Sustained high oil prices could, at the extreme, shave as much as 0.75 per cent off domestic growth this year, an Irish economist said yesterday.
Mr Austin Hughes, chief economist with IIB, said that crude oil prices of more than $30 (€34) per barrel could leave growth in the Republic's economy at between 2 and 2.5 per cent for 2002, well below previous expectations.
Crude prices yesterday rose above $27 in the wake of Iraq's announcement that it was suspending oil exports for 30 days in response to Israel's actions in occupied Palestinian areas. This compares to a price of $18 at the end of last year.
Yesterday's price level would, if sustained, take about 0.25 per cent off growth, Mr Hughes said.
However, he added that "the markets still think that there's a reasonably small risk of a reasonably big rise" in crude prices.
"If they start to go above $30, we're talking about material impacts on growth," he said.
The first effects of increasing oil prices will be felt through higher inflation, as domestic fuel becomes more expensive, economists agreed. Mr John Beggs, chief economist with AIB Group Treasury said that lasting high prices could add about 0.5 per cent to inflation this year. "Earlier projections were for inflation between 4 and 4.25 per cent," he said. "You'll probably be looking at another half a per cent now. It's coming early in the year too, which is problematic and may build."
"It affects real disposable income," said Mr Beggs. "It's deflationary and reduces growth in the economy."
Both economists said much depended on how prolonged the current uncertainty on oil prices lasted.
"It's not just the Israeli/Palestinian conflict," said Mr Beggs. "You have the US war on terror and the threat against Iraq. It seems to me that the scope for oil prices to be higher is significant."
As far as euro-zone interest rates were concerned, both were convinced there was little case for a rise in the short term, despite growing threats to inflation.
"The ECB has been hoping and projecting that inflation will fall back but the economy is still very weak," said Mr Beggs.
"Because it's growing at less than 2 per cent, it has lots of spare capacity. It therefore has scope to grow without real inflation."
Mr Hughes expects euro-zone rates to remain steady until June or July. "If we see a very big rise in oil prices, it might cause them to delay further," he said.
The Republic's consumers, meanwhile, could feel the effect of rising oil prices as soon as next week, as distributors consider raising prices throughout their dealership networks.
Maxol chief executive, Mr Tom Noonan, said if oil prices stayed high, fuel prices on Irish forecourts could rise by up to four cents a litre in coming months.
He said that Maxol, which held a 14 per cent share of the retail market, had increased its prices by one cent last week and, unless something happened in coming days, a further rise could be expected within the coming week.
"The Israeli situation is more of a concern than anything Saddam Hussein might be saying," he added, pointing out that OPEC countries or Russian producers could easily pick up any slack created by the Iraqi export move.
A spokeswoman for Statoil, which operates 300 service stations, said that, as oil prices continued to rise, domestic fuel prices would be affected, "and, as far as consumers are concerned, not in a good way".
Esso, which has passed on two price rises to its 350-strong network within the last month, was yesterday monitoring developments, according to a spokeswoman.
