Israel -Hamas Conflict: Oil Supply to Shrink by 6 to 8 million bpd Under Large Disruption Scenario – World Bank
The World Bank has said that under a “large disruption” scenario like that witnessed during the Arab oil embargo in 1973, the global oil supply would shrink by 6 million to 8 million barrels per day (bpd) if the ongoing conflict in the Middle East between Israel and Palestine militia group, Hamas, escalates.
Under this scenario, the oil price is expected to average between $140 and $157 a barrel, representing a hike of 56 percent to 75 percent.
While there has not been major impacts on commodity prices as a result of the ongoing conflict, escalation of the conflict might push global commodity markets to the cliff, the Bank says in its latest Commodity Markets Outlook.
Unlike the 1973 conflict in the Middle East during the Yom kippur, which led to major oil-price shocks, the oil price has remained stable amidst the current conflict. But things could change quickly in the coming weeks or months if there is escalation.
The Bank in its baseline forecast, sees oil prices averaging $90 a barrel in the current quarter before declining to an average of $81 a barrel in 2024 as global economic growth slows.
Based on precedent since the 1970s, the report outlined what might happen under three risk scenarios, depending on the degree of disruption to oil supplies.
According to the Bank, in a “small disruption” scenario, the global oil supply would drop by 500,000 to 2 million bpd. Under this scenario, it says the oil price is expected to increase between 3 percent and 13 percent relative to the average for the current quarter. The price is expected to average between $93 and $102 a barrel.
In a “medium disruption” scenario, the Bank said the global oil supply would decrease by 3 million to 5 million bpd. This would increase oil price by 21 percent to 35 percent. Prices would average between $109 and $121 a barrel.
The report acknowledged that since the 1970s oil-price shocks, many countries have taken precautionary measures to depend less on oil, but cautioned policymakers to be at alert.
“The fact that the conflict has so far had only modest impacts on commodity prices may reflect the global economy’s improved ability to absorb oil price shocks. Since the energy crisis of the 1970s, the report says, countries across the world have bolstered their defenses against such shocks.
They have reduced their dependence on oil—the amount of oil needed to generate $1 of GDP has fallen by more than half since 1970. They have a more diversified base of oil exporters and expanded energy resources, including renewable sources.
Some countries have established strategic petroleum reserves, set up arrangements for the coordination of supply, and developed futures markets to mitigate the impact of oil shortages on prices. These improvements suggest that an escalation of the conflict might have more moderate effects than would have been the case in the past.
“Policymakers nevertheless need to remain alert, the report says. Some commodities—gold in particular—are flashing a warning about the outlook. Gold prices have risen about 8% since the onset of the conflict.
Gold prices have a unique relationship to geopolitical concerns: they rise in periods of conflict and uncertainty often signaling an erosion of investor confidence,” the Bank said in a statement made available to Majorwaves.
The World Bank advised policymakers in developing countries like Nigeria and other African countries to take precautionary measures against potential increase in inflation if the conflict escalates.
“If the conflict escalates, policymakers in developing countries will need to take steps to manage a potential increase in headline inflation. Given the risk of greater food insecurity, governments should avoid trade restrictions such as export bans on food and fertilizer. Such measures often intensify price volatility and heighten food insecurity.
They should also refrain from introducing price controls and price subsidies in response to higher food and oil prices. A better option is to improve social safety nets, diversify food sources, and increase efficiency in food production and trade.
In the longer term, all countries can bolster their energy security by accelerating the transition to renewable energy sources—which will mitigate the effects of oil-price shocks,” the Bank stated.
“The report provides a preliminary assessment of the potential near-term implications of the conflict for commodity markets. It finds that the effects should be limited if the conflict doesn’t widen.”
“Overall commodity prices are projected to fall 4.1 percent 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 percent in 2024. Commodity prices are expected to stabilize in 2025.
“The conflict’s effects on global commodity markets have been limited so far. Overall oil prices have risen about 6 percent since the start of the conflict. Prices of agricultural commodities, most metals, and other commodities have barely budged.
“The outlook for commodity prices would darken quickly if the conflict were to escalate,” the Bank added.
Speaking on the report, the World Bank’s Chief Economist and Senior Vice President for Development Economics, Indermit Gill was quoted as saying: “The latest conflict in the Middle East comes on the heels of the biggest shock to commodity markets since the 1970s—Russia’s war with Ukraine.”
“That had disruptive effects on the global economy that persist to this day. 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,” Gill added.
Also speaking on the report, the Bank’s Deputy Chief Economist and Director of the Prospects Group, Ayhan Kose, was quoted as saying: “Higher oil prices, if sustained, inevitably mean higher food prices.”
“If a severe oil-price shock materializes, it would push up food price inflation that has already been elevated in many developing countries. At the end of 2022, more than 700 million people—nearly a tenth of the global population—were undernourished. An escalation of the latest conflict would intensify food insecurity, not only within the region but also across the world.”
Oil price drops
Oil price dropped on Monday. The West Texas Intermediate (WTI), dropped by 1.46 percent to sell at $84.29 per barrel. Brent Crude, which is the global oil benchmark, fell by 1.13 percent to sell at $89.46 as at 10:01 (WAT). This is according to the price template of the Oilprice.com seen by our correspondent.
Last week Monday, October 23, 2023, the Organisation of Petroleum Exporting Countries (OPEC) basket of 13 crudes stood at $94.29.
Background
Hamas early this month attacked Israel in a dramatic fashion, firing about 5,000 missiles into the country, which led to the death of hundreds of people. Israel retaliated, besieged Gaza and has continued offensive operations in the area against Hamas.
Since the conflict started, close to 8,000 people have been killed. Out of this number, more than 3,257 are said to be children, representing more than 40 percent of those that have been killed.
There are growing calls for ceasefire as the conflict rages on in the region, which plays a key role in global energy supplies.
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“Three weeks of violence have ripped children from families and torn through their lives at an unimaginable rate. The numbers are harrowing and with violence not only continuing but expanding in Gaza right now, many more children remain at grave risk,” Save the Children Country Director in the occupied Palestinian territory Jason Lee, was quoted in a statement.
“One child’s death is one too many, but these are grave violations of epic proportions. A ceasefire is the only way to ensure their safety. The international community must put people before politics – every day spent debating is leaving children killed and injured. Children must be protected at all times, especially when they are seeking safety in schools and hospitals.”
