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Crude prices could rise to more than $150 a barrel if the conflict in the Middle East escalates, the World Bank warned on Monday, risking a repeat of the 1970s oil price shock if key producers cut supplies.
In its quarterly Commodities Markets Outlook, the multilateral lender said a prolonged Israel-Hamas conflict could drive big rises in energy and food prices in a “dual shock” for commodity markets still reeling from Russia’s full-scale invasion of Ukraine.
“The latest conflict in the Middle East comes on the heels of the biggest shock to commodity markets since the 1970s — Russia’s war with Ukraine,” said Indermit Gill, the World Bank’s chief economist and senior vice-president for development economics.
Under the bank’s baseline forecasts, overall commodity prices are predicted to fall 4.1 per cent in the next year, with oil prices declining to an average of $81 a barrel, down from a projected $90 a barrel in the current quarter, as economic growth slows.
However, the report said this outlook could quickly reverse if the conflict in the Middle East intensifies. In a worst-case scenario, global oil supply could shrink by 6mn to 8mn barrels a day, sending prices to between $140 and $157 a barrel, if leading Arab producers such as Saudi Arabia moved to cut exports.
Under small and medium disruption scenarios, prices could hit $102 to $121 a barrel, the report added. Current global oil demand is about 102mn b/d.
The war began when Hamas launched cross-border attacks from Gaza on October 7, killing more than 1,400 people and taking more than 230 hostages, according to Israeli officials. The Israeli bombardment has killed more than 8,000 people in Gaza and injured more than 20,000, according to Palestinian officials.
The conflict threatens to spread beyond Israel and the occupied Palestinian territories, with energy analysts warning that global exports could be hit if leading crude producers such as Iran became actively involved.
European gas prices this month jumped to their highest levels since March as traders feared that pipeline disruptions would hit global supplies, but oil markets have mostly shrugged off the impact of conflict.
Benchmark Brent prices fell more than 3 per cent to about $87 a barrel on Monday, having exceeded $89 after the outbreak of the latest conflict. Crude prices hit a record $147 a barrel in 2008 on the eve of the global financial crisis.
The World Bank said the global economy was in a better position to withstand a supply shock than in October 1973, when Arab members of Opec cut exports to the US and other countries that supported Israel in the Yom Kippur war, quadrupling crude prices.
The Middle East is less important for global oil exports than it was 50 years ago, accounting for around 30 per cent of supply, down from 37 per cent in the 1970s.
But 30 per cent is still a big share, warned Ayhan Kose, the World Bank’s deputy chief economist. “When you think about oil prices, what happens in the Middle East does not stay in the Middle East. It has huge global repercussions.”
But the report warned that there had not yet been a full recovery from Russia’s invasion of Ukraine in February 2022, which Kose described as “traumatic for commodity markets”.
He told the Financial Times that a “really negative outcome” will come if an escalation in the conflict drives a persistent increase in commodity prices, which would unleash “another wave of inflation” and force central bankers to act. Gil added: “Policymakers will need to be vigilant.”
This would have severe consequences for food security in poorer countries already facing rising levels of hunger, according to the bank. Increases in oil and gas prices would also drive up shipping and fertiliser costs, making agricultural commodities more expensive.
“Higher oil prices, if sustained, inevitably mean higher food prices,” said Kose, adding that at the end of 2022 nearly a tenth of the world’s population was undernourished.
“An escalation of the latest conflict would intensify food insecurity, not only within the region but also across the world,” Kose said.
