The World Bank has issued a cautionary statement, indicating that oil prices might skyrocket to over $150 per barrel if the current hostilities in Gaza, led by Israel, escalate into a comprehensive Middle East conflict.
The bank highlighted that such an escalation would result in a “dual shock” to the financial markets, further straining the global economy, which is already in a precarious state following Russia’s invasion of Ukraine in the previous year.
Drawing parallels to the 1973 Arab oil embargo, the organization underscored the severity of the situation, stating that even a minor disruption could propel oil prices to exceed $100 per barrel, up from just below $90 at present.
Analysts have raised concerns about a potential “cascading” impact of soaring oil prices on other commodities, including gas and food, which could trigger a new wave of inflation.
On Monday, Brent crude prices dropped by 1.5%, as the ground offensive by Israel in Gaza appeared to be more restrained than initially anticipated.
Despite this, the World Bank has highlighted the significant increase in geopolitical risks in the Middle East due to the recent conflict, emphasizing its potential to have extensive global effects. However, they clarified that a surge in oil prices is not their primary expectation.
In their latest commodity outlook, the World Bank pointed out that today’s world is considerably less dependent on oil for economic growth and exports from the Middle East than it was back in the 1970s.
The contribution of oil to the total energy supply has decreased from approximately 44% in the 1970s to about 30% in the present day. Concurrently, the proportion of renewables has surged from less than 1% to nearly 7%.
Although the share of global oil supply produced by the region has decreased from 37.4% at its highest in 1974 to 29.5% today, Ayhan Kose, Deputy Chief Economist at the World Bank, emphasized the continued crucial role of oil in the global economy.
He stated, “The impact of oil-related events in the region extends beyond its borders. An escalation in conflict could have far-reaching consequences.”
The World Bank highlighted the potential for substantial disruption to commodity supply in the event of escalating conflict in the region, drawing attention to the fact that natural gas prices have surged by 35% following a terrorist attack by Hamas on October 7, which resulted in over 1,400 Israeli casualties.
A prolonged escalation in prices might lead to “destabilizing repercussions across the global economy,” it warned.
World Bank’s Chief Economist, Indermit Gill, remarked, “The recent turmoil in the Middle East is a follow-up to the most significant disruption in commodity markets since the 1970s, caused by the Russia-Ukraine conflict.
“This has had lingering disruptive impacts on the worldwide economy, which continue to be felt today. It is crucial for policymakers to remain alert. In the event of an intensification of the conflict, the global economy would be confronted with a double energy crisis for the first time in many years—not only due to the Ukraine war but also owing to the situation in the Middle East.”
In a highly pessimistic scenario envisioned by the World Bank, where the conflict escalates to a regional level, disrupting oil supplies by approximately 6% to 8%, or around six to eight million barrels daily, oil prices could surge by up to 75% from their present rate to about $157, it projected.
A disruption in supply similar to the Iraq war in 2003, which resulted in a reduction of roughly 2.3 million barrels per day, could drive prices up to $121 per barrel, marking an increase of around one-third.
Drawing from historical events, the World Bank suggested that a disruption comparable to the Libyan civil war, which led to a collapse in its daily production of about 1.5 barrels in 2011 and resulted in the death of Colonel Muhammad Gaddafi, could cause prices to soar to between $93 and $102 per barrel.
On the other hand, the World Bank stated that if the conflict remains localized and countries like China continue to dampen the sluggish global recovery, oil prices could potentially retract to $81 a barrel in the next year.
Mr. Kose highlighted that economies such as the UK, Canada, and the US, now the leading oil producers globally, are significantly less dependent on the Middle East for energy. However, he pointed out that prices have already been inflated due to a decision by OPEC to “restrict” supplies, in conjunction with Russia, which is not a member of the oil cartel.
The World Bank observed that although the surge in prices was expected to be short-lived, oil prices did not revert back to the levels seen before the embargo following the oil crisis of the 1970s.
