The State must “hoard resources” in order to protect those on low incomes and the unemployed from freezing next winter, an Oireachtas Committee has heard.
The Oireachtas Committee on Budgetary Oversight met on Tuesday, hearing from academic experts, a range of groups and trade unions.
Economist and Trinity College Dublin Professor John Fitzgerald cautioned of the need for the Government to “guard its resources” coming into the winter due to uncertainty around the conflict in the Middle East. The adjunct professor said that there would be a “huge shock” to the Irish economy if the price of oil rises further, making a worldwide recession possible.
Prof Fitzgerald is the ESRI’s former lead researcher. He previously said that its declaration in May 2008 that the economy was fundamentally sound was a mistake that would stay with him for the rest of his life.
At the Oireachtas banking inquiry in 2015, Professor John FitzGerald said that in the absence of in-house expertise on the banking sector his organisation relied upon data from international bodies, none of which were predicting a global financial crash. On that basis, the ESRI made a call that Ireland would escape collapse – a prediction that turned out to be entirely wrong.
“The current energy crisis caused by the closure of the Strait of Hormuz, if it continues, will have grave consequences for the world economy,” said Prof Fitzgerald on Tuesday.
“The head of the International Energy Agency indicated that it could be the worst such crisis since the Second World War. The IMF reinforced this message last month, indicating that it could result in a world recession. We don’t know whether the Strait of Hormuz will remain closed for long. If they reopen immediately, the economic consequences will still be serious, but not grave.
“However, closure into the autumn winter would precipitate a world recession, seriously affecting most of the world. I worked in the Department of Finance on the Oil Price Crisis of the 1970s, so I have experience of this.
“What we don’t know is how high prices would have to go to reduce world demand by 15% equal supply. The Economist newspaper recently reviewed the academic research on this, suggesting that prices will have to rise by between 150 and 500% if the Strait of Hormuz doesn’t reopen.”
Prof Fitzgerald said that rising prices would involve “huge transfer of resources from rich and poor energy consumers to remaining oil producers.”
“If energy demand has to be cut by 15%, some of this will be achieved by using alternative energy sources, but in the short term, most would have to be delivered by cutting world output. That is a recession. As rich countries like Ireland bid for scarce supplies, squeezing other economies out of the market, this would have an even bigger impact on poorer countries. And there are stories today on the impact already in India,” he said.
“If oil price is doubled $240 a barrel, Ireland would be worth off by 7.5 billion, or 2 1/2% national income. If oil prices rise to over $200 a barrel, which might be more realistic, the streets remain closed, the hit to Ireland would approach 15 billion, or 5% national income. If a world output were then reduced by 3% as a result of the crisis based on previous ESRI modelling, Irish national income and consumption would fall by at least 3% in real terms, adding to unemployment, with inflation, rising well above 5% towards 10%.
The economist said that the State must protect the most vulnerable in Irish society, even if that means borrowing.
“To protect those in low incomes and pay for increased unemployment payments, the welfare bill in the next budget would balloon. In real terms, revenue would fall with lower consumption and employment. Depending on how high oil prices go, this could necessitate the government actually borrowing next year. It’s that serious a hit.
‘THE GOVT SHOULD KEEP ITS POWDER DRY’
“These are very crude numbers. You need an economic model to do the job comprehensively. However, if the war continues, the consequences for Ireland would be very serious. Until we know whether the Department of Finance moderates scenario is right, or whether, instead, we face a very serious crisis, the government should keep its powder dry.”
The economist claimed that relying on “the wisdom of Donald Trump to save us from an economic crisis is a dangerous bet.”
“The most serious case where Ireland is worse off by just two and a half per cent, or maybe even 5 per cent, there is no way the Government could protect the bulk of the population from the consequences. Instead, the government needs to hoard resources to be able to provide proper protection for those on low incomes and the unemployed, who would otherwise freeze next winter,” added the economist.
“Both the EU Commission and the MF have warned against governments directly subsidising energy costs through tax cuts. In the long run, that would just lead to higher prices, benefitting oil, presumers, can produce us, not consumers.
“The relative strength of the public finances means that if managed appropriately, there should be no need to repeat government induced austerity,” said the professor.
“We’re in a stronger financial position to deal with it,” he said, adding: “Even if the government has to borrow next year to stop people freezing to death.”
Prof Fitzgerald said that his particular concern was households in rural areas and farmers on very low incomes who are elderly.
“If they can’t heat their homes next winter, there will be deaths from hypothermia,” said the economist.
“Ensuring that, if the price of kerosene doubles, trebles, quadruples, they can keep warm, that is what we need to be ready to deal with.”
TDs and Senators heard warnings that there will be a “very big rise in consumer prices and unemployment” if the Strait of Hormuz remains closed.
It heard of the way in which a series of budget measures may be implemented to respond to the short and medium-term impacts of the energy crisis and cost of living pressures impacted by the conflict in the Middle East.
The meeting heard that the ongoing volatility in global energy markets, combined with persistent cost-of-living pressures, continues to place a significant strain on households and businesses across Ireland.
Professor Lisa Ryan (UCD) told the meeting that the goal should be to electrify heating and transport.
“Ireland faces an acute exposure compared to other countries to the global energy crisis due to systemic over reliance and imported fossil fuels. Over 80 per cent of our energy is imported, including 100 per cent of our oil, 80 per cent of the natural gas, and we are highly susceptible to international price volatility,” said Ryan.
“It also means that any energy subsidies generally involves subsidising import of fossil fuels. The primary driver of this vulnerability is a fuel mix dominated by oil, worth 50 per cent, and natural gas around 30 per cent of our energy mix. And if we look at this bisector, we see the transport consumes by 42 per cent of total energy, and that’s almost exclusively derived from oil, and private cars account for 71 per cent of all journeys, which is very high compared to other countries. Residential heating shows that 46 per cent of homes still rely on high carbon fuels, oil, coal, peat. We’re not including gas there.
“With over 700,000 households still dependent on oil, and this number has increased, in fact, over the last 10 years, these households are extremely vulnerable to price increases.”
“65% of Ireland’s housing stock was built before 2001, and is of low quality, and these are very inefficient structures that require deep retrofits before you can put a heat pump in them,” she claimed.
Martina Lawless, director of the Economic and Social Research Institute (ESRI) said it was not clear how long fuel prices would remain high, adding that if the increase continued into next year, there would be “very substantial impacts on the public finances” – with concerns exiting about Ireland’s reliance on corporate taxes.