Although the global economy is in a much better position than it was in the 1970s to cope with a major oil-price shock, an escalation of the latest conflict in the Middle East—which comes on top of disruptions caused by the Russian invasion of Ukraine—could push global commodity markets into uncharted waters, the World Bank has said.
In its latest Commodity Markets Outlook, released on Monday morning, The Washington based lender said the effects should be limited if the conflict doesn’t widen.
The Bank note that 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% next year. Prices of agricultural commodities are expected to decline next year as supplies rise. Prices of base metals are also projected to drop 5% in 2024. Commodity prices are expected to stabilize in 2025.
“The conflict’s effects on global commodity markets have been limited so far. Overall oil prices have risen about 6% since the start of the conflict. Prices of agricultural commodities, most metals, and other commodities have barely budged.
“The outlook for commodity prices would darken quickly if the conflict were to escalate,” it said.
The report stated that effects would depend on the degree of disruption to oil supplies.
According to the global Bank, in a “small disruption” scenario, the global oil supply would be reduced by 500,000 to 2 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% and 13% relative to the average for the current quarter—-to a range of $93 to $102 a barrel, the report said.
“In a “medium disruption” scenario—roughly equivalent to the Iraq war in 2003—the global oil supply would be curtailed by 3 million to 5 million barrels per day. That would drive oil prices up by 21% to 35% initially—to between $109 and $121 a barrel. In a “large disruption” scenario—comparable to the Arab oil embargo in 1973— the global oil supply would shrink by 6 million to 8 million barrels per day. That would drive prices up by 56% to 75% initially—to between $140 and $157 a barrel.
“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. That had disruptive effects on the global economy that persist to this day. 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,” said World Bank’s Chief Economist and Senior Vice President for Development Economics, Indermit Gill.
The World Bank’s Deputy Chief Economist and Director of the Prospects Group, Ayhan Kose, noted that “Higher oil prices, if sustained, inevitably mean higher food prices. If a severe oil-price shock materializes, it would push up food price inflation that has already been elevated in many developing countries. At the end of 2022, more than 700 million people—nearly a tenth of the global population—were undernourished. An escalation of the latest conflict would intensify food insecurity, not only within the region but also across the world.”