Once more with feeling, eh. It’s time, yet again, to pull on those big girl and boy pants and face into our latest big global crisis. It is a tall order. While watching a live broadcast this week of the inquiry into how we handled Covid, the realisation dawned that we’ve not yet even fully dealt with the international crisis before last, and we’re knee-deep in a new one.
That was the global pandemic that began six years ago, and last Tuesday the panel assessing Ireland’s response to Covid-19 held a round-table discussion of experts. Impossible to watch, I’d wager, without experiencing a strong element of PTSD; being brought back to that frightening time. In the intervening period since then we’ve also had the Russian invasion of Ukraine, and all the fall-out that entails. Now we’re in the middle of something new. Not to forget, in between times, the utter horror of the Israeli war on Gaza. Oh and before all that, Brexit.
Clearly what’s happening to the rest of us right now is not even vaguely in the galaxy of the suffering of the populations directly affected by the bombs and missiles. But it’s another new reality, as we find ourselves once again assuming the brace position.
Unlike in the first few weeks the experts are no longer saying that things might just be all right economically if the hostilities in Iran cease soon. We’re facing inflationary and supply shocks. The hikes in food prices, flights cancelled, possible drug shortages, lack of fertiliser affecting food security and manufacturing being disabled. Not to mention those price rises at the petrol pumps. In the longer term it is the fall-out from the Iranians effectively operating a toll booth approach in the Strait of Hormuz.
For any government there is a thin line between not causing people to panic, yet preparing a population for what’s around the corner as a result of a global fossil fuel shock. Be in no doubt that behind the scenes there is a strong sense of déjà vu as the system prepares for what is set to be a very tough winter. We will hear talk of protecting the vulnerable and how everyone will need to play their part.
No amount of putting your head in the sand can take from the fact that we are, as Simon Harris, the tanaiste and minister for finance, put it “living through the largest energy crisis in the history of the world, bigger than the last three combined”.
Last Thursday Micheál Martin, the taoiseach, gave a radio interview on Newstalk. There was a strong sense of “keep calm and carry on” in his message. But you didn’t need to read too closely between the lines. He spoke of us being “on the precipice of the most severe kind” if the war continues. Fuel rationing was not being considered “at this stage”.
He spoke of supply shocks leading to inflation. All the products that are derived from oil: fertiliser, plastics, helium for semiconductors. Jet fuel shortages. “You name it there are a whole range of secondary effects that will affect key sectors of the economy,” he said.
“After the last six or seven years we have had one shock after the other — Brexit, Covid, the Russian invasion of Ukraine … tariffs coming from the US. Now this, and cumulatively this will have impact.”
His comments come as the final tankers bearing fossil fuel as cargo arrive in Europe from the war-torn area. The realities were really sinking in for European governments this week, especially the energy situation to be faced next winter. At the consumer level it ranged from the threat to sun holidays, to heating your home next winter.
The real worry on supply here surrounds home heating oil and its kerosene component, needed in so many Irish homes. The cost has already soared and it is expected that the last kerosene shipments that came through the Strait of Hormuz will arrive on our shores later this month.
The warning was restated by the taoiseach that “no government can compensate for a crisis of this kind” in terms of every sector or every person’s livelihood, but it would target help at those who need it. The problem for our government is that no matter how often it’s said people don’t really believe that. Look at what was done during Covid.
The Comptroller and Auditor General has reported that the cost of the pandemic was almost €30 billion up to the end of 2022. In the wake of the Ukraine invasion, and that fuel crisis, we had the one-off payments. With plenty of warning the government moved on from those in last October’s budget — but it still rankles with many. That’s unreasonable, given so many of those people simply did not need them.
The government package announced last week came in at €250 million, largely considered to be an opening offer. It’s to be reviewed at the end of May, but no surprise if that gets pulled back.
In a blog post this week Oxford Economics, a leading independent economic advisory firm, examined what might happen if things get significantly worse in relation to Iran. Its experts looked at a possible scenario where global oil supplies dropped by 20 million barrels per day, with prices surging to $190 per barrel in August. Even harder spikes for diesel, jet fuel and shipping fuel. European and Asian natural gas prices continuing to rise, pushing up electricity prices.
There would be shortages, rationing. They pointed out how about two thirds of global oil consumption is transport-related and “diesel is the backbone of commercial logistics, agriculture and parts of industry”.
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In this frightening scenario of a prolonged war, they wrote of global inflation hitting 7.7 per cent, but unlike 2022 where the global economy kept growing through the price shock, “the severity of this disruption tips the world into outright contraction”. The potential damage of two significant inflation overshoots within four years. They concluded: “The world is not yet in this scenario. But the mechanisms that would take us there are very much in play.”
This is worst-case, what-if stuff. But no one has any clue where this is all going to end up. The Trump-fuelled mood music is no cause for optimism. We are in a very lucky situation economically compared to lots of our near neighbours and certainly in relation to developing countries where the impact is already being felt strongly.
Even if it all ended tomorrow the after-effects would be felt for a long time. If it keeps going, tough choices will have to be made by the government. Equally there needs to be an acceptance by some people that indeed the government cannot soften every economic blow.
On other fronts this column has long wondered about the wisdom of the reduction of VAT from 13.5 per cent to 9 per cent for the hospitality industry. If things worsen economically this decision, due to come into effect in July, at an estimated cost of €681 million in a full year, will surely be reviewed by the government. It may not be the only one that has to be shelved. We’ve all been here before.