petrol or jet fuel prices rise.

For crisis-hit countries already grappling with austerity, higher oil prices could complicate efforts to grow out from under onerous debt loads. This may affect policies concerning strategic or emergency reserves. So far France is the only euro zone country to explicitly state that it may join the United States and UK in tapping spare supplies. But with rising Spanish bond yields already thrusting Europe back into crisis mode, other vulnerable countries might be tempted to go along.

The problem is that there is no guarantee that would drive prices down. Europe’s reserves are mostly refined products, not crude. And Germany, home to Europe’s biggest stockpile, remains opposed to tapping its supplies. Even if it could be convinced, any deterioration in the geopolitical standoff over Iran’s nuclear programme could just as easily send oil prices higher, regardless.

The best Europe’s hardest-pressed economies can hope for is that the threat of a strategic reserves release keeps Brent hovering around $120 a barrel – far from comfortable, but not high enough to choke off growth completely. For countries already battered by the debt crisis, that’s hardly a consolation.


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