The World Bank warned on Monday that a sharp escalation in the war between Israel and Hamas – which would spill over into a broader Middle East conflict – could drive oil prices up by up to 75 percent.
The potential for a global energy shock following Hamas’ brutal attack on Israel has been a pressing question for economists and policymakers trying to combat inflation over the past year.
Energy prices have been largely subdued since Hamas invaded Israel on October 7. But economists and policymakers have been closely watching the war’s progress and examining previous conflicts in the region to determine the possible extent of the economic impact of the current conflict, which is intensifying and expanding across the Middle East.
The new World Bank study suggests that such a crisis could overlap with energy market disruptions already caused by Russia’s war in Ukraine, which could exacerbate the economic fallout.
“The latest conflict in the Middle East follows the biggest shock to commodity markets since the 1970s – Russia’s war with Ukraine,” Indermit Gill, World Bank chief economist and senior vice president for development economics, said in a statement accompanying the report. “If the conflict were to escalate, the global economy would experience a double energy shock for the first time in decades – not just from the war in Ukraine, but also from the Middle East.”
The World Bank forecasts that global oil prices, currently around $85 a barrel, will average $90 a barrel this quarter. The organization had expected a decline next year, but disruptions to oil supplies could drastically change those forecasts.
The bank’s worst-case scenario is related to the 1973 Arab oil embargo imposed during the Arab-Israeli War. A disruption of this severity could knock up to eight million barrels of oil a day off the market, pushing prices as low as $157 a barrel.
A less severe but still devastating outcome would be if the war were like the 2003 war in Iraq, with oil supplies falling by five million barrels a day and prices rising by as much as 35 percent to $121 a barrel.
A more modest outcome would be if the conflict ran parallel to Libya’s civil war in 2011, which saw two million barrels of oil per day lost from global markets and prices rise by as much as 13 percent to $102 a barrel.
World Bank officials warned that the impact on inflation and the global economy would depend on the duration of the conflict and how long oil prices remained elevated. However, they said continued higher oil prices would lead to higher prices for food, industrial metals and gold.
The United States and Europe have tried to prevent a rise in global oil prices following Russia’s invasion of Ukraine. Western nations introduced a price cap on Russia’s energy exports, a move aimed at limiting Moscow’s oil revenues while ensuring oil supplies continue to flow.
The Biden administration also used the country’s strategic petroleum reserve to ease oil price pressures. A senior administration official told The New York Times last week that President Biden could approve a new round of releases from the reserve, an emergency stockpile of crude oil stored in underground salt caverns near the Gulf of Mexico.
Biden administration officials have publicly downplayed their concerns about the economic impact of the conflict, saying it is too early to predict the consequences. Treasury Secretary Janet L. Yellen noted at a Bloomberg News event last week that oil prices have been generally flat so far and that she has not yet seen any signs that the war is having a global economic impact.
“What could happen if the war spreads?” said Ms. Yellen. “Of course there could be more significant consequences.”