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Viscous Cycle? Oil's Rise Threatens Growth Everywhere

Companies, even high-tech highfliers, know their earnings may be threatened.

It's an obvious point, but probably one worth making, that energy costs affect people and companies everywhere. It is also obvious -- but again, worth mentioning -- that what happens abroad matters to the many U.S. companies that do business overseas.

The high cost of energy -- at $37.62 a barrel, it's more than three times what it was at its lows two years ago -- has already taken a full percentage point out of

Organisation for Economic Co-operation and Development household income, according to the economists at

J.P. Morgan

.

It doesn't hurt all countries equally, though. Mexico, for example, is a net exporter of oil -- last year it produced 1.6 million more barrels a day than it used -- and this helps make up for the extra costs borne by its people and its manufacturers. Brazil, on the other hand, uses 700,000 more barrels a day than it produces. Its stock market has been under pressure, and its currency, the real, is at a nine-month low.

Most of the economies that matter, from the Wall Street point of view, are a bit more like Brazil's than Mexico's. Oil costs are obviously taking some speed out of the U.S., but it helps that we are an oil producer (though we produce less than half of what we use) and that our economy is based more on new technology and the service sector than heavy industry.

Serious

"Most of Europe is more seriously affected, although the U.K. is a net exporter," says John Llewellyn, chief global economist at

Lehman Brothers

. "Asia is most seriously affected -- particularly countries like Korea, Taiwan and Thailand, which have gone for these energy-intensive industries."

Gushing
Oil prices surging

Source: BigCharts

While slower growth in the U.S. isn't such a bad thing -- remember that it wasn't too long ago people were talking about the possibility of the economy overheating -- it's not so welcome elsewhere. Europe has not been as strong. And though many Asian economies have been growing at a rapid pace, this is mostly because they have been on the rebound from the crises that rocked them in 1997 and 1998. Even without the higher price of oil, these countries would be set to slow.

With increased energy costs, the risk is that they slow down too much. Making matters worse, other economies may not be as well-equipped to deal with the other side of expensive oil -- inflation. High productivity and margin expansion in the U.S. mean that there is less pass-through to consumers than in other countries.

Different Banks

Finally, the U.S. has a central bank that has shown itself incredibly adept at keeping the economy on an even keel. The

European Central Bank

, in contrast, is basically untested. And of monetary authorities' ability in Japan, Asia's biggest economy, the less said the better.

"The oil price isn't really the story," says

Merrill Lynch

world markets investment strategist David Bowers. "The real issue is the ability of economies to respond. For instance, people have bought the soft-landing hypothesis in the States. Contrast that with Europe, where the sense is that central banks may tighten again despite the fact that their economies are slowing. Maybe it's Europe and Japan that have the hard landing."

One of the things that investors learned in 1997 and 1998 was that trouble abroad didn't necessarily mean that selling the U.S. was a good idea. To the contrary, in times of global turmoil, U.S. assets are often the best-quality good you can buy, and investors flock to our shores.

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Canary in a Coal Mine

But U.S. assets aren't uniformly good during periods of slower global growth. Many U.S. companies have significant exposure overseas, and they may see their bottom lines take a hit. The 50 companies in the

S&P 500

with the most foreign exposure significantly underperformed the overall market in 1997 and 1998, according to Merrill Lynch's quantitative strategy group.

The important difference between now and then is in the makeup of that portfolio. While old consumer favorites like

Tupperware

(TUP) - Get Report

-- 85% of its revenue comes from overseas -- are still on the list, there are a good deal more tech companies with heavy foreign exposure these days.

Compaq

(CPQ)

gets 55% of its sales from overseas; so does

Hewlett-Packard

(HWP)

.

Intel

(INTC) - Get Report

does 58% of its business overseas;

Applied Materials

(AMAT) - Get Report

, a whopping 66%.

Granted, nobody expects the price of oil to knock the world economy onto the ropes. But it's pretty clear that oil is going to slow things down, and technology-company earnings may be less than bulletproof when that happens.