May 30, 2024

Conflict in Middle East Could Bring ‘Dual Shock’ to Global Commodity Markets

The ongoing conflict in the Middle East, compounded by disruptions caused by the Russian invasion of Ukraine, poses the risk of a “dual shock” to global commodity markets, warns the latest Commodity Markets Outlook from the World Bank.

The report, released today, provides a preliminary assessment of the potential near-term implications of the conflict for commodity markets. While the current effects are limited, the World Bank emphasizes that an escalation of the conflict could push global commodity markets into uncharted waters, impacting not only energy but also agricultural and other essential commodities.

Under the baseline forecast, oil prices are projected to average $90 a barrel in the current quarter, with a decline to an average of $81 a barrel next year as global economic growth slows. Overall commodity prices are expected to fall by 4.1% next year, with agricultural and base metal prices projected to drop 5% and stabilize in 2025.

The conflict’s impact on global commodity markets has been modest thus far. Oil prices have risen approximately 6% since the start of the conflict, and prices of agricultural commodities and most metals have seen minimal fluctuations.

The report outlines three risk scenarios based on historical experiences since the 1970s, highlighting the potential consequences of disruptions to oil supplies. In a “small disruption” scenario, a global oil supply reduction of 500,000 to 2 million barrels per day would lead to an initial oil price increase of 3% to 13%, reaching a range of $93 to $102 a barrel. In a “medium disruption” scenario, equivalent to the Iraq war in 2003, a cut of 3 million to 5 million barrels per day would drive oil prices up by 21% to 35%, reaching between $109 and $121 a barrel. In a “large disruption” scenario, comparable to the Arab oil embargo in 1973, a global oil supply reduction of 6 million to 8 million barrels per day could result in a 56% to 75% initial price surge, reaching between $140 and $157 a barrel.

“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,” said Indermit Gill, the World Bank’s Chief Economist and Senior Vice President for Development Economics. “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.”

Ayhan Kose, the World Bank’s Deputy Chief Economist and Director of the Prospects Group, expressed concerns about the potential consequences for global food security: “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.”

Despite the relatively muted impact of the conflict on commodity prices, the report underscores the need for vigilance among policymakers. Gold prices, often a harbinger of geopolitical concerns, have risen about 8% since the conflict began, signaling a potential erosion of investor confidence.

In the event of an escalation, policymakers in developing countries are advised to manage potential inflation by avoiding trade restrictions, such as export bans on food and fertilizer, which can heighten price volatility and food insecurity. Instead, they should focus on improving social safety nets, diversifying food sources, and enhancing efficiency in food production and trade.

The World Bank recommends a long-term strategy for all countries to bolster energy security by accelerating the transition to renewable energy sources, which can mitigate the effects of oil-price shocks on the global economy.

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