The World Bank warned that if the conflict escalates in the Middle East, crude prices could reach $150 per barrel. This would be a return to the oil price shock of the 1970s if major producers cut their supply.
In its quarterly Commodity Markets Outlook the multilateral lender warned that a prolonged Israel/Hamas conflict would cause a big increase in food and energy prices, causing a “dual blow” to commodity markets already reeling from Russia’s full-scale invasion in Ukraine.
Indermit Gil, World Bank chief economist and senior vice president for development economics, said that the latest conflict in the Middle East follows the biggest shock on commodity markets since 1970 — Russia’s War with Ukraine.
According to the bank’s base forecasts, the overall commodity price is predicted to drop by 4.1 percent in the coming year. oil will fall to an average price of $81 per barrel from the projected $90 per barrel for the current quarter as the economic growth slows.
The report stated that this outlook could change quickly if the conflict intensifies in the Middle East. If Saudi Arabia and other major Arab producers cut their exports, the worst case scenario would be that global oil supplies could drop by 6mn-8mn barrels per day. This would push prices up to $140 to $157 a barrel.
The report said that under small and medium disruption scenarios the price could reach $102 to $121. Global oil demand currently stands at 102mn barrels per day.
According to Israeli officials, the war began on October 7 when Hamas launched attacks across the border from Gaza. More than 1,400 people were killed and more than 230 taken hostage. According to Palestinian officials, the Israeli bombardment in Gaza has resulted in more than 8, 000 deaths and more than 20, 000 injuries.
Energy analysts warn that the conflict could spread beyond Israel and occupied Palestinian Territories, if major crude producers like Iran become actively involved.
The European gas price this month rose to its highest level since March, as traders worried that pipeline disruptions could affect global supplies. However, oil markets have largely ignored conflict’s impact.
Benchmark Brent fell by more than 3 percent to around $87 per barrel on Monday. Prices had risen above $89 a barrel after the onset of the latest conflict. Crude oil prices reached a record high of $147 per barrel on the eve the global financial crisis in 2008.
The World Bank stated that the global economy is better able to withstand an supply shock today than it was in 1973 when Arab members cut their exports to US and other countries who supported Israel during the Yom Kippur War, quadrupling the price of crude oil.
The Middle East has a smaller role in global oil exports today than it did 50 years ago. now accounts for about 30%, down from 37% in the 1970s.
Ayhan Kose is the deputy chief economist at the World Bank. He warned that 30 percent was still a large share. When you consider oil prices, the Middle East is not the only place where what happens there affects the price. It has global repercussions.”
The report warns that the market has not recovered fully from Russia’s invasion in Ukraine, described by Kose as “traumatic” for commodities.
He said that an “extremely negative outcome” would be a continuing rise in commodity prices. This would trigger “another surge of inflation” forcing central bankers into action. Gil said: “Policymakers must be vigilant.”
According to the bank, this would have serious consequences for food safety in countries that are already experiencing rising levels of hunger. The bank said that rising oil and gas costs would increase shipping and fertiliser prices, increasing the cost of agricultural commodities.
Kose said that higher oil prices would inevitably lead to higher food prices if they were sustained. He added that by the year 2022, nearly a 10th of the global population will be undernourished.
“An intensification of the conflict in the region, as well as around the globe, would increase food insecurity.”