Oil price plunge lends unexpected hand to ailing southern Europe
The plunging oil price is giving an unexpected lift to Europe’s crisis-battered southern periphery as decreasing fuel costs help spur demand.
Spain, Europe’s fourth-largest economy, could add as much as 1 percent to annual growth with oil prices between $80-90 a barrel, the government said. Italy, which is in its fourth year of recession, stands to boost GDP 0.3 percent with a sustained $10 oil price drop, according to a report from BNP Paribas SA.
“There’s no doubt lower oil prices will act as a stimulus to growth in the region,” Frederik Ducrozet, a Paris-based economist at Credit Agricole, said by phone. “Greece, Spain, Portugal and Italy would be clear beneficiaries.”
The region’s crisis-ravaged southern arc is looking forward to an unexpected boon from the oil drop after years of contraction left record debt levels and unemployment that confound economic recovery. As importers of oil, the countries gain economically from the plummeting price through lower energy costs and increased buying power for consumers.
A slowdown in global demand coupled with the highest U.S. output in more than 30 years have contributed to a more than 40 percent drop in the price of Brent crude from a high of $115 a barrel in June. Bundesbank President Jens Weidmann, who has resisted expanding European Central Bank bond purchases to tackle the region’s malaise, calls the decline a “mini stimulus package.”
The Organization of Petroleum Exporting Countries, responsible for two-fifths of global supply, extended the drop by resisting calls last week to reduce its 30 million-barrel-a- day quota. Brent for January settlement declined to a five-year low of $67.53 a barrel on Dec. 1 on the London-based ICE Futures Europe exchange.
Southern European countries are also helped by the fall of the euro. While the drop limits the gains from less expensive dollar-denominated oil, it makes the goods they produce cheaper to export. The euro has lost 9.6 percent of its value against the U.S. dollar this year.
The falling oil price and declining euro will aid Spain in possibly surpassing its 2 percent growth target for 2015, a forecast that looked optimistic three months ago, according to the government. The country’s initial growth estimates were based on a budget package that foresaw an average oil price of $104 a barrel and the euro trading at $1.30.
“There were several aspects that weren’t contemplated when the government made its forecasts that can help us,” Spanish Economy Minister Luis de Guindos said last week in Madrid. “The depreciation of the euro exchange rate can help us and the decline of commodities prices can help us.”
Portugal’s Secretary of State for Finance Manuel Rodrigues said this week the government budget was calculated with higher oil prices and that a drop “always has a positive effect.”
In Greece, whose 2009 budget fallout triggered the debt crisis, the lower price alters the country’s budget calculus as it battles an unemployment rate of more than 26 percent.
“There will be of course radical changes to the way national economies deal with the budgets for 2015,” Greek Energy Minister Yiannis Maniatis said at a conference yesterday in Athens. The lower oil price will remain next year, he said.
The downside for Greece is that a lower price may dampen investment in oil and gas. When the country approved new legislation for exploration 3 1/2 years ago, Brent’s price was $117 a barrel.
“Greece must take all this into consideration with regard to the new licensing rounds,” Mathios Rigas, chief executive officer of Energean Oil & Gas SA, Greece’s only hydrocarbon producer and explorer, said yesterday in Athens. “The effort to explore for hydrocarbons in the country entails exceptionally high risks and requires long-term commitment from investors.”
Over a period of three to four quarters, a $10 drop in the per barrel oil price could contribute 0.4 percentage points to growth in the euro area as a whole even as it trims 0.4 from inflation over two years, BNP Paribas said in the Dec. 1 report.
Still, a dearth of European demand could stanch the effect of lower energy prices compared with a more robust boost in the U.S., where consumer confidence is higher, BNP Paribas said.
The other risk is deflation, which could dampen the impact on consumption, according to Marco Brancolini, a London-based bond analyst at Royal Bank of Scotland Group Plc.
“There is a risk of entrenching deflation, which in turn can raise questions regarding debt sustainability,” Brancolini said in an e-mailed response to questions. “But aggressive action from the ECB could address such concerns.”
[Bloomberg]
