War in the Middle East could cause an oil price shock, the World Bank warns
A major escalation of the war between Israel and Hamas – one that would spiral into a wider conflict in the Middle East – could send oil prices soaring by as much as 75 percent, the World Bank warned on Monday.
The potential for a global energy shock in the wake of Hamas’s brutal attack on Israel has been a pressing question for economists and policymakers as they have tried to combat inflation over the past year.
Energy prices have remained largely under control since Hamas invaded Israel on October 7. But economists and policymakers have been closely watching the war’s trajectory and studying past conflicts in the region as they try to determine the potential scale of economic fallout if the current conflict were to erupt. is intensifying and broadening throughout the Middle East.
The new World Bank research shows that such a crisis could overlap with the energy market disruptions already caused by Russia’s war in Ukraine, further exacerbating the economic fallout.
“The latest conflict in the Middle East follows the biggest shock to commodity markets since the 1970s: Russia’s war with Ukraine,” Indermit Gill, the World Bank’s chief economist and senior vice president for development economics, said in a statement. accompanied the report. “If the conflict were to escalate, the global economy would experience a double energy shock for the first time in decades – not only from the war in Ukraine but also from the Middle East.”
The World Bank expects global oil prices, currently hovering around $85 per barrel, to average $90 per barrel this quarter. The organization had predicted these numbers would decline next year, but oil supply disruptions could drastically change these forecasts.
The bank’s worst-case scenario is linked to the 1973 Arab oil embargo, which occurred during the Arab-Israeli war. A disruption of this severity could remove as much as eight million barrels of oil per day from the market and send prices soaring to $157 per barrel.
A less severe, but still disruptive, outcome would be if the war played out like the 2003 Iraq War, with oil supplies cut by five million barrels per day and prices rising by as much as 35 percent to $121 per barrel.
A more modest outcome would be for the conflict to run parallel to Libya’s 2011 civil war, with two million barrels of oil a day lost from world markets and prices rising by as much as 13 percent, to $102 a barrel.
World Bank officials warned that the effects on inflation and the global economy would depend on the duration of the conflict and how long oil prices remained high. However, they said that if higher oil prices persist, it would lead to higher prices for food, industrial metals and gold.
The United States and Europe have tried to prevent global oil prices from rising in the wake of Russia’s invasion of Ukraine. Western countries imposed a price ceiling on Russian energy exports, a move aimed at limiting Moscow’s oil revenues while keeping oil supplies flowing.
The Biden administration also tapped the country’s Strategic Petroleum Reserve to ease pressure on oil prices. A senior administration official told The New York Times last week that President Biden could authorize a new round of releases to bookan emergency supply of crude oil stored in underground salt caverns near the Gulf of Mexico.
Biden administration officials have publicly downplayed concerns about the economic impact of the conflict, saying it was too early to predict the consequences. Treasury Secretary Janet L. Yellen noted at a Bloomberg News event last week that oil prices had been generally flat so far and that she had not yet seen any signs that the war was having global economic consequences.
“What could happen if the war spreads?” said Ms. Yellen. “Of course there could be more meaningful consequences.”