IRELAND IS more dependent on imported oil for its energy requirements than almost any other European country. That makes a sluggish domestic economy, reliant on export-led growth for recovery, particularly sensitive to rising global energy prices.
In a matter of weeks, the world has seen a surge of some 20 per cent in the price of a barrel of oil as market traders reacted to violence in Egypt and Libya, and to serious political unrest in neighbouring oil-producing countries. Today the Middle East region accounts for more than one-third of global oil production, a smaller share than in 1973 when Arab states operated an oil embargo that crippled the world economy and resulted in high inflation, low growth and increased unemployment. As yet, there have been no major disruptions to oil supply and any shortfall in Libyan output – which accounts for 2 per cent of global supply – could probably be offset by Saudi Arabia raising its production. But markets dislike uncertainty and worries about the political unrest now sweeping through the Middle East, allied to fears that Saudi Arabia might be affected, have been the main factors pushing oil prices higher.
Ireland imports all its oil and nearly all of its gas requirements, relying on outside sources of supply to meet 90 per cent of its energy needs. And while there are 90 days of strategic oil reserves, not all are stored in the State. Clearly, there are some grounds for concern about access to supply in the event of a major and sustained oil crisis. But the impact of rising energy prices is a more immediate issue.
For the global economy, sustained higher oil prices could undermine the slow recovery in major developed economies, the US and Europe. Higher oil prices would mean lower economic growth and result in higher inflation, leaving consumers with less spending power as energy costs rise. That, in turn, would present central banks with some difficult decisions. The US Federal Reserve, which has kept interest rates low and engaged in quantitative easing – printing money to stimulate economic activity – would face market pressure to raise interest rates to check rising inflation. That would also risk choking off a fragile economic recovery. Likewise, the European Central Bank, which has kept interest rates low for almost two years, would face a similar dilemma.
And with the Irish economy reliant on global buoyancy as the path to recovery, a sustained oil price shock is the last thing a new government needs to face.