In a report released on Monday, the World Bank has warned of a major jump to global oil prices if the ongoing Israeli invasion of Gaza triggers a “disruption” to supplies, adding the conflict could also adversely impact other commodities.
The “special focus” report on the potential near-term implications of the Middle East conflict on commodity markets notes that oil prices are expected to average $84/barrel this year due to lower demand amidst weak global growth. However, it warns, historical precedent suggests an escalation to the conflict could leader to “large increases” in the prices of oil and other commodities.
Recalling the 1973 Arab oil embargo, the World Bank notes that 4.3 million barrels/day of oil were removed from the global market between October 1973 and March 1974, quadrupling official prices. “Although the embargo lasted only five months, real oil prices remained elevated and never returned to pre-embargo levels,” it notes, adding it had led to a spike in global inflation and played a “major role” in triggering the 1975 global recession. Additional conflicts that had boosted oil prices were the Iranian revolution in 1978; the Iran-Iraq war between 1980 and 1988; the Iraqi invasion of Kuwait in 1990, it added.
Sounding a note of optimism, the global institution said market conditions today were “markedly” different from those of past price shocks. Among today’s changed circumstances, it said, was a reduced dependence on oil; diversification of supply sources; establishment of strategic reserves; development of oil futures markets; and the establishment of the International Energy Association.
On the current conflict, the World Bank outlined three risk scenarios, reflecting the severity of the impact on supply. Under a “small disruption scenario,” it assumes global oil supply would be reduced by 0.5-2 percent of supply, resulting in an increase in prices by 3-13 percent ($93.3-104/barrel) above the baseline of $90/barrel in the fourth quarter of 2023. A medium-disruption scenario, meanwhile, assumes that global oil supply is reduced by 3-5 percent of supply, which could see oil prices initially increase by about 21-35 percent ($113.33-128.8/barrel) above the baseline forecast.
A large-disruption scenario, according to the report, would assume the Israel-Gaza conflict spiraling across the region, with sharp disruptions to oil supply. In this case, it states, global oil supply would fall by 6-8 percent of supply, resulting in oil prices initially increasing by 56-75 percent ($152-173.3/barrel) above the baseline.
The report warns that any of these disruptions could have a cascading effect on the prices of other energy commodities, especially LNG, as well as non-energy commodities. Higher energy prices, it states, raise production costs of food and metals. A rise in global uncertainty, it notes, could also raise the price of gold, often considered a safe haven asset, as well as exacerbating food insecurity.
Acknowledging the “relatively muted” effect of the Middle East conflict on oil and energy markets so far, the report said the World Bank’s projections assumed that a contained conflict would have a minimal impact on commodity prices. “Nonetheless, an escalation of the conflict is a major risk to commodity markets because the region has a substantial share of the global oil supply,” it warned.
Stressing that the global economy was now in a better position to cope with energy price shocks than in previous decades, the World Bank emphasized that the Middle East conflict coming on the heels of Russia’s invasion of Ukraine could raise the specter of “dual and compounding shocks to commodity markets that could test the resilience of the already fragile global economy.”