The Impact of Middle East Conflict on Global Commodity Prices
The Warning from the World Bank
The World Bank’s October 2023 Commodity Markets Outlook report highlights the potential significant impacts of the escalating conflict in the Middle East on global commodity prices. According to the Washington-based institution, if the Israel-Hamas conflict expands across the region, there could be a surge in oil and commodity prices. These price hikes could lead to supply disruptions, causing a ripple effect on the global economy and exacerbating food insecurity.
Potential Scenarios and Oil Price Increases
The report presents three potential scenarios for the conflict’s impact on oil supply and prices. In a small disruption scenario similar to the Libyan civil war in 2011, global oil supply would decrease by 500,000 to 2 million barrels per day, resulting in an initial oil price increase of 3-13%. In a more severe scenario comparable to the Iraq war in 2003 or the Iran-Iraq war, the oil supply could be curtailed by 3-5 million barrels a day, driving up prices by 21-35%. In a large disruption scenario akin to the Arab oil embargo during the Yom Kippur War in 1973 or Iraq’s invasion of Kuwait, the global oil supply would reduce by 6-8 million barrels per day, causing prices to soar by 56-75%.
Implications for Oil and Commodity Prices
These potential disruptions could lead to significant fluctuations in oil prices. The baseline forecast of $90 per barrel could escalate to $102 in a small disruption scenario and surge to $157 per barrel in a large disruption scenario. These price fluctuations would undoubtedly impact the global economy and consumer prices.
Human Cost and International Monitoring
Beyond the economic consequences, the ongoing conflict has already resulted in a tragic loss of life, with thousands of casualties on both sides. The situation is being closely monitored by the international community as Israel’s expanded ground operations in Gaza continue to escalate tensions.
The Resilience of the Global Economy
Despite the potential disruptions, the World Bank’s report highlights that the current global economy is better equipped to handle major price shocks compared to the 1970s. This is due to decreased dependence on energy commodities, diversification of supply sources, strategic reserves, and the presence of institutions like the oil futures market and International Energy Association.
Concerns and Recommendations
The World Bank’s Deputy Chief Economist, Ayhan Kose, warns of the inevitable impact of sustained higher oil prices on food prices. The Chief Economist at the World Bank, Indermit Gill, advises policymakers to remain vigilant as escalating conflicts in Ukraine and the Middle East could lead to a dual energy shock.
Outlook and Forecasts
The World Bank’s preliminary assessment predicts that if the conflict does not expand further, its impact on commodity markets should be limited. The report forecasts crude oil prices to average $90 a barrel in the current quarter, declining to $81 next year due to slowing global economic growth. Additionally, the report predicts a 4.1% decrease in overall commodity prices next year, with agricultural commodities and base metals prices expected to drop in 2024 and stabilize by 2025.
This article highlights the potential consequences of the escalating conflict in the Middle East on global commodity prices. It emphasizes the importance of monitoring the situation and the impact it could have on the global economy and food security. The World Bank’s warnings serve as a reminder of the need for careful consideration and proactive measures to mitigate the potential adverse effects of such conflicts.
