Another reason Europe’s in crisis? A high oil bill
Why did Europe go from bad to total horrific panic in the last year? There are all sorts of theories: weak growth, the impact of austerity, missteps by central bank bureaucrats. But here’s another scapegoat offered up by the International Energy Agency: Europe’s soaring oil bill.
The IEA laid out some eye-catching numbers on Thursday: Between 2000 and 2010, Europe spent an average of $182 billion per year on oil. Then, in 2011, due in part to a civil war in Libya, Europe spent a record $488 billion on crude. In 2012, thanks to tight global supplies in the first half of the year and tensions with Iran, the continent is expected to spend well over $500 billion. To put that in context, the total debt of Greece, which has everyone sweating, is about $370 billion.
The IEA worries that the recent oil crunch has been bleeding Europe’s economy, which in turn has exacerbated the continent’s debt woes. “Prices at these levels are forcing households to either cut back on spending on other items or to increase their debt,” said Maria Van der Hoeven, executive director of the IED. “They are also undermining the profitability of companies that are unable to pass on fully higher input costs.”
Europe’s oil bill has become further swollen because oil is priced in dollars, and the euro has been falling sharply against the dollar. Although Europe’s more-efficient cars, denser cities, ample transit, and other efficiency measures have helped limit the damage, the continent has endured seen a steep surge (pdf) in oil payments:
But how much is oil really to blame for Europe’s problems? Trying to quantify the precise economic hit that the E.U. has taken from higher oil prices is tricky. After all, that extra $300 billion in oil costs or so isn’t a pure economic loss. The euros spent on oil don’t just vanish into thin air. Many of the countries that provide the EU with crude — particularly Norway, Russia, Saudi Arabia, the UAE — are also major destinations for European exports. So some of the money ends up getting recycled back into the European economy.
On the other hand, there’s a more subtle way in which high oil prices may have further contributed to Europe’s sluggish growth. The high price of crude has lately pushed inflation in the euro zone up past the European Central Bank’s target of 2 percent. And, as a result, the ECB has been highly reluctant to provide any more monetary stimulus to the rest of Europe. “The likelihood of inflation falling below 2 percent in the short run seems low,” wrote ING economist Peter Vanden Houte in a recent note. “A further rate cut seems out of the question.”
Recently, a number of analysts have been exploring whether energy prices have been an underrated contributor to the mess in Europe. In a recent paper (pdf) for Nature, James Murray and David King described how steadily rising crude prices worsened Italy’s trade imbalances in the run-up to the country’s debt crisis: “Despite a decrease in imports of 388,000 barrels per day compared with 1999, Italy now spends about $55 billion a year on imported oil, up from $12 billion in 1999. That difference is close to the current annual trade deficit.” Few people think that this is the only reason Europe’s in a fix (the structure of the euro zone is what has made trade imbalances so problematic), but it hasn’t helped.
That said, the oil situation could change very rapidly in the months ahead. Lately, crude prices have been tumbling back downward — with the price of Brent recently falling to a seven-month low near $91 per barrel. Part of that seems to be driven by reports that Iran might agree to let UN inspectors back in, but part is due to slackening growth in places like China.
Barring a sharp economic slowdown around the world, a drop in oil prices might provide some small relief to Europe. Though it’s a stark reminder that the fate of the continent is still quite vulnerable to the twists and turns of the energy markets.