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Israel-Palestine conflict could push oil prices to over $150 a barrel, warns World Bank

'If a severe oil-price shock materialises, it would push up food price inflation that has already been elevated in many developing countries,' says expert

Published: Mon 30 Oct 2023, 3:59 PM

Updated: Mon 30 Oct 2023, 6:41 PM

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Photo: AP file

Photo: AP file

World Bank on Monday warned that the Israeli-Palestinian conflict could push global commodity markets into uncharted waters and prices of oil could rise to as high as $157 a barrel in case of large disruption to global supply.

According to the World Bank’s latest Commodity Markets Outlook report, the Middle East conflict’s effects on global commodity markets have been limited so far as oil prices have risen about 6 per cent since the start of the conflict while prices of agricultural commodities, most metals, and other commodities have barely budged.

“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, chief economist and senior vice president for development economics at World Bank.

“Policymakers will need to be vigilant. If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades—not just from the war in Ukraine but also from the Middle East,” Gill said.

The World Bank warned that the outlook for commodity prices would darken quickly if the conflict were to escalate.

Since the start of the Middle East conflict started earlier this month, more than 8,000 people have died. Most of the casualties in the war have been civilians, especially children. After Israel launched a ground invasion in Gaza last week, it is feared that the death toll could rise substantially in the coming days.

3 scenarios

The World Bank report outlined three risk scenarios related to the Middle East conflict based on historical experience since the 1970s, largely depending on the degree of disruption to oil supplies.

In a “small disruption” scenario, the global oil supply would be reduced by 500,000 to two million barrels per day—roughly equivalent to the reduction seen during the Libyan civil war in 2011. Under this scenario, the oil price would initially increase between 3 per cent and 13 per cent relative to the average for the current quarter— to a range of $93 to $102 a barrel.

In case of a “medium disruption” scenario, the global oil supply would be curtailed by 3 million to 5 million barrels per day, pushing prices up by 21 to 35 per cent initially to between $109 and $121 a barrel.

But in the event of a “large disruption” scenario, the global oil supply would shrink by 6 million to 8 million barrels per day, resulting in prices skyrocketing by 56 to 75 per cent to between $140 and $157 a barrel.

As per World Bank base estimates, oil prices are expected to average $90 a barrel in the current quarter before declining to an average of $81 a barrel next year as global economic growth slows. Overall commodity prices are projected to fall 4.1 per cent next year. However, they are expected to stabilise in 2025.

Meanwhile, Ayhan Kose, the World Bank’s deputy chief economist and director of the Prospects Group, alerted that higher oil prices could inevitably mean higher food prices.

“If a severe oil-price shock materialises, it would push up food price inflation that has already been elevated in many developing countries,” he said.

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