The International Energy Agency’s chief, Fatih Birol, has warned that the energy crisis caused by the war in the Middle East could be much worse than anything seen in the past 70 years. Without the Gulf production, world oil supplies are set to fall by 20 per cent and world gas supply by 10 per cent, a scale never before seen.
Whether this bleak prospect is avoided depends on quickly reopening the Strait of Hormuz. However, Donald Trump has obviously learned from the Irish fuel protesters: when oil is scarce, blockade supplies to make things worse. So he is blockading the Strait of Hormuz to prevent any oil getting through, further limiting world energy supply.
While financial markets believe that the crisis will be avoided, there remains a real possibility that this won’t happen and, as the IMF warned last week, the resulting energy price shock could push the world into recession. That would cause huge pain across the globe.
The Government hasn’t made clear to the Irish public – or to its backbenchers – the high risk that things could become much worse if the war drags on. Neither at the public nor political level is there a real appreciation that there could be an economic disaster just around the corner.
It’s not wise for any government to rely on Trump having the good sense to avoid a world economic crisis by ending his feud with Iran.
Our Government initially took a more prudent approach, introducing limited short-term support measures, while aiming to preserve a war chest in case of a far more grave crisis next winter. If the worst economic outcome happens, it will be vital for the Government to be able still to intervene to protect those on low incomes, and to cope with a rise in unemployment.
Between 1973 and 1980, the real oil price rose 500 per cent. In the absence of viable alternatives, world demand only dropped by 15 per cent. Oil-consuming countries such as Ireland had to pay a huge amount to power their economies and homes. Irish people were immediately 4 per cent worse off.
This time, if supplies are not restored, the world will have to cut demand by 20 per cent within one year. Scarcity will drive energy prices dramatically higher until demand falls off. The rich world will pay much higher prices to secure supply, squeezing out poor countries that can’t afford to pay.
[ When the crisis is caused by oil dependence, the solution isn’t cheaper oilOpens in new window ]
The Government cannot prevent world oil prices from rocketing, inevitably leaving us as a nation much worse off. But, given the risk of further significant energy price hikes, which would bring high inflation and recession, the Government should have held back its financial firepower to look after those on low incomes who would be worst affected, if necessary.
The package introduced 10 days ago is extremely poorly targeted, frittering away valuable resources. As the ESRI, and my Trinity colleague Barra Roantree, have pointed out, most of the money from cuts in excise tax goes to the better off.
The fuel protesters showed no interest in the welfare of those on low incomes, who could face a devastating rise in the cost of heating next winter. Instead, the support they sought was targeted at helping business – hauliers, bus owners, agricultural contractors and farmers.
With the exception of farmers who face world prices, the other businesses will gradually put up their prices to cover their higher costs, and avoid the long-term consequences of the price shock.
While farmers will face higher costs that they cannot pass on, the energy supports will be particularly beneficial for better-off farmers. Many farmers on very low incomes could well be very cold next winter, something the new supports will not help.
Over time, Irish governments have favoured the Robin Hood school of economics – taking from the better off to support those on low incomes. This package, however, responding to the wishes of the protesters, does nothing for those on low incomes who may have problems keeping warm – the sheriff of Nottingham has triumphed.
Unfortunately there has been little political support for preserving a war chest to protect the economy next winter, if this crisis gets much worse. Instead, scarce resources are going to support small businesses and help for motorists.
The Government needs to hold the line on any more tax cuts or subsidies, explaining why, as the adults in the room, it is their job is to preserve financial wriggle room to prepare for a possible very difficult future.
Like King Canute, we cannot hold back the tide of a world energy price shock. Longer term, real energy security will only come from investing more in wind, solar, electrifying our transport, and insulating our homes. But that’s a discussion for another day.