The oil threat
Europe fears that higher crude prices caused by the North Africa crisis could prompt a rate rise
In the middle of the recovery from recession, Europe is now facing the consequences of the winds of change sweeping through the political landscape in North Africa and Bahrain. The markets have seen two days of losses, but the most dangerous effect comes from oil. The massacre carried out by Gaddafi in Libya and the shutdown of at least a quarter of the crude oil production in the country- a situation that could last, given that European oil firms such as Repsol have suspended or drastically cut production- have pushed the price of a barrel of oil above $110. The price rises have not been reined in by the well-intentioned message of OPEC, which is prepared to increase production in order to offset the Libyan collapse.
The problem is that the markets are already assuming that the effects of the unrest will not end in Libya, whose production of 1.6 million barrels a day could be replaced with relative ease. That has prompted many European countries to announce that their energy supplies are not at risk in the short term. What is worrying investors is the chance that the rebellion could spread to other Arab states where the production levels are greater.
For the European economies, the main threat stems from the inflationary contagion that a rise in the price of oil might have, should the situation not stabilize in a reasonable time frame (a maximum of two months). The effect that oil has on prices is indexed: for every $10 price rise in a barrel of oil, inflation in Europe can rise as much as two points. But inflationary effects do not stem solely from oil prices. Over the last few months the price of foodstuffs and other raw materials has shot up. The rise in the price of wheat was one of the causes of the rebellion against Mubarak.
To fight inflation, central banks have hardly any other option but to raise interest rates. Increasing the price of borrowing would be the equivalent of putting the brakes on growth forecasts and the creation of jobs. In Spain, a rate rise in a period of very weak growth (barely 0.7 percent expected for 2011) would delay the arrival of net creation of jobs by six months at least. The supposed advantages of the crisis in North Africa, such as the rise in tourism receipts in Spain, would be derisory in comparison with the damage caused by a toughening of credit conditions.
The economic risks of the North African crisis are evident, but they are still not properly defined. They will depend on the amount of time that the troubles last, the state of the wells when stability returns and the political solutions that are offered. It would be desirable for a return to normality in the region to include the democratization of the countries in question. Whatever the case, the situation requires immediate European and national responses. The priority is to guarantee the energy supply. The Spanish government has announced an energy savings plan in response to possible supply problems. Let's hope this time that the plan is a serious one.
