How oil prices led to Europe debt crisis

Oil shift reshapes the global financial system. Relations between oil prices and financial sector are very related. However to justify relationship using facts and figures is a work requiring a lot of efforts. So this is the presumption, hypothesis to  be formulated to conclusions by help of You, my dear reader, or by time.

Oil made price jump in 2008
Year 2004 WTI Cushing spot 40$/barrel
Year 2007  WTI  Cushing spot  70$/barrel
Year 2008  WTI  Cushing spot  140 $/barrel
Year 2012 WTI   Cushing spot  85 $/barrel

Recorded by myself and wikipedia authors

Obviously the price increase of the main cost element in cost of every product or service led to increase of cost of goods or services.

Eventually or prices or products where shifted, where demand were elastic or some businesses disappeared.

Price shift is a fast solution, while reduction of cost is long way of invention. When market re-organizes due to oil prices within one year, businesses uses these solutions which are fast:

• profit margin drop (fastest and happens almost without interference of management),
• mergers or acquisitions (to reduce financing or administrative costs due to scale)
• reduction of employees (just reduce operating expenses), sale of assets.

Conclusion: oil prices increase – reduces businesses.

Public debt is dependent on business growth

All states had debts before 2008. State debt is common since money were invented.  It is important to know – how investor makes decision to lend money for state.  Few of  us really know, but lets put some logic and think:

• When state has no debt and has revenue, would seem stupid – not to take part of stake of ones state revenue. At such situations, investor even puts more effort to persuade You to borrow: influences that You need something extra, you still do not have, etc.
• When state has a debt ~50% of GDP, investors do not have such a good justification for investment and nobody even had last 50 years.  So investor has to come to relative indicators (like GDP vs money borrowed), to show that state will have money to pay back
• Withing 20th century oil already had its fluctuations, but  politics – ruling the state – usually give preference to increase  public purchases. Public purchases is a tremendous business and there is a lot of businessmen energy invested not to loose it.
• So up to 2008 investors thought that it is normal, that state with debt of 80%, 100% or 160% of GDP will pay its debt. Probably fore-casted budget sheets of these state showed it with warranty, assuming one thing wrongly – business and taxes will go up.

But in 2008 oil made shift, business went down and both investors and states discovered that tax increase perspective is negative, and that huge amount of loans is lost.

To secure system  states increases its taxes, tries to borrow more, this step balances the cash for period of 3-6 months but afterwards spiral of business negative perspective goes down even more.

What to do. Is this the end of the world? 

Please read the continuation here