THE Irish economy will shrink more than 3pc this year if oil prices stick at $150 a barrel, while at least one country on the eurozone's periphery would be likely to default, Ernst & Young economist Marie Diron warns in a new report.
The price of Brent crude skirted $120 last week and many analysts said it could rise further if the protests in Libya spread to other repressive oil-producing regimes, such as Saudi Arabia.
Falling growth here and elsewhere in Europe if oil rose to $150 a barrel would create renewed turmoil on sovereign debt markets and further hurt the banking sector, which would in turn require new bailouts.
"With little room for manoeuvre on the fiscal and monetary policy sides to buffer the negative economic impact, the outlook for the region would turn very bleak for several years to come," the Paris-based economist wrote.
Ms Diron says the Irish economy will contract by 2.6pc this year if oil stays at $120 and shrink by 2.3pc if oil stays at the $85 levels seen last year.
A further contraction in gross domestic product this year would put an end to the optimistic growth forecasts used by the Department of Finance and the political parties in last month's election campaign.
More importantly, it would make it all but impossible for the new Government to pare borrowing to 3pc of GDP by the 2015 deadline imposed by the European Commission. That means that the Commission may insist on further cuts.
Rising oil prices will impact the Irish economy in several ways, Ms Diron says.
"The first and immediate impact is higher transport and heating costs. Energy accounts for nearly 10pc of households' expenditure in Ireland," Ms Diron said.
"A rise in energy prices quickly raises monthly outgoings. Since transport and heating cannot easily be cut back, this means a smaller amount left to spend on other goods and services."
Higher oil prices also add to companies' production costs and force them to either cut back on other spending or to cut production. Here in Ireland, everything from fertiliser to airline tickets is likely to rise.
Higher production costs are also passed on through the production chain and, typically after one to two years, result in higher prices of all kinds of goods and services that further dent households' budgets, Ms Diron adds.
Irish exports, which are already growing slower than almost anywhere else in Europe, would be hard hit because Ireland was far from her main markets, which made transport more difficult.
Rising oil prices would trigger a double whammy for Ireland by pushing up inflation elsewhere in Europe, which would force the ECB to raise interest rates earlier than normal.