IF OIL prices average $120 a barrel this year, Ireland’s gross domestic product would contract by 2.6 per cent and would increase by just 0.4 per cent next year, according to economists at Ernst Young.

If oil prices were to reach $150 a barrel, GDP would contract by 3.1 per cent and would continue to fall next year by 0.2 per cent, according to Marie Diron, a senior economic adviser with Ernst Young.

Brent crude was trading at just over $112 a barrel yesterday afternoon. Price pressures eased yesterday following an announcement by Saudi Arabia, the world’s largest exporter of oil, that it would increase production to meet any shortages.

The political unrest in Libya and other parts of north Africa and the Middle East caused prices to spike sharply last week.

Using its Economic Eye Ireland forecast model, Ernst Young believe inflation would come in at -0.5 per cent this year at $120 a barrel and 0.8 per cent at $150 a barrel. Its baseline prediction, with oil at $85 is inflation at -1.4 per cent.

Ms Diron said the immediate impact of higher prices would be on transport and heating costs; energy accounts for nearly 10 per cent of household expenditure.

“A rise in energy prices quickly raises monthly outgoings,” said Ms Diron. “Since transport and heating cannot easily be cut back, this means a smaller amount left to spend on other goods and services.”

If oil prices were to remain high for one or two years, there would be a knock-on effect in the cost of all goods and services.