Middle East Unrest Could Harm Struggling European Economies

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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 political trouble in the Middle East, but there is a risk of contagion.

Not a 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 have driven Brent crude to $107.60 this week.

The world faces a 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 a long period of time. 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 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 financial security of nations like Portugal is based on austerity, higher taxes, and GDP recovery. Economic growth in these nations may be badly hurt by higher oil prices. That is also true for the U.S. and China. The U.S., however, has a large services sector that 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, which helps cash-strapped countries, to EUR500 billion. The tipping point for a Portugal bailout could be the unexpected high price of oil.

Tripoli is not very far from Lisbon, and the distance looks shorter every day.

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Douglas A. McIntyre

Douglas McIntyre is editor of 24/7 Wall St.

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