Conflict in Middle East: World Bank Warns of Potential Oil Price Shocks, 30 OCT
The conflict between Israel and Gaza has escalated, with Israeli ministers declaring that the war will not be short-lived and they are resolved to secure victory. As the world watches this tension unfurl, fresh concerns are being raised about the possible ripple effects on the global economy, particularly the oil market, which is already grappling with the fallout from the Russian invasion of Ukraine.
Global Oil Market on Alert
The World Bank has sounded the alarm bell, warning that the conflict could trigger a sharp increase in oil prices, potentially creating a double shock to the energy market. It noted that the impact of the conflict has so far been limited, with oil prices climbing by about 6%, while other commodity prices such as food and metals remain relatively stable.
However, the bank also outlined three possible scenarios for oil prices depending on the extent of the disruption to oil supplies. A mild disruption, akin to the Libyan civil war in 2011, could push prices up to $103 per barrel. A moderate disruption, like the Iraq war in 2003, could see prices rise by 35% to $121 per barrel. In the event of a severe disruption mirroring the Arab oil embargo in 1973, the prices could surge by 75% to reach $157 per barrel.
Potential Double Energy Shock
Indrawati Gill, the World Bank’s Chief Economist, expressed concern that the recent conflict in the Middle East occurs on the heels of the Russian invasion of Ukraine, which has been described as the largest shock to commodity markets since the 1970s. If the Middle East conflict escalates, the world could be facing a double energy shock — one from Ukraine and another from the Middle East.
The World Bank also highlighted the potential impact of rising oil prices on food prices, which could exacerbate global food insecurity. A surge in oil prices could trigger inflation in food prices, which is already a growing concern in many developing countries. The bank pointed out that over 700 million people, nearly one-tenth of the world’s population, are already suffering from malnutrition, and the escalating conflict could worsen food insecurity both in the region and globally.
Preparing for Potential Shocks
Despite the limited impact of the conflict on commodity prices to date, the World Bank acknowledged that the global economy is better equipped to handle major oil price shocks than in the 1970s. Countries have significantly reduced their dependence on oil, with the amount of oil required to generate one dollar of GDP decreasing by more than half since 1970. They have diversified their oil sources and expanded their energy resources, including renewable energy. Some countries have even established strategic oil reserves, supply coordination arrangements, and developed futures markets to mitigate the impact of oil shortages on prices.
While these improvements suggest that the impact of an escalation in the conflict may be more moderate than in the past, policymakers need to stay vigilant. Certain commodities, particularly gold, often serve as safe-haven investments during periods of conflict and uncertainty, indicating a potential erosion of investor confidence.
In the event of conflict escalation, developing countries will need strategies to manage potential inflation increases. To avoid worsening price volatility and food insecurity, governments should steer clear of trade restrictions such as export bans on food and fertilizers. They should also refrain from imposing price controls and support measures in response to rising food and oil prices.
In conclusion, while the impact of the conflict on commodity prices has been limited so far, policymakers need to be prepared for potential risks and take measures to manage potential inflation increases and food insecurity.
No comments:
Post a Comment