Oil prices have doubled over the past two years but this is only the start and the cost is likely to soar over coming years, writes Gerard O'Neill

One of Samuel Beckett's characters observed that "everything will turn out alright - unless something foreseen happens".

In a little over 24 months, the world price of oil has risen from $20 (€16.50) a barrel to around $40 a barrel. Few foresaw such an increase - and fewer still prepared for it.

Worse still, we are only at the beginning of a long-term rise in oil prices and it is likely that we will never see $20 a barrel again. Furthermore, it is far more likely that oil will reach $60 a barrel in the next few years - "something foreseen" which suggests that everything will not turn out alright.

The Irish economy consumes an average of 180,000 barrels of oil every day, or just 0.2 per cent of the world's daily consumption of some 80 million barrels.

Our small share belies the fact that our economy is unusually dependent on oil compared with other developed countries.

Our consumption of oil in recent years has risen by 1.8 per cent for every 1 per cent growth in gross domestic product (GDP) - three times the EU average of 0.6 per cent.

The Republic's annual oil consumption is forecast to rise from less than 9 million tonnes per annum at present to nearly 13 million tonnes by 2010.

Of course, the relationship works both ways: higher GDP does means that we buy more cars (increasing oil consumption); but the need to hire more workers in a growing economy increases the numbers commuting in their cars (requiring more oil consumption).

This is why organisations such as the International Monetary Fund suggest that a sustained increase in oil prices by, say, $10 a barrel will lower average growth rates by as much as half a percentage point.

However, an oil-dependent economy like the Republic's is more vulnerable to price increases than the average.

If we follow the pattern of rapidly growing economies, a $10 oil price increase will reduce the growth rate by 1 percentage point or more.

This may not sound like much but the increase in oil prices over the past 12 months could "cost" the Irish economy €1 billion in growth foregone next year - and that is if prices don't go up any further.

The Republic, with the rest of the euro zone, has been sheltered from the worst of recent price increases by the strengthening of the euro against the dollar.

So we will not feel the full effect of recent price rises because they have been partly offset by currency movements.

Such shifts cannot continue to shelter us from the "something foreseen" of the global economic effects of further price rises.

Nor can they protect us from the biggest shock of all - an imminent peak in world oil production as ageing oil fields roll over into declining output, with newer but smaller oil fields unable to fill the output gap.

In economic terms, the world has returned to a strong growth path over the past few years. This partly accounts for the rise in oil prices.

In 2002, world demand for oil grew by only 0.2 per cent - demonstrating the weak state of the global economy. Currently, however, total oil demand is rising by 2.9 per cent per annum - a massive turnaround in growth for the world's most traded commodity.

Such a turnaround has caught many producers off guard, with suppliers such as OPEC "catching up" with demand, a process that has lead to inevitable price increases.

If the issue was simply one of "turning on the taps" to meet surging demand, we could rest assured that prices would ease from their current $40 peak and fall back to $30 or lower as demand and supply eventually come into balance. But that is not the whole picture.

There is growing evidence of an imminent peak in global oil output - with the result that supply will level off and then fall, regardless of rising demand.

Some 99 countries in the world can produce significant amounts of oil and, of these, 52 have passed their peak of production (including the UK). Already, their combined output is falling by an average of 4 per cent per annum.

Furthermore, another 16 are at or near their peak (including China). All the remainder are expected to seek peaks in the next 25 years.

Three recent studies point to the timescale of the oil peak:

1. A report published in March 2004 by oil analysts Douglas-Westwood, entitled The World Oil Supply Report 2004-2050, concluded that a continuous growth in world oil demand of 3 per cent per annum would lead to a global oil production peak in 2008. Demand is currently growing by 2.9 per cent.

2. An article in the April 26th edition of Oil & Gas Journal on world oil production forecasts concluded that global crude oil production will peak at 81 million barrels per day in 2006-2007.

3. An editorial in the April 2004 edition of Petroleum Review forecasts that world oil production will have to grow at a unprecedented rate of 4.5 per cent to meet expanding demand and to offset the decline in the post-peak producing countries - a task that will simply hasten the arrival of production peaks in those countries not yet there.

The implications of all this for the Republic are extremely serious - and they go far beyond concerns about the impact on inflation (significant as this will be).

The fact is that our entire transportation and food production sectors - and a large part of our power generation and industrial production requirements - are critically dependent on oil.

As it is, we have one of the most oil-dependent economies in the world.

For example, the Republic has the second-highest dependence on oil in the EU just to generate electricity (hence the recent demands for a price increase by ESB).

In terms of our total energy consumption (including power generation, transportation, heating etc), we are ranked ninth in the world with regard to oil's share of total primary consumption, making us more dependent on oil for our energy than Saudi Arabia.

Looking beyond the headlines, we must ask what the Republic's requirement for 13 million tonnes of oil in 2010 will mean in a world that may be producing less and less oil with each passing year.

We need to realise just how vulnerable our energy security and our economic prosperity actually are.

People won't stop buying petrol for their cars because it has become too expensive even if and when oil goes to $60 or a $100 a barrel - how else will they get to work or to the shops?

The real crunch will come when there isn't any petrol to buy.

Oil prices will rise and fall continuously as they always have over the coming weeks and months.

At times it will seem as if the crisis has past and things really have turned out alright. But don't be lulled into a fall sense of security.

There is only one long-run direction for oil prices and that is up. If, like Beckett's character, we continue to wait for "something foreseen" to happen, we might just discover that we have left it too late.

Gerard O'Neill is chief executive of Amárach Consulting and president of the Association for Energy Economics in Ireland