Siemens Reports Irish Economy Most Vulnerable to Potential Oil & Gas Price Shocks

 

Ireland's GDP could fall by as much as 7.5% if the world was to experience a sudden oil or gas price rise, according to a report launched by Siemens. The report, which examines the economic impacts for Ireland of different high oil and gas price scenarios, highlights the particular vulnerability of the Irish economy to such price shocks.

 

The findings of the report entitled ‘The Economic Impacts for Ireland of High Oil & Gas Prices; Pathways to risk mitigation and a low carbon future’, indicate that the impacts of an oil and gas price rise would be more severe on Ireland than other economies such as UK, Europe and USA. “Ireland is particularly sensitive to this type of shock particularly the knock-on effects in global markets and trade. Results from the study show Ireland suffering more pronounced economic impacts and a slower recovery as compared with other countries,” according to Dr. Werner Kruckow, CEO, Siemens Limited.

 

As a small open economy heavily dependent on world demand for Irish exports, any major shock to the global economy would significantly impact on Ireland. Additionally, Ireland’s high dependency on imported fossil fuels would also further exacerbate the effects of any shock – with ramifications for business and society through higher electricity, transport and heating costs, increased levels of “fuel poverty” and a loss of competitiveness.

 

The high oil and gas price scenarios presented in the report were constructed within plausible boundaries of future prices from 2010 to 2025 (1). They illustrate alternative futures that may be triggered through one or a combination of events. The price scenarios were then evaluated in cooperation with the ESRI against a baseline scenario to offer a detailed analysis of the impact of each on GDP, inflation, interest rates and wage rates internationally and for Ireland, resulting in GDP drops of between 3.5% - 7.5%.

 

One of the authors of the report Dr. Andrew Kelly, AP EnvEcon Ltd., said “These are scenarios not predictions, but you only need look back to the summer of 2008 to see how quickly the price of oil can rise and fall. Nobody can say with certainty what the future market price of oil and gas will be, however, in building these scenarios we set the boundaries within the broader international market outlooks on price. What could make these happen? In the years ahead there are a number of factors which may increasingly contribute to both higher and more volatile prices, including rising demand in emerging economies, natural disasters, political tension and conflict in regions of supply, and of course a diminishing supply pool from which to extract these resources at lower cost. It is another risk we face that should be factored into political decision making.”

 

The good news, according to the report, is that Ireland has options to reduce our risk exposure to some of the identified risks. “ Ireland’s 80% dependency on imported oil and gas puts the economy at considerable risk. And yet Ireland is surrounded by an abundance of renewable resources that could reduce our risk of exposure, create employment opportunities and reduce emissions. Irish waters have the biggest wave heights, greatest tidal flows and strongest winds in Europe, giving us the potential advantage over other European countries to generate and export energy across the Continent, ” commented Dr. Werner Kruckow, CEO Siemens Limited who sponsored the research.

 

The report recommends a number of policy actions that Ireland could undertake on a national level. “Ireland needs to develop a plan for a sustainable integrated energy system based on four strategic pillars and do so without delay. They are:

1. Maximising Electricity Generation from Renewable Sources
2. Grid Upgrade and Integration into the European Grid
3. Promoting Energy Efficiency & Conservation
4. Maximising Electricity Usage in Transportation

Siemens will make the following recommendations of policies and measures to Government in the coming weeks to build a sustainable energy system in Ireland;

 

The ‘Wishlist’ For Public Policy Makers

1. Develop a high level 2050 strategy plan with a measurable roadmap for the energy system in Ireland – covering the four pillars outlined above.
2. Develop a ‘Carrot & Stick’ approach for business and public sector on energy savings and green house gas emissions. Support investment with tax incentives and favourable financing models.
3. Electrifying the Transport Sector - Deliver rail related projects in Transport 21, run hybrid buses in Dublin, speed up implementation of electric cars and related infrastructure. Electrify the national rail network.
4. Position Ireland as an attractive test-bed for sustainable pilot projects and encourage industry to participate and lead.
5. Modify the Public Procurement Process to take into account life cycle costs and support quick roll-out of projects in the sustainability area.

 

Notes to Editor

For the purposes of the analysis, oil and gas prices are viewed as a coupled entity. The NiGEM model was used to model the impact of high oil and gas price scenarios on the global economy. The outcomes of the global modelling then feed a more detailed national evaluation using the ESRI HERMES model.

(1) The Scenarios Modelled

Accelerated Growth Scenario illustrates a rapid increase in global oil prices where global demand, supply and associated political constraints combine over the next 10 years to drive the prices significantly higher before the markets adjust. This scenario shows a sharp reduction in Ireland’s GDP of around 7.5%, an appreciation of the Euro, an increase in interest rates and a slowdown in the international economy.

Root Scenario – oil price is low for an extended period before jumping to above $150 a barrel. This scenario is illustrative of a major short-term shock where revisions to global supply and accessibility force a rapid increase in oil price which is then sustained until markets adjust and new supply sources are exploited. As a result of this shock, Ireland’s GDP falls sharply relative to the baseline out to 2010 and remains around 3.5% below the baseline out to 2025. Similarly output for the international economy falls steadily until the latter half of the decade; by 2025 output is between 1.5 and 2.5% below the baseline in the US, UK and Euro area.

Camel Scenario incorporates two major and sustained price shock events one year apart with an ultimate reversion to a trend comparable to the baseline scenario. This scenario is illustrative of a highly uncertain future oil price market where major sequential and persistent conflicts lead to dramatic market responses. As in the previous scenarios, the effect on Irish output is stronger than the effect on international output. In the long run, the output is around 3.5% below the baseline scenario.

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