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Mideast, North African woes add $20 premium to oil price Add to ...

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What Libya conflict could mean Oil prices climbed today after coalition strikes on Libya, prompting concerns over what the conflict could mean to the crude market and the global economy, already touchy after the devastation in Japan.

Analysts question how Libya's oil infrastructure will emerge from the UN-mandated action in the country, which represents about 2 per cent of world crude supply, The Globe and Mail's European correspondent Eric Reguly reports today.

"The international military intervention in Libya is primarily a humanitarian issue but the crisis could also have important implications for the global economy," said Julian Jessop, chief international economist at Capital Economics in London.

"The uncertainty about what happens next is an additional threat to equity markets still nervous about the high level of oil prices and the disaster in Japan," Mr. Jessop said in a research note.

"It is possible, of course, that events in Libya could soon become a positive if Gadhafi either backs down or is overthrown, and the conflict ends quickly. Oil prices could then swiftly fall back towards $90/barrel. Indeed, there could be a further boost to sentiment if the major Western powers are finally seen to have got something right. But for now, the regime in Tripoli shows no sign of giving up."

For now, said Mr. Jessop, there are two key concerns: Whether the conflict could damage Libya's oil and natural gas facilities, and whether it could spark an anti-West backlash or, in the extreme, a surge in terrorism.

"The upward pressure on the price of oil to date has been capped by the expectation that the disruption to Libyan supply will be only short-lived, allowing it to be offset fairly easily by drawing on stockpiles and increases in output from elsewhere (notably Saudi Arabia)," Mr. Jessop said.

"This might change if there is more serious damage, accidental or otherwise. Libya only accounts for 2 per cent of the world's oil supply but the strength of global demand means that the market is tight and the prolonged loss of Libyan oil could push prices all the way up to the highs above $140 seen in 2008."

On the second issue, Mr. Jessop noted that Moammar Gadhafi has a "long track record of sponsoring extremists," though the fact that many Arab countries support the UN move makes this a lower risk.

"But a large number of civilian casualties could change this. Some Arab leaders have already expressed concern that the intervention has gone well beyond the imposition of a 'no-fly zone' originally backed by the Arab League. The risk of a backlash could also increase if the Western powers become bogged down in a ground war. Note that the UN resolution legitimizing the intervention does not explicitly call for regime change, nor does it allow for occupying forces, so this could get messy."

Eric Lascelles, the chief economist at RBC Global Asset Management, estimated today that the uprisings and violence in the Middle East and North Africa have led to a $20 premium on the price of oil, and that's not likely to ease any time soon.

Even if it did, he said in a report, it would be temporary because the recovery is now entrenched and the long-term cost of getting crude out of the ground is rising.

"This qualifies as a stagflationary event, meaning slower economic growth and higher inflation," Mr. Lascelles said. "But the consequences should be fairly muted for the developed world, if somewhat more troubling for emerging markets. Bond markets should suffer from this episode, though equities may prove surprisingly resilient."

He added that the global economy will be "dinged" by higher inflation, but won't be dealt a fatal blow.

"So long as the global recovery persists, oil prices can be sustained at fairly high levels, and even have room for steady gains over the long term."

Shell wants national strategy Shell Canada today issued a call to arms for all the players in the energy industry - companies, governments and NGOs - to develop a national strategy that would give allow Canada to become a global superpower in the sector.

"Canada's emergence as a global energy superpower hinges on the country's ability to develop a truly national approach to energy," Lorraine Mitchelmore, the Canadian company's president, said today as she spoke about its 100th anniversary here.

At this point, she said, Canada has the "hallmarks" of an energy superpower but lacks the proper strategy that would include fiscal and regulatory measures.

"Key elements of the strategy should be a price on carbon, sustainable and affordable energy with a reduced carbon footprint, and a national rather than a regional approach to our energy market," said Ms. Mitchelmore.

"Along with Norway , we are the most stable, the most reliable and the most democratic of the world's top 10 oil and gas producers." she added "That's a distinct competitive advantage given the current turmoil in North Africa and the Middle East , where five of the other top 10 are located."

Euro ministers agree on fund Finance ministers of the embattled euro zone have reportedly agreed to elements of a bailout fund with a capital base of €700-billion. According to reports from Brussels today, the fund, a replacement for the existing scheme, will have €80-billion in capital and €620-billion in guarantees.

"We agreed on all aspects of the European Stability Mechanism," said Luxembourg's Prime Minister Jean-Claude Juncker, chief of the finance group of the 17 member states.

It would come into effect early in 2013.

Mr. Juncker's announcement came as it appeared increasing likely that Portugal will have to go to the euro group with cap in hand, as did Greece and Ireland before it.

As speculation mounts that Portugal will be next in line for a bailout, the main opposition party is balking at new austerity measures, a move that could bring down the government this week.

A vote on the plan is expected Wednesday.

Portugal's Prime Minister Jose Socrates has already threatened to quit if its opposition doesn't vote to agree on the measures.

What markets think about Canada The markets are abuzz with speculation over Jim Flaherty's budget tomorrow, and whether Canadians will be heading into another election. And, oh yes, our little political scandal.

"Opposition to the budget has transcended substance," said Carl Weinberg, chief economist at High Frequency Economics.

"Opposition parties are now charging the Tories with contempt of Parliament for failure to disclose the cost of its anti-crime measures," the U.S. economist said in a research note yesterday.

"They are also bringing an influence-peddling [allegation]involving a former adviser to the prime minister. It is a juicy story."

Mr. Weinberg expects an election, so he bowed out of talking about Mr. Flaherty's budget.

"Since the budget is likely to be DOA, we see no point in speculating about its implications for GDP," he said. "While the Tories seem likely to retain power, you never know in elections. You also cannot be sure that the opposition parties will not find a way to work together."

Here's what Scotia Capital economists Derek Holt and Gorica Djeric expect:

"Political risk is the key factor to watch for in Canadian markets this week. Tomorrow's Federal budget, to be released after the close of markets, is unlikely to contain material surprises, but the opposition reaction could. The cottage industry of budget trackers that swoops in on Parliament Hill at this time every year may have micro surprises to address. But the macro big picture elements are unlikely to change compared to what is already well understood in markets.

"They include staying the course on corporate tax reductions, allowing temporary stimulus to fall off the books and impose some near term fiscal drag and thus do some of the [Bank of Canada's]work in tightening policy conditions, moving the deficit-to-GDP ratio to largely immaterial levels within two years, and getting back to balance in about four fiscal years. Frankly, much of the debate over nailing fiscal deficit projections years down the road makes for good controversy among analysts and politicians, but is of little substance to the economy and markets in that both the government's projections and the higher deficit forecast risks flagged by the Parliamentary Budget Officer yield an inconsequential medium-term deficit-to-GDP ratio."

Citi reinstates dividend Shares of Citigroup Inc. are climbing today after the U.S. bank said it will begin paying a dividend again for the first time since 2009, and announced a reverse stock split of 1-for-10. The 1 cent quarterly dividend will arrive in the second quarter.

Other U.S. banks boosted their dividends last week after the Federal Reserve said it had done stress tests on the U.S. banks. Banks are allowed to hike their dividends if they pass.

Tiffany cuts outlook Tiffany & Co. today trimmed its first-quarter projections on expectations that its sales in Japan will fall by 15 per cent in the wake of the earthquake, tsunami and nuclear troubles.

The famed luxury retailer cut about 5 cents (U.S.) from its original earnings-per-share estimates, now projecting 57 cents.

"Tiffany stores located in the Kanto and Tohoku regions, which generate somewhat more than half of sales in Japan, were closed or operating on reduced hours after the earthquake and tsunami, wwith physical damage limited to a few stores," said chief executive officer Michael Kowalski. "... We cannot provide meaningful forecasts about sales in Japan beyond the first quarter and, therefore, have not adjusted our sales or earnings plan for the remaining quarters of 2011."

The Asia-Pacific region has been strong for Tiffany, with sales climing 25 per cent there. For the fourth quarter, Tiffany's profit climbed to $181.2-million or $1.41 a share as overall revenue rose 12 per cent to top $1-billion.

What a web we weave Germany's Porsche SE is selling its new Spyder hybrid in the United States for a tidy $845,000 (U.S.). And if you can afford that, you can no doubt afford the shipping and handling charges the auto maker says aren't included in the price.

"To ensure the 918 Spyder's worldwide exclusivity, Porsche will produce no more than 918 examples.," the company said in a statement today. "Start of production at Porsche's famed factory in Stuttgart-Zuffenhausen is planned for Sept. 18, 2013 (9/18), and the U.S. base manufacturer's suggested retail price is $845,000 (excluding destination and handling charges)."

It is a sharp-looking machine, which Porsche said will boast a 500-plus horsepower V8 engines "assisted" by two electric motors with a total of at least 218 horsepower, but use only three litres per 100 kilometres.

Boyd Erman's Morning Meeting Warren Buffett is providing a little balm for Japanese markets, saying that he doesn't believe that the earthquake, tsunami and now nuclear crisis that have battered the country will change its economic future, Streetwise columnist Boyd Erman writes.

In Economy Lab today

The fate of the 40th Canadian Parliament will likely rest on the budget, Kevin Milligan writes.

If not a hike to minimum wage, then what? Stephen Gordon looks at the alternative.

In Personal Finance today

Too many homeowners choose pretty over practical when doing renovations. Dianne Nice offers tips on how to spend wisely.

Personal finance is not yet covered in all schools, so it's up to parents to teach kids how to manage money.

From today's Report on Business

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