Lofty oil new headache for debt-ridden Europe

Fri Feb 24, 2012 10:40am EST
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters)- No sooner are Europe's debt anxieties easing a touch than a sharp rise in oil prices threatens to impede the economy's tentative recovery from the euro's near-death experience with Greece.

Brent oil has shot up about 20 percent since mid-December on concern over cuts in Iranian supply, and set an all-time high this week in euros.

Oil has not reached a level that poses a grave danger to growth, economists say. In dollars, today's price around $123 is still below last April's $127 high, let alone the record peak of $147 scaled in 2008.

But the risk is that consumers and companies, their confidence still fragile, will crawl back under the covers.

"This comes at a difficult time for the euro area economy, which I would still characterize as being in a state of mild recession despite one or two more promising signs," said Julian Callow, an economist at Barclays Capital in London.

"If we were to see a rapid, sudden escalation in the oil price, then for sure it would be a factor that would lead us to be revising down our projections for euro area growth and, if sustained, could make a mild recession turn into something more serious," he said.

Picking a precise pain threshold is tricky, but prices are approaching the danger zone.

Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, said he would not be too worried by another $10-15 rise in the oil price in dollar terms for dollar-based industries. But it would be a different matter if oil climbed above $140 a barrel and stayed there.   Continued...

The Euro sculpture is pictured in front of the headquarters of the European Central Bank (ECB) in Frankfurt January 24, 2012. REUTERS/Lmar Niazman