The Economic Impacts for Ireland of High Oil and Gas Prices doc

Baseline Scenario 2025 This study models the economic effect of a series of high oil and gas price scenarios on the Irish economy.. • Carbon taxes increase from €13.8/tonne 08 THE ECONOM

The Economic Impacts for Ireland

of High Oil and Gas Prices

Pathways to risk mitigation and a low carbon future

A research project commissioned by Siemens Limited

Foreword

Oil and gas prices have been the

subject of considerable interest in the wake of a particularly volatile year in 2008 which saw a nominal peak of over $140 per barrel in July of that year, with a subsequent collapse to just under

$40 dollars per barrel by December1 The scale of the price swing and the rapidity of the change stand out from real and nominal price trends over the past two decades and serve as a timely illustration of the power of the unexpected

As a small open economy, Ireland is heavily dependent on world demand for Irish exports and also on our competitive position within the global marketplace

Any shock to the global economy that has

a negative impact on global growth will reduce the demand for Irish exports and therefore domestic output Additionally Ireland’s dependency on imported oil and gas for the operation of the economy and society is particularly high and this adds to the level of national risk exposure

In this report we examine the economic impacts for Ireland of three high oil and gas price scenarios for the period from 2010 to 2025 and consider the challenges Ireland may face in the event of such developments

macro-The focus is principally on the economic exposure Ireland and the world maintain with respect to oil and gas price volatility and how and to what extent, we can influence the rate of dependency on these

fuels in order to mitigate the corresponding level of impacts

The report is structured into three core sections:

1 The development of three high oil and gas (HOG) price scenarios out

to 2025

2 An estimation of the macroeconomic impacts for Ireland for each of the three HOG price scenarios as compared with the most recent national Baseline from the Economic and Social Research Institute (ESRI)

3 An outline of strategic options that could reduce Ireland’s reliance on oil and gas

Siemens is grateful to Dr Andrew Kelly of AP EnvEcon Limited for his contribution to this report We would also like to acknowledge the support and input

of the ESRI Siemens sees itself in the vanguard of the drive for sustainability This report, together with our previous studies, represents part of our contribution and commitment to help stakeholders take informed decisions – decisions that could have economic and environmental ramifications for generations to come

Dr Werner Kruckow CEO Siemens Limited Dublin, Ireland July 2010

Oil and Gas Prices and their Determinants

Chapter 1

Oil and Gas Prices and

their Determinants

This opening section of the report

deals with oil and gas prices and has

fed directly into the design of the

three HOG price scenarios tested as part of

the macroeconomic impact analysis The

purpose of this review is not to identify

the most likely path for oil and gas prices

Shocks, by their nature, are rarely a feature

of such exercises and as a result, such

an endeavour would no doubt yield a

moderate and steady outlook linked to the

current situation.2 However, the recent and

unprecedented economic crisis serves as

an unfortunate and timely reminder of the

distinction between the unlikely and the

impossible As such we choose to highlight

the unlikely We identify the principal price

determinants, examine historical evidence

of change, and consider long and short run

price outlooks from major international

analytical sources In essence we gather

evidence for ‘what could be’ and thereby

use this information to set boundaries

for our HOG price scenarios without the

constraint of an international consensus on

‘what seems most likely’

Determinants of price

Oil is an important global commodity

and its price is broadly determined

by the fundamental principles of supply,

demand and market expectations.3

There are numerous market agents,

however the dominant roles are arguably

held by a handful of operators OPEC

is the most influential player on the supply

side while the OECD countries are seen

as the most influential group on the

demand side Additionally, emerging

economies, principally China and India,

account for the majority of the increase

in global energy consumption and have

thereby evolved into important drivers of

demand and price change in the global oil

market

These players and a set of possible

04 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future

Table 1: Examples of oil price influencing events

Revisions to national reserve inventories

Revisions to internationally viable oil stocks and production rates

Natural disasters The unknown

Increased penetration of oil and gas powered technologies

Figure 1: Annual average crude oil price 1970-2010

‘events’ are highly influential in the evolution of oil price Some illustrative examples4 of such major price driver events

on both the supply and demand side are presented in Table 1 below

Historical evidence of change

Figure 1 presents the historical free market

prices of Illinois crude in both real and nominal dollars per barrel from 1970 to

2010 The most striking events are the

2008 peak and trough where a threefold change in price was experienced within the same calendar year and the significant and extended shock of the late 70’s and early 80’s during the Iran/Iraq conflict period The

Annual Average Crude Oil Price (US $)

evidence in this case illustrates quite clearly

that shocks – both acute and protracted

– have occurred in recent history

Short-term price outlook

In Figures 2 and 3 we present short (1 year)

price outlook confidence intervals from

the Energy Information Administration

(EIA) with a view to illustrating the

perceived volatility in the market price

even on this time horizon Figure 2 is taken

from the time of the oil price peak in July

2008 whereas Figure 3 is taken from the

same publication one year later in July

2009 (when prices had collapsed and were

comparatively stable) In these figures,

the red line represents the upper bound

expectation for oil price, whilst the green

line indicates the lower bound

Figure 2 gives us a clear indication of

how significant changes in the current

price can lead to far greater uncertainty

with respect to price outlook In this

case indicated by the particularly large

gap between upper and lower bound

expectations Figure 3 then moves

the same methodological assessment

forward one year and shows how the fall

and apparent stabilisation in oil prices,

along with the shorter price outlook time

frame allow for a much reduced angle of

divergence between the upper and lower

bands It is also of note, that when looking

back at the actual price path in Figure 2,

we see that from the July peak of 2008,

prices actually dipped well below the lower

statistical bound over the course of the

following year

Whilst this is only one outlook on price,

it serves to illustrate how outlooks and

expectations for ‘plausible’ energy prices

can shift dramatically in a short period of

time– in this case because of the financial

crisis and the following Great Recession

that took almost everybody by surprise

In the context of our developed HOG price

scenarios the point here is to note that

unforeseen spikes and collapses in price

can occur and they can do so within a very

short space of time Additionally, we make

note of how price volatility can debase

confidence in the stability of future prices

and can thereby create an environment of

major uncertainty surrounding future price

evolutions

Long-term price outlook

Forecasting long-term oil prices is

challenging and arguably futile Forecasts

can respond quite dramatically to current

2006 Jan 2007 Mar 2007 May 2007 July 2007 Sept 2007 Nov

2007 Jan 2008 Mar 2008 May 2008 Sept 2008 Nov

2008 Jan 2009 Mar 2009

2009 July 2009 Sept 2009 Nov 2009

Actual to July 08 Historical Lower Bound Upper Bound

Figure 2: EIA NYMEX WTI 95% confidence intervals in July 08

Figure 3: EIA NYMEX WTI 95% confidence intervals in July 09

2006 Jan 2007 Mar 2007 May 2007 July 2007 Sept 2007 Nov

2007 Jan 2008 Mar 2008 May 2008 Sept 2008 Nov

2008 Jan 2009 Mar 2009

2009 July 2009 Sept 2009 Nov 2009

Actual to July 09 Historical Lower Bound Upper Bound

) per barrel

Oil and Gas Prices and their Determinants

events and changes in expectations Both

can change quickly as illustrated by the

revised EIA International Energy Outlook

(IEO) for world oil prices presented in

Figure 4

The trend lines represent the change

in the ‘reference case’ world oil price($2007)

outlook between the IEO 2008 and IEO

2009 reports In the space of a year the

price projection – not its confidence

interval – has altered significantly, with

a near doubling of the real oil price($2007)

in 2025 under more recent analysis5

Adjusting values to nominal prices would

result in a nominal price forecast for 2025

of approximately $220 per barrel from the

2009 outlook, as compared with a nominal

price of over $120 per barrel from the 2008

analysis6

Figure 5 draws on the associated

literature and presents the EIA high and

low world oil price scenarios which frame

the reference case These alternate price

projections present a real oil price($2007) low

of just $50 and a high of just under $200

in 2025

The boundaries of the high price

scenario described here have been used

in developing the HOG Price scenarios to

restrict the impact of ‘events’ in a given

year to the comparable high price scenario

range In no case or year do the HOG prices

exceed the EIA high price scenario peak

real value of $200($2007) per barrel The

highest real oil price($2008) reached being

06 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future

approximately $175 in the second peak

of the ‘Camel’ HOG price scenario which is presented later

Conclusion on price outlook

The primary conclusion on price outlook

is simply that both moderate change and extreme shifts are possible and changes in price can occur within a very short space

of time There are numerous factors which may combine to deliver short and sharp price shocks, as well as more persistent combinations that could deliver prolonged changes in price Similarly, expert

international outlook on price can change dramatically and quickly for both the short and long-term

Into the future, it seems likely that sustained pressure on available resources will ultimately lead to increased price volatility with implications for the market price Therefore, we conclude that there

is both precedent and growing potential for price changes of the scale described in the HOG price scenarios in Chapter 3 over longer time frames

Figure 5: Annual energy outlook: Reference, high and low price ($2007) oil scenarios to 2025

Baseline Scenario 2025

Chapter 2

Baseline Scenario 2025

This study models the economic effect

of a series of high oil and gas price

scenarios on the Irish economy

However, oil and gas prices are just

one component of the macroeconomic

modelling exercise and need to be

mapped against a broader perspective

comprising the many different parameters

and assumptions relating to the structure,

interactions and development of the Irish

and world economies For this purpose, we

have adopted the ESRI’s Baseline forecast for

Ireland out to 20257 as the scenario against

which the HOG price scenarios are tested

Baseline Scenario description

The ESRI Baseline 2025 scenario (hereafter,

Baseline Scenario) takes a lead from the

Recovery Scenarios for Ireland report that

was published by the ESRI in May 20098 and

specifically the World Recovery Scenario

(WRS) described therein9 The principal

assumption is that global economies

recover from recession by the middle of

2010 and then proceed to grow at rates

nearing potential from 2011 onwards10 with

a corresponding recovery in world demand

for Irish exports The forecasts for the key

macroeconomic aggregates of this WRS

scenario for Ireland are presented in Table

2 with the principal statistic for average

GNP growth of 3.3 per cent over the period

2015 to 2020 and more moderate growth

averaging 2.7 per cent over the period

2020-2025 An ESRI ‘storyline’ for this scenario

is presented under the next heading

Scenario Story

Weak domestic demand and the recession

in the international economy leads to a

substantial fall in output in the

manufacturing and market services sectors

with overall GNP expected to fall by 9.0

per cent in 2009 and by almost 2 per cent

in 2010 The increase in unemployment

associated with the contraction in

economic activity over the period

2008-2010 is expected to lead to significant wage moderation in both the public and private sectors The macroeconomic model suggests that nominal wage rates in the economy as a whole could decline by 6.6 per cent in the period 2009-2011 As a result

of the world recovery and the improvement

in competitiveness, GNP growth is expected

to resume, averaging 5.5 per cent in the period 2010-2015 (i.e the average growth experienced in each of the five years 2011-15)

The high degree of responsiveness

of the Irish economy to changes in world activity could give rise to a strong recovery from 2011 onwards, assuming the economy regains competitiveness However this recovery would imply a restoration of only some of the losses sustained over the period 2008-2010 As a result of the recession, by

2015 output would be around 15 per cent

below where it would have been without the global economic crisis

On public finances, the lower level

of economic activity is likely to reduce government revenue from a range of taxes while at the same time government expenditure is expected to rise due to increased welfare and national debt interest payments As a result the general government balance as a percentage of GDP is expected to remain very high at

12 per cent in 2010, taking into account the fiscal measures for 2009 and Budget

2010 announced to date The resumption

of economic growth after 2011 would bring about an improvement in the general government balance which on the basis of this benchmark scenario is forecast to fall to 3.9 per cent of GDP in 2015

The deterioration in the economy

is expected to lead to a dramatic rise in unemployment and the unemployment

Table 2: World Recovery Scenario Major Aggregates

Baseline Scenario 2025

rate As a result of lower levels of output

in the building, manufacturing and market

services sectors total employment is

expected to fall by 9.2 per cent in 2009

and a further 5.8 per cent in 2010 The

unemployment rate is expected to peak

at 16.5 per cent in 2010 In line with the

anticipated recovery in economic activity

from 2011 onwards, employment growth

is expected to resume and average 2.8 per

cent over the period 2010-2015 This is

expected to result in some moderation in

the unemployment rate which is projected

to fall to 6.6 per cent by 2015

Emigration is assumed to peak at 50,000

in 2012 The cumulative net emigration

of 152,000 over the period 2009 to 2015

represents a significant reduction in the

labour force as a result of the recession Of

course the likely response of migration to

the current recession is highly uncertain

If migration were not to resume to the

extent assumed here this would lead to a

larger rise in the unemployment rate and a

slower recovery in the labour market than

described

The combination of the bursting of the

housing bubble and the world financial

crisis has had a substantial impact on the

endowment of labour and capital in Ireland

This has served to permanently reduce the

potential output of the economy While the

Medium-Term Review 2008-2015 published

in Spring 2008 suggested that the potential

output growth rate for the Irish economy

over the period 2005-2020 was around

3.6 per cent a year, today we feel that it

is closer to 3.0 per cent a year Over the

longer-term we anticipate average GNP

growth of 3.3 per cent over the period

2015 to 2020 and more moderate growth

averaging 2.7 per cent over the period

2020-2025

Specific scenario assumptions

Fuel price assumptions in the Baseline

Scenario are as follows:

• Gas prices fall from €25.8 per MWh

• We assume no growth in real peat prices

over the period

• Carbon taxes increase from €13.8/tonne

08 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future

en implemented according to the timetables announced by the relevant system operators.12

Note on alternative scenarios

It is noted that the Baseline Scenario

is the less ambitious of the two main energy scenarios developed in Ireland

at the end of 2009 The more ambitious scenario is the ‘White Paper plus’ scenario which incorporates assumptions such as greater penetration of renewables, higher proportions of electric vehicles and meeting all of the targets established within the National Energy Efficiency Action Plan (NEEAP)13

We believe that the targets of the

“White Paper plus” scenario and other similarly ambitious scenarios will require concerted national action and investment over the next 15 years and there are many challenges yet with respect to infrastructure, investment and technology that must be considered It is in the context

of this challenge that this report hopes

to support further debate on the risks we face, the options available and the means

of progression It is for this reason that the Baseline Scenario is adopted as our reference case.14

Table 3: Electricity savings in MWh

250 300

2025 or just under $100 in $2008 prices

The Baseline oil price scenario therefore assumes a steady and moderate increase

in oil price with no price shocks anticipated over the next 15 years

Electricity demand in the Baseline Scenario has been adjusted to take account

of recently implemented measures which have not yet had a substantial impact (further details in DCENR’s National Energy Efficiency Action Plan, 2009-2020)11 but will lead to savings over the period to 2025

Energy demand is reduced by the amounts shown in Table 3, and changes linearly between the reference years

With respect to energy infrastructure, plant commissioning and decommissioning in the modelling exercise has be

Economic and Social Impacts of three Oil and Gas Price Scenarios

Chapter 3

Economic and Social Impacts of three

Oil and Gas Price Scenarios

Relative to the Baseline oil price

presented in the last chapter, we have

modelled three alternative oil price

scenarios known as – “Accelerated growth”,

“Root” and “Camel”15 along with an impact

assessment for each of the scenarios In

each impact assessment we interpret the

results to explain the outcomes and their

linkage with the oil price variable16

HOG Price Scenario 1: “Accelerated

Growth”

The accelerated growth scenario (Figure

7) presents a steady but rapid increase in

global oil prices from the recovery year of

2011 The most rapid growth occurs in

the eight years subsequent to the 2011

recovery, with a slowed rate of growth

then from 2019 to 2025, where real prices

actually fall and level off The scenario is

illustrative of an aggressive price path where

global demand, supply and associated

political constraints combine over the

next ten years to drive available resource

prices significantly higher before ultimately

moderating somewhat as markets adjust

Internationally, the impact of a rise in oil

prices on output and inflation varies across

countries and depends on the response of

monetary authorities An oil price shock of

this size would have a substantial effect on

inflation Figure 8 shows the percentage

change in the price level compared to the

Baseline Scenario for the US, the UK and

the Euro Area In this simulation monetary

authorities react by increasing interest rates

to negate some of the upward pressure on

the price level The results suggest that

by 2015 interest rates in the US would be

around 13/4 percentage points above the

Baseline Scenario and that interest rates

in the Euro Area and UK would be around

11/5 to 11/4 basis points above the Baseline

Scenario

This higher level of interest rates

would increase the cost of capital in these

countries and have a negative effect

on output In addition, the Euro would appreciate by around 3 per cent against both the Dollar and Sterling in the long

term, having a negative effect on Euro Area competitiveness The effect of the oil price shock on the levels of GDP for the US, UK and Euro Area are shown in Figure 9 The

250 300

Figure 7: Accelerated Growth scenario

5 9

Economic and Social Impacts of three Oil and Gas Price Scenarios

results show that by 2019 output in the US

would be around 4.5 per cent below the

Baseline Scenario and that output in the

Euro Area and UK would be 3.75 and 3.3

per cent, respectively, below the Baseline

Scenario Over the medium to long term,

the impact on output is strongest in the

US as they have a higher oil intensity of

production After that, the decline in output

continues but not at the same pace as this

scenario assumes that the increase in the

oil price post-2019 is more modest than in

earlier years Overall the adverse effects are

less marked in the UK economy as it has

domestic oil reserves

This type of shock would affect Ireland

through three main channels Firstly, the

appreciation of the Euro reduces Irish

competitiveness by leading to an adverse

movement in our terms of trade and this

results in a loss in income Secondly, the

increase in interest rates would have

a negative effect on investment and

therefore output Finally, the slowdown

in the international economy reduces the

demand for Irish exports The effects of this

shock on the Irish economy are stronger

than on the international economy This

arises not necessarily because the Irish

economy is more sensitive to oil prices but

rather because of its greater sensitivity

to a slowdown in international output,

changes in interest rates and changes in its

competitive position

Figure 10 shows that there would be a

sharp reduction in the level of Irish GDP as

a result of this oil price scenario Our model

indicates that the level of output in 2025

would be around 7.5 per cent below the

Baseline Scenario In terms of the effect

on GDP growth rates, this oil price scenario

would knock around 1.4 percentage points

off the average growth rate between 2010

and 2015 The average growth rate between

2015 and 2020 would be around 0.6

percentage points lower and the average

growth rate between 2020 and 2025 would

be around 0.2 percentage points lower The

shock to world output would substantially

reduce the demand for Irish exports and

consequently reduce output in the industrial

and market services sector By 2019, output

in both the industrial and market services

sector would be around 6 per cent below

that in the Baseline Scenario

The impact on the price level in Ireland

is more muted than on the international

economy The effect on the consumption

deflator is shown in Figure 11 The more

negative impact on output puts downwards

10 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 11

pressure on the price level which negates some of the upward pressure caused

by higher oil prices The impact of higher consumer prices would lead to a substantial fall in real personal disposable income This has a marked negative effect

on consumption and, in turn, has a negative impact on sectoral output that

is driven by domestic demand (e.g distribution) The rise in interest rates would have a negative effect on investment in Ireland with total investment being around 5.5 per cent below the Baseline Scenario in the long run

Given the impact on consumer prices,

we would anticipate knock-on effects of higher inflation on wage rates as employees bargain to protect their real after-tax wage However, the simulation results indicate that wage rates could actually be below that of the Baseline over the long term This arises because the effect on the demand for Irish exports (due to the slowdown in the international economy) is so severe that the only way firms can negate some of this impact and try to regain some lost competitiveness is to reduce wage growth The results show that employment could fall by 2 per cent below the Baseline in the long-run and that the unemployment rate would be on average around 0.5 percentage points above the Baseline Scenario These effects are likely to

be stronger if wage rates do not fall below those in the Baseline Scenario

HOG Price Scenario 2:” Root”

In the Root Scenario (Figure 12), the oil price is low for an extended period of time before jumping to above $150 per barrel The price then reaches a bumpy plateau with no sustained return to sub-$150 prices In real terms, the price by 2025 is only marginally higher than that of the Baseline Scenario The scenario is illustrative

of a major short-term price shock where revisions to global supply and accessibility force a rapid increase in oil price to a new plateau This plateau is sustained and the price mitigates over the years in real terms

as markets adjust and new supply sources are exploited at the higher costs

In this Scenario, the impact on the price level in the international economy is very strong over the medium term but the effect begins to diminish in the longer term (see Figure 13) Over the medium term monetary authorities respond to the strong increase in the price level by raising interest rates which has a further negative effect on output

250 300

Figure 12: Root scenario

% change relative to Baseline

4.00 5.00

Figure 15: Root scenario - Impact on Price Level for the Irish Economy

-1

GDP

Figure 16: Root Scenario - Impact on Output (GDP) for the Irish Economy

Economic and Social Impacts of three Oil and Gas Price Scenarios

Figure 14 shows the effect on output as

a result of this shock Output falls steadily

below the Baseline Scenario in the US, the

UK and the Euro Area until the latter half

of the decade; it then falls by less as the oil

price moves back closer to where it is in the

Baseline By 2025, output is between 1.5 to

2.5 per cent below the Baseline in the US,

UK and Euro Area

As before, the results for the Irish

economy follow a similar pattern to those in

the international economy The inflationary

impact of the oil price increase results in

the Irish price level being around 4 per

cent above the Baseline Scenario in the

medium term (see Figure 15) This effect

weakens over the longer term and prices

actually end below the Baseline by 2025

This seems counter intuitive but in this case

the downwards pressure on the price level

as a result of the negative effect on output,

outweighs the upwards pressure caused by

higher oil prices at the end of the period

As a result of this shock, output in

Ireland falls sharply relative to the Baseline

out to 2016 (see Figure 16) Despite the

fact that the impact on the international

economy is slightly more moderate over

the longer term, GDP remains around 3.5

per cent below the Baseline as Ireland is

more sensitive to shocks in the international

economy The simulation results indicate

that output in the industrial sector would

be around 31/2 per cent below the Baseline

Scenario in 2025 while output in the

market services sector would be around

41/2 per cent below the Baseline Scenario

In this Scenario the effect of higher interest

rates leads to a fall in investment of around

21/2 per cent in the long run relative to the

Baseline Scenario

In terms of labour market impacts,

when the oil price increases sharply

(between 2013 and 2016) wage rates

initially increase above the Baseline

Scenario as workers demand higher wages

to compensate for their loss in purchasing

power However, as in the Accelerated

Growth Scenario, in the long-term firms

try to regain some lost competitiveness so

wage rates fall below the Baseline leaving

workers considerably worse off In this

Scenario, total employment is around 1 per

cent below the Baseline in the long run

HOG Price Scenario 3:”Camel”

The “Camel” scenario (Figure 17) incorporates

two major and sustained price shock events

one year apart with an ultimate reversion to

a trend comparable to that of the Baseline

12 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future Pathways to risk mitigation and a low carbon future THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES 13

250 300

Figure 17: Camel Scenario

Scenario In real terms, the second price shock peak of the camel scenario represents the highest oil price assessed as part of the study – at a level of $175 in 2019 The scenario is illustrative of a highly uncertain future oil price market where major sequential and persistent conflicts lead to dramatic market responses

In this Scenario there are two transient oil price spikes in 2014-2015 and 2018-

2019 As a result, in the simulation results there will be stronger effects during these two time periods Figure 18 shows the impact on the price level in the international economy In this Scenario, as oil prices and the price level follow a more unsteady path and so too do interest rates Monetary authorities respond to this type of shock by increasing interest rates sharply during the two price spikes but lowering them when the price level starts to come down again

In this scenario there is some appreciation

of the Euro against the Dollar and Sterling but the effect is much smaller than in the Accelerated Growth Scenario and the effects are strongest when the price spikes occur.The effect on the level of output in the international economy is shown in Figure

19 As mentioned above, the impact on output is not smooth over time because of the nature of the shock For each country the impact on output is considerably smaller than in the Accelerated Growth Scenario Figure 20 shows the impact on the level of Irish GDP and Figure 21 shows the impacts on domestic price levels The impacts reflect the patterns shown for the international economy As in the previous Scenario, the effect on Irish output is stronger than the effect on international output In the long run output is around 3.5 per cent below the Baseline Scenario; more than half the long run effect reported in the Accelerated Growth Scenario By 2025, industrial output is around 3.4 per cent below the Baseline Scenario and output

in the market services sector is around 4.5 per cent below the Baseline Scenario As the interest rate differential (compared to the Baseline) is not smooth, neither is the response of investment to such a shock Although the impact on investment is negative, it is more marked during the periods of the oil price spikes For example, total investment is around 4 per cent below the Baseline Scenario during the second oil price spike but is around 2 per cent below the Baseline Scenario in the long run Similar to the Root Scenario, wage rates initially rise above the Baseline Scenario

Figure 18: Camel Scenario - Impact on Price Level in International Economies

-1 2010

Figure 19: Camel Scenario - Impact on Output (GDP) in International Economies

-1.00 2010

GDP

Figure 20: Camel Scenario - Impact on Level of Irish GDP

Chapter 4

Ireland,s dependence on Oil and Gas

4.00 5.00

Figure 21: Camel Scenario - Impact on Price Level for the Irish Economy

Economic and Social Impacts of three Oil and Gas Price Scenarios

values when the spikes in the oil price occur

and then fall below the Baseline Scenario in

the long-term As a result of the lower level of

activity in the economy, total employment is

around 1 per cent below the Baseline Scenario

in the long-run and the unemployment rate

rises by around 0.3 percentage points above

the Baseline values

For each of the prior price scenarios

we have described the modelled economic

impacts However, whilst these broader

economic indicators are a core component

of this report, it is important to be aware

that there are further additional impacts

with associated value that are not explicitly,

or in some cases even implicitly, captured

within such analytical systems We identify

six such impacts in this study

Table 4 presents a qualitative summary

of these six impact areas to be considered in

the context of what high oil and gas prices

would mean for Ireland

14 THE ECONOMIC IMPACTS FOR IRELAND OF HIGH OIL AND GAS PRICES Pathways to risk mitigation and a low carbon future

DESCRIPTION IMPACT

Higher energy costs will impose a greater financial burden on the poor relative to the rich In this way the exposure to higher energy prices poses a greater potential cost to those least able

to afford the change This can lead to negative welfare implications

Related to the distributional impact, higher fuel and energy costs will push more individuals from the margins into a position of energy and fuel poverty This is a situation where a household spends more than 10% of its income on trying to heat and light a home to an adequate level

The costs of this shift include reduced welfare, poor health and excess winter mortality

Increased fuel prices will add to travel costs and constrain travel decisions This may lead to reduced emissions, an outcome similar to that of a carbon tax for transport However, unlike

a tax which would at least generate revenue for investment, exposure to rising international oil prices would simply increase costs Whilst the very poorest may not have access to a car, the dominance of private transport in the Irish market would suggest the impact would be felt widely with reduced travel for leisure and additional cost for commuting

Energy price volatility associated with high oil and gas prices creates a situation of market uncertainty This makes planning difficult, can generate financial problems for business and individuals, hinders investment decisions and creates a poor environment for economic growth

On a positive note however, such volatility can also serve as a strong incentive for alternative energy sources for those who do choose to invest The indirect taxes on final energy demand offer another mechanism to mitigate price volatility, although there are constraints in this regard

Within Europe, Ireland already has comparatively high electricity costs and fuel costs Whilst Ireland lacks the major energy-intensive industries to have competitiveness severely impacted

by oil and gas prices, the cost of energy and fuel is a factor in relation to the operational costs

of business and associated investment decisions

The cost nationally of importing oil and gas would be expected to rise under the higher price scenarios

Whilst demand may drop somewhat, the lack of alternatives and strong energy requirements in society would likely see the national energy import bill rise Statements from Minister Ryan suggested Ireland currently spends approximately €6 billion per annum on imported fossil fuels

Table 4: Summary table of non-modelled impacts