If the price of Brent crude oil surges to $150 a barrel, one eurozone country will default and the whole region will fall into recession, according to Marie Diron of Ernst and Young (via Ambrose Evans-Pritchard).
The result of this rise would be particularly bad for Ireland, where the economy would shrink by 3% in 2011 as a result. Even worse, according to the report, if Brent crude prices hold around $120, which seems more likely, Ireland is still going to see its GDP shrink by 2.6%. Brent is around $116 right now.
"We think the peripheral countries would suffer most. Spain, Greece, and Portugal face a double whammy since they have no room to offset the oil shock by slowing the pace of fiscal consolidation," says Diron.
The Ernst and Young report adds to concerns over the cost of inflation to the strength of the eurozone's economy. Just this morning, Eurostat reported rising producer prices, largely a result of higher energy costs.
It may explain the more direct approach of British Prime Minister David Cameron when it comes to dealing with the issue of Libya. He's been out in front of the problem, calling for a no fly zone, but has recently had his administration back off earlier bullishness, after the Obama administration seemed to shy away from military action.
By. Gregory White