World Bank Warns Middle East Conflict Could Propel Oil Prices To $157 Per Barrel

As the world closely monitors the situation between Israel and Hamas, the World Bank’s monthly report on commodities, titled “Potential Near-Term Implications of the Conflict in the Middle East for Commodity Markets,” has raised a resounding alarm concerning the imminent future for oil prices.

Since the Hamas’ attacks on Oct. 7, the West Texas Intermediate Crude Oil Spot Price (WTI), as tracked by the United States Oil Fund USO, has barely showed any meaningful appreciation.

According to the World Bank, while current oil markets have evolved considerably from previous supply shocks, historical events provide vital insights. They indicate that intensifying conflicts in the Middle East might lead to significant interruptions in oil supply, potentially causing a sharp increase in prices.

How Did Oil React During Prior War In The Middle East?

Historically, events in the Middle East, such as wars or geopolitical tensions, have had the potential to disrupt oil supplies and impact oil prices.

1. The First Oil Price Shock (1973-1974): This significant disruption unfolded during the Arab oil embargo, aimed at nations supporting Israel during the Yom Kippur War. The embargo, which lasted from October 1973 to March 1974, removed 4.3 million barrels per day (mb/d) from the global oil market, equivalent to approximately 7.5 percent of the global supply in 1973. During the embargo, the Organization of the Petroleum Exporting Countries (OPEC) quadrupled official prices from $2.70/bbl in September 1973 to $13/bbl in January 1974. This episode is commonly referred to as the first oil price shock.
2. The Second Oil Price Shock (Late 1978): The second major disruption in the global oil market occurred during the Iranian revolution, which began in late 1978. Over a six-month period, up to 5.6 mb/d of oil were withdrawn from the global market, leading to more than a doubling of oil prices.
3. The Iran-Iraq War (1980-1988): Another significant disruption in the global oil market took place during the Iran-Iraq war, spanning from September 1980 to August 1988. Both countries halted oil exports, removing 4.1 mb/d of oil from global markets.

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How Could Oil Prices React To The Israel-Hamas War?

The report outlines three distinct scenarios that World Bank economists have highlighted for consideration.

1. Small Disruption Scenario:

• Oil Supply Reduction: This scenario anticipates a relatively modest global oil supply reduction, ranging from 0.5 million barrels per day (mb/d) to 2 mb/d. This reduction represents between 0.5 to 2% of the total oil supply in 2023.
• Price Impact: Oil prices are projected to rise by 3 to 13%, translating to a price range of $3 per barrel to $12 per barrel above the baseline of $90 barrel.

2. Medium Disruption Scenario:

• Oil Supply Reduction: Building on historical precedents, the medium disruption scenario envisions a more substantial global oil supply reduction, ranging from 3 mb/d to 5 mb/d. This corresponds to approximately 3 to 5 percent of the total oil supply in 2023.
• Price Impact: In the event of an escalation of the conflict to match this scenario, oil prices could experience a more significant initial surge. Prices are forecasted to increase by approximately 21% to 35%, amounting to a price range of $19 per barrel to $31 per barrel above the baseline, which remains set at $90 per barrel in the fourth quarter of 2023.

3. Large Disruption Scenario:

• Oil Supply Reduction: The large disruption scenario paints a grim picture, assuming that the crisis escalates into a full-blown regional conflict that severely disrupts oil supply. Global oil supply is estimated to plummet by a substantial 6 to 8 mb/d, representing roughly 6 to 8% of the total oil supply in 2023.
• Price Impact: If this dire scenario unfolds, the consequences for oil prices would be severe. Oil prices are projected to surge dramatically, initially increasing by a staggering 56 to 75%. This translates to an estimated price range of $50 per barrel to $67 per barrel above the baseline, which corresponds to a range between $140 and $157 per barrel.

Source: The World Bank

The Bottom Line

Today’s global economy is better equipped to weather energy price shocks than in previous decades, thanks to reduced reliance on oil and diversified sources of supply. However, the Middle East conflict comes hot on the heels of Russia’s invasion of Ukraine in early 2022, a geopolitical disruption that sent shockwaves through commodity markets and the global economy.

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Image created using artificial intelligence with MidJourney.