World Bank Warns of Potential Record High Oil Prices Amid Middle East Conflict

World Bank Warns of Potential Record High Oil Prices Amid Middle East Conflict

The World Bank has issued a cautionary statement, predicting that if the ongoing conflict between Israel and Hamas were to escalate into a full-scale war, global oil prices could surge to an unprecedented high of over $150 per barrel. Drawing comparisons to the significant Middle Eastern conflict five decades ago, the World Bank emphasized the potential for crude oil costs to reach uncharted territories.

In a detailed analysis of the economic implications of a conflict expanding beyond Gaza’s borders, the World Bank outlined a scenario where a major disruption in the vein of the Arab oil boycott of the 1970s could trigger a supply shortage, driving oil prices up from the current rate of about $90 per barrel to a staggering $140 to $157. The previous record, not accounting for inflation, stood at $147 per barrel in 2008.

Indermit Gill, the World Bank’s chief economist, highlighted the recent conflict’s impact, citing the lingering disruptive effects of Russia’s war with Ukraine, which continue to reverberate through the global economy. Gill stressed the need for policymakers to remain vigilant, underscoring the potential for a simultaneous energy shock from both the war in Ukraine and the Middle East.

According to the Bank’s assessment in its latest commodity markets outlook, an escalated conflict would not only affect energy costs but would also result in a surge in food prices, potentially leading to a situation where hundreds of millions of people worldwide could face food insecurity.

While the ongoing Israel-Hamas conflict has had a limited impact on commodity prices thus far, with only a 6% increase in oil prices, the Bank warned that the situation could quickly worsen should the conflict escalate.

The World Bank’s baseline forecast suggests that oil prices will average $90 per barrel in the current quarter, before declining to an average of $81 per barrel next year, owing to a slowdown in global economic growth. Additionally, the report outlines three alternative paths for oil prices, contingent on the level of disruption:

  1. A “small disruption” scenario, akin to the reduction in global oil supply during the Libyan civil war in 2011, could lead to a price range of $93 to $102 per barrel.
  2. A “medium disruption” scenario, comparable to the Iraq war in 2003, could result in a 21% to 35% initial increase in oil prices, bringing them to between $109 and $121 per barrel.
  3. A “large disruption” scenario, akin to the Yom Kippur war of 1973, could cause a 56% to 75% surge in prices, elevating them to between $140 and $157 per barrel.

The oil embargo of 1973 had far-reaching consequences, with a sudden fourfold increase in crude oil prices leading to higher inflation and rising unemployment, ultimately culminating in the end of the long postwar economic boom.

Ayhan Kose, the World Bank’s deputy chief economist, pointed out the inevitable connection between sustained high oil prices and elevated food prices, stressing the potential for a severe oil-price shock to exacerbate the already elevated food price inflation in many developing countries.

With over 700 million people globally facing undernourishment at the end of 2022, Kose emphasized that an escalation of the current conflict would worsen food insecurity not just in the region but worldwide.

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