Escalated conflict in the Middle East could result in oil at $150 per barrel

Thus far, the Israel-Hamas conflict has had limited impact on the global economy. However, an escalation to a direct war between Israel and Iran, could result in oil prices rising to $150 a barrel and global output cut by $1 trillion, according to a new analysis by Bloomberg Intelligence (BI) and Bloomberg Economics (BE).

The new study from BI and BE – Middle East Energy Scenarios– looks in detail at four broad scenarios and their potential impact on global GDP and inflation, from a sustained ceasefire to a confined conflict, a multi-front proxy war and a larger war involving direct conflict between Israel and Iran.

Ziad Daoud, chief emerging markets economist at Bloomberg Economics and co-author of the report said: “Our base case is that the war will remain largely confined, as it has been since October, with limited impact on the global economy. But this could change. A risk scenario involving a prolonged conflict could result in a global recession that takes about $1 trillion off global GDP, with surging oil prices and plummeting sentiment dropping growth to 1.7 per cent. Outside of the financial crisis and pandemic, that would be the worst growth for world economy since 1982, when the Federal Reserve hiked interest rates to contain inflation from the 1970s oil shock. The world economy is still recovering from an inflationary cycle exacerbated by Russia’s invasion of Ukraine in 2022, and another conflict in a critical energy-producing region could significantly recharge inflation to nearly 7 per cent this year. The Fed’s 2 per cent target would then be far out of reach and costlier gasoline would be a hurdle for President Joe Biden’s re-election campaign.”

Significant disruption of production in the Arabian Gulf region, which produces almost 20 per cent of the world’s oil, or to transport of oil in the extreme case of a potential blockage of the Strait of Hormuz, could shift Opec+ policy to maximum output, according to BI and BE. In this case the spare production capacity in Saudi Arabia, the UAE and Kuwait would become “irrelevant” if the strait is shuttered.

Salih Yilmaz, senior oil analyst at Bloomberg Intelligence and co-author of the report added: “Opec+ members with spare capacity, like Russia and Kazakhstan, would benefit as they would have room to maximize production at higher prices to compensate for reduced output from the Gulf countries in the cartel. The US would likely have to tap its strategic petroleum reserve to make up for some of the lost barrels and limit the impact on prices at the pump.

“In addition, a direct war in the Middle East could push prices for liquified natural gas up by at least 35 per cent if a Gulf-region conflict disrupts flows from Qatar, which sends more than 10 billion cubic feet of LNG through the Strait of Hormuz every day.”

The other conflict scenarios outlined in the report include:

Proxy war may shorten path to $100 oil

“A direct war would also be catastrophic for global markets. And while we see the continuation of a confined war as the most likely scenario, the fragile stability could easily shatter, with even a minor escalation potentially triggering a wider conflict. The recent Iranian attack on Israel serves as a stark reminder of the ever-present risk of escalation.”