World Bank warns that oil prices could reach $100 per barrel if the conflict in the Middle East worsens.

The World Bank said that a serious increase in tensions in the Middle East could push the oil price to $100 (£80) per barrel, and reverse the recent decline in global inflation.

The Washington-based organization said that the recent drop in commodity prices was levelling off before the recent missile attacks by Iran and Israel, making the interest rate decisions of central banks more difficult.

It added that its prediction that crude oil prices would average $84 per barrel in this year could prove to be too optimistic if the crisis worsens.

The fear of a war on a large scale in the Middle East has already led to an increase in fuel prices for motorists. The price of a barrel of Brent crude has risen to $87. Meanwhile, the average price for a -litre of unleaded gasoline in Britain is now above £1.50.

In the latest report on commodity markets from the World Bank, it was stated that a moderate disruption in supply due to conflict could increase Brent’s average price this year up to $92 per barrel. Oil prices could reach $100 per barrel if a more severe disruption occurs, which would increase global inflation by almost one percentage point in 2024.

Between mid-2022 and mid-2023, global commodity prices plummeted by nearly 40% and were the driving force behind a near-two-percentage-point drop in global inflation over that period. The World Bank’s index of commodity price has remained virtually unchanged since mid-2023.

In response to higher than expected inflation, financial markets have already reduced expectations of the pace and scale of interest rate reductions this year.

Indermit Gil, chief economist at the World Bank, stated: “Global inflation is unabated.” Falling commodity prices, a key factor in disinflation, have essentially reached a brick wall.

This means that interest rates may remain higher than expected in this year and the next. A major energy shock may undermine the gains made in the last two years to reduce inflation.

World Bank stated that an increase in conflict in the Middle East would also lead to higher prices for natural gas, fertilizers and food. The strait passes through a fifth of the world’s LNG exports. If the supply was interrupted, the prices of fertilisers that rely on LNG for their production would increase substantially.

The Bank’s base forecast assumes that the crisis will not worsen. Overall food prices are expected to fall by 6% in 2020 and 4% in 2030. Fertilisers are predicted to drop by 22% and 6% respectively in 2024.

The World Bank stated that the increase in investments in green technologies has pushed up the prices of metals critical to the global clean energy transition.

Copper prices, which are needed for electric-grid infrastructure as well as electric vehicles, reached a record high of two years in April. They were forecast to increase 5% in the year 2024, before stabilising by 2025. The price of aluminium is expected to rise by 2% by 2024, and by 4% by 2025. This will be boosted by electric vehicles, solar panel production, and other renewable power infrastructure.