Esmond Birnie: Rising global oil prices are yet another blow to Northern Ireland economy

The initial period of hostilities between Israel and Iran had already caused the global oil price (US dollars per barrel) to edge up from roughly $67 to $77. It is now quite likely that the Iranian retaliation against Trump’s air strikes will push that price above $100.

It is all about supply and demand. Elements in the Tehran regime have suggested they are about to close the Strait of Hormuz. That relatively narrow shipping lane is a choke point through which about 20% of global supplies of oil are carried from suppliers such as Saudi Arabia through to customers in the West or East Asia.

A similar high proportion of global supplies of liquified gas are shifted through the Strait.

IF Iran blocks that shipping lane then global oil supplies are restricted. There is dearth of immediate alternatives given that the Western economies are unlikely to turn to Russia. So, world prices could start to rise back towards the peak level they reached back in 2022 after the Russian invasion of the Ukraine when they reached $139 per barrel.

Such developments are particularly bad news from the point of view of the Northern Ireland economy.

We face the prospect of household finances being squeezed and consequentially less disposable income being available to spend on things other than transport and household heating.

Northern Ireland is unusually dependent on oil for home heating: according to the 2021 Census almost one half of households were entirely dependent on oil and a further 15% of households were using oil in combination with another fuel. (In contrast in England in 2021 only 3.5% of households used oil heating).

We almost know that “fuel poverty” rates (households where more than 10% of income has to be spent on energy and heating) in Northern Ireland exceed those in GB. So, the likelihood is an oil shock impacts disproportionally on Northern Ireland.

In the late 1970s-80s the UK was shielded from any negative impact of higher oil prices given that the North Sea had converted the UK into a net oil exporter. That is no longer the case.

In fact, across the UK higher oil prices will shave off a considerable amount of what was previously the expected economic growth rate.

Using research by the Office for Budget Responsibility, a 40% rise in oil prices (taking them to about $105) might be associated with a reduction in GDP growth of 0.8% points.

That research was conducted back in 2011 (and gave broadly similar results to IMF research from 2007). IF we take the possibly overly optimistic view that growth in energy efficiency, higher use of renewables and “de-Carbonisation” of the UK economy over the last 15 years has halved the impact of an oil shock then we would still be looking at 2025 growth rates being about 0.4% points below previous levels.

Given that forecast growth for 2025 was already as low as about 1.0% (partly because of the global uncertainty generated by the Trump tariffs) a further reduction of 0.4% would be very painful.

Interestingly, this week the UK government will publish a new industrial strategy and the reduction in energy prices to heavy industry is going to be a key part of that strategy (it is not just traditional sectors such as steel or chemicals which use a lot of electricity but think of AI and data centres).

Such a strategy may well make some sense but higher oil prices imply the cost of subsidising energy prices will increase. This point is especially relevant to Northern Ireland where industrial electricity prices are even higher than those in GB.

There is a real danger that 2025 will start to feel like a stagflationary near recession with inflation rising but growth not much above zero. And what is true at the UK-wide level would also apply to Northern Ireland in particular”.

Esmond Birnie, senior economist, University of Ulster