Any escalation of the latest imbroglio in West Asia will likely push up the prices of various commodities in the global market “into uncharted waters”, the World Bank has said.

However, the global economy is in a much better position than it was in the 1970s to cope with any major crude oil price shock, the bank said in its latest Commodity Markets Outlook.

“... history suggests that an escalation of the conflict in the region could trigger substantial oil supply disruptions. Accordingly, there are many possible effects on oil and other commodity markets should the conflict expand,” the report said.

Disruptive knock

In particular, a major escalation could cause an initial surge in oil prices, with disruptive knock-on effects on other commodity markets. The degree of the surge and the extent of the disruptions would depend on the scale and duration of the conflict.

The outlook for commodity prices would darken quickly if the conflict were to escalate. In a “small disruption” scenario, the global oil supply would be reduced by 500,000 to 2 million barrels per day—roughly equivalent to the reduction seen during the Libyan civil war in 2011. Under this scenario, the oil price would initially increase between 3 per cent and 13 per cent relative to the average for the current quarter, to a range of $93 to $102 a barrel.

In a “medium disruption” scenario—roughly equivalent to the Iraq war in 2003—the global oil supply would be curtailed by 3-5 million barrels a day. That would drive oil prices up by 21–35 per cent initially—to between $109 and $121 a barrel. 

In a “large disruption” scenario—comparable to the Arab oil embargo in 1973— the global oil supply would shrink by 6-8 million barrels per day. That would drive prices up by 56 per cent to 75 per cent initially—to between $140 and $157 a barrel.

Food inflation

Ayhan Kose, the World Bank’s Deputy Chief Economist and Director of the Prospects Group, said: “Higher oil prices, if sustained, inevitably mean higher food prices.”  

 A severe oil-price shock will push up food price inflation that has already been elevated in many developing countries, he said.

Indermit Gill, the World Bank’s Chief Economist and Senior Vice President for Development Economics, said: “Policymakers will need to be vigilant. If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades—not just from the war in Ukraine but also from the Middle East.”

The World Bank report, providing a preliminary assessment of the conflict, for commodity markets, said the effects should be limited if the conflict doesn’t widen.  According to the Bank’s baseline forecast, crude oil prices are expected to average $90 a barrel in the current quarter before declining to an average of $81 a barrel next year as global economic growth slows. 

Limited impact

“Overall commodity prices are projected to fall 4.1 per cent next year. Prices of agricultural commodities are expected to decline next year as supplies rise. Prices of base metals are also projected to drop 5 per cent in 2024. Commodity prices are expected to stabilise in 2025,” it said.

Till now, effects of West Asian conflict on global commodity markets have been limited. Overall, crude oil prices have increased by about 6 per cent since the start of the conflict. “Prices of agricultural commodities, most metals, and other commodities have barely budged,” the report said.

The first oil price shock took place between October 1973 and March 1974 when an Arab oil embargo was imposed on nations that supported Israel during the Yom Kippur War. It led to the removal of 4.3 million barrels per day (mb/d) from the global oil market, equivalent to approximately 7.5 per cent of global supply in 1973. During the embargo, the Organisation of the Petroleum Exporting Countries (OPEC) quadrupled official prices from $2.70/barrel in September 1973 to $13 in January 1974.  

Changed conditions

Crude oil prices saw major escalation later during the 1978 Iranian revolution,  the Iran-Iraq war that lasted 8 years from 1980 and Iraq’s invasion of Kuwait in 1990. 

However, the current oil market conditions are different with dependence on the energy commodity decreasing, supply sources diversifying and creation of strategic reserves by countries such as the US. The development of the oil futures market and the International Energy Association have also helped in countering any such situation.

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