Yields on the five-year sovereign debt of Portugal rose over 7% as capital markets investors lost faith once again in the nation’s ability to right its economy. Past patterns, if they are followed, would mean the debt of Spain will also become more expensive to fund.
There would not seem to be much relationship between European debt and fear of contagion and political trouble in the Middle East, but there is.
Not one single EU nation is among the top 40 oil producers in the world. Italy and Germany are in the top 50, but their reserves are minuscule compared to those of Saudi Arabia, Libya and Iran. Concerns about an interruption of the flow of oil from any of these nations has driven Brent crude to $107.60 today.
The world faces potential shortage of crude if Middle East civil wars undermine exports.The Libyan government as already said so. Several large oil companies may cut production in the country. That is old news. What is not examined often is what happens to the financially battered nations of Greece, Ireland, and Portugal if oil prices stay higher than $100 for any long period. The cost of gasoline, heating oil, and petrochemicals will soar. The CIA Factbook puts Portugal’s industrial production at 23% of GDP. The figure for Spain is 25.5%. Not all of this production is based, even in part, on crude supply. But, the by-products of crude do fuel much of the world’s industrial production and virtually all of its transportation.
The financially security of nations like Portugal is based on austerity, higher taxes, and GDP recovery. Economic growth in these nations will be badly hurt by higher in oil prices. That is true even for the US and China. But, the US at least has a large services sector which dominates GDP. The Chinese government underwrites that price of energy to maintain economic growth. Small European nations are not as lucky.
It is fortunate that the EU has seriously considered raising the size of the European Financial Stability Facility that helps cash-strapped countries to EUR500 billion. The tipping point for of Portugal bailout could be the unexpected high price of oil.
Tripoli is not very far from Lisbon and the distance gets closer every day.
Douglas A. McIntyre
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