A major escalation of the war between Israel and Hamas, potentially broadening into a wider Middle East conflict, could lead to a significant surge in oil prices, warns the World Bank. Economists and policymakers have been closely monitoring the situation, considering its potential economic repercussions in the midst of efforts to combat inflation.
Despite Hamas’s invasion of Israel on October 7, energy prices have remained relatively stable. However, the World Bank’s latest study suggests that a further intensification of the conflict could overlap with disruptions caused by Russia’s war in Ukraine, creating a dual energy shock for the global economy.
Currently, global oil prices hover around $85 per barrel, with the World Bank projecting an average of $90 per barrel for this quarter. However, if the conflict escalates, the worst-case scenario could mirror the 1973 Arab oil embargo, potentially removing eight million barrels of oil per day from the market and sending prices as high as $157 per barrel. A less severe outcome, similar to the 2003 Iraq war, might see a 35% increase in prices to $121 per barrel, while a situation akin to the 2011 Libya civil war could lead to a 13% rise, reaching $102 per barrel.
World Bank officials emphasize that the impact on inflation and the global economy depends on the conflict’s duration and how long oil prices remain elevated. Sustained higher oil prices could lead to increased costs for food, industrial metals, and gold.
In response to potential market disruptions, the United States and Europe have implemented measures to stabilize global oil prices. Western nations introduced a price cap on Russia’s energy exports to limit Moscow’s oil revenues while ensuring a steady oil supply. Additionally, the Biden administration tapped into the Strategic Petroleum Reserve, a stockpile of crude oil stored in underground salt caverns near the Gulf of Mexico, to alleviate oil price pressures.
Treasury Secretary Janet L. Yellen acknowledged the possibility of more significant consequences if the war expands but noted that it was too early to predict the full extent of the economic fallout.
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