World Bank warns of record oil prices if war escalates

Reuters/Amir Cohen

• Price could hit $150 a barrel
• Israel-Hamas war began on October 7
• Prices have so far remained stable

Oil prices could hit record highs of $150 a barrel if the war between Israel and Hamas escalates into a wider conflict, according to an economic risk assessment from the World Bank.

In its latest Commodity Markets Outlook, the World Bank cautioned that the cost of crude could enter “uncharted waters”.

It outlined three risk scenarios. In a “small disruption”, the global oil supply would be reduced by between 500,000 and 2 million barrels per day (bpd), roughly equivalent to that seen during the Libyan civil war in 2011. In this situation the Bank predicted that the oil price would initially increase between 3 percent and 13 percent to a range of $93 to $102 per barrel.

In a “medium disruption” scenario – roughly equivalent to the Iraq war in 2003 – 3 million to 5 million bpd would be taken out of the market. That would drive oil prices up by 21 percent to 35 percent initially to between $109 and $121 per barrel. 

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And the Bank said that in a “large disruption” scenario – comparable to the Arab oil embargo in 1973 – the global oil supply would shrink by 6 million to 8 million bpd. The Bank predicted that this would drive prices up by 56 percent to 75 percent initially, to between $140 and $157 per barrel.

“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,” Indermit Gill, the World Bank’s chief economist and senior vice president for development economics, said in a statement.

During the 1973 Arab-Israeli War, Arab members of the Organization of Petroleum Exporting Countries (Opec) imposed an embargo against the United States and its allies.

Oil and gas prices have remained relatively stable since the outbreak of the war between Israel and Hamas on October 7. Brent crude futures rose to nearly $88 per barrel in Asia trade on Tuesday, according to Reuters data, after falling by over $3 on Monday. These prices are below the $97 reached in late September. 

But Gary Dugan, CIO and SEO of Dalma Capital, told the Alternative Investment Management (AIM) summit in Dubai on Monday that the “weaponisation of oil, if it creates an inflation problem, comes at exactly the wrong time”.

He said in the current environment, “the risks are to the upside” and that oil prices at $150 a barrel is a possibility.

Under the World Bank’s baseline forecast, 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. 

Prices of agricultural commodities, most metals and other commodities have barely moved since the start of the conflict.

Policymakers nevertheless need to remain alert, the report from the World Bank said. 

Some commodities – gold in particular – are flashing a warning, the multilateral said. Gold prices have risen about 8 percent since the onset of the war. 

Gold prices typically rise in periods of conflict and uncertainty, often signaling an erosion of investor confidence.

Speaking at the AIM summit, Mohamed El-Erian, chief economic advisor to Allianz, said: “The higher the risk of escalation, the higher the risk of contagion to the rest of the world, in terms of economics and finance.

“That contagion would add to problems of economic growth, to the inflation challenge and to the fragmentation of the global economy.”