ISLAMABAD: The World Bank’s latest report predicts that in the event of a “large disruption” scenario in the Middle East, akin to the impact of the 1973 Arab oil embargo, global oil prices could potentially rise to a range of $140 to $157 per barrel.
The report suggests that global oil prices are expected to average around $90 a barrel in the fourth quarter of this year and decrease to an average of $81 in 2023 due to a slowing global economy, leading to reduced oil demand. Nevertheless, the report emphasizes the significant risk of a substantial increase in oil prices if the ongoing Middle East conflict escalates.
It notes that, since the beginning of the Israel-Hamas war, oil prices have risen by approximately 6%, whereas prices for agricultural commodities, most metals, and other commodities have seen minimal changes.
The report outlines three risk scenarios based on historical conflicts in the region, each with varying levels of disruption. In the case of a “small disruption,” which is equivalent to the reduction in oil output observed during the 2011 Libyan civil war (approximately 500,000 to 2 million barrels per day), oil prices could potentially rise to a range of $93 to $102 per barrel in the fourth quarter.
A “medium disruption,” roughly on par with the Iraq war in 2003, could result in a decrease in global oil supplies by 3 million to 5 million barrels per day, leading to prices ranging from $109 to $121 per barrel.
The “large disruption” scenario, resembling the impact of the 1973 Arab oil embargo, would reduce global oil supply by 6 million to 8 million barrels per day, initially causing prices to surge to $140 to $157 per barrel, representing an increase of up to 75%.
The report also underscores the potential consequences of sustained high oil prices, particularly in developing countries, including the likelihood of higher food prices.
Additionally, it notes that despite challenges in China’s real estate sector, the country’s oil demand has remained surprisingly robust, experiencing a 12% increase in the first nine months of 2023 compared to the same period in 2022.
The report mentions that Russia’s oil production and exports have shown relative stability, even with Western-imposed embargoes on Russian crude due to the Ukraine conflict. It observes a shift in Russia’s crude oil exports from Western countries to China, India, and Turkey, partially compensating for the decline in Western exports.
The report also delves into the challenges of enforcing a price cap on Russian crude oil introduced in late 2022. This cap, which aims to restrict the use of Western-supplied services for Russian crude above a certain price, has been breached due to Russia’s trading methods.
In conclusion, the World Bank emphasizes the potential impact of an escalation in the Israel-Hamas conflict on global oil prices. It advises policymakers in developing countries to prepare for the possibility of increased inflation. Furthermore, it encourages governments to refrain from implementing trade restrictions such as export bans on food and fertilizer, as these measures can worsen price volatility and food insecurity.
