A major escalation of the war between Israel and Hamas — one that spilled over into a broader Middle East conflict — could send oil prices surging as much as 75 percent, the World Bank warned on Monday.
The potential for a global energy shock in the wake of Hamas’s brutal attack on Israel has been a pressing question for economists and policymakers, who have spent the past year trying to combat inflation.
Energy prices have remained largely contained since Hamas invaded Israel on Oct. 7. But economists and policymakers have been closely monitoring the trajectory of the war and studying previous conflicts in the region as they try to determine the potential scale of economic repercussions if the current conflict intensifies and broadens across the Middle East.
The World Bank’s new study suggests that such a crisis could overlap with energy market disruptions already caused by Russia’s war in Ukraine, exacerbating the economic consequences.
“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,” Indermit Gill, the World Bank’s chief economist and senior vice president for development economics, said in a statement that accompanied the report. “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 projects that global oil prices, which are currently hovering around $85 per barrel, will average $90 per barrel this quarter. The organization had been projecting them to decline next year, but disruptions to oil supplies could drastically change those forecasts.
The bank’s worst-case scenario is pegged to the 1973 Arab oil embargo, which took place during the Arab-Israeli war. A disruption of that severity could remove as much as eight millions barrels of oil per day off the market and send prices as high as $157 per barrel.
A less severe, but still disruptive, outcome would be if the war played out like the 2003 war in Iraq, with oil supply being reduced by five million barrels per day and prices rising as much as 35 percent, to $121 a barrel.
A more modest outcome would be if the conflict paralleled the 2011 civil war in Libya, with two million barrels per day of oil lost from global markets and prices rising as much as 13 percent, to $102 per barrel.
World Bank officials cautioned that the effects on inflation and the global economy would depend on the duration of the conflict and how long oil prices remained elevated. They said that if higher oil prices were sustained, however, that would lead to higher prices for food, industrial metals and gold.
The United States and Europe have been trying to keep global oil prices from spiking in the wake of Russia’s invasion of Ukraine. Western nations introduced a price cap on Russia’s energy exports, a move aimed at limiting Moscow’s oil revenues while ensuring oil supply continued to flow.
The Biden administration also tapped the nation’s Strategic Petroleum Reserve to ease oil price pressures. A senior administration official told The New York Times last week that President Biden could authorize a new round of releases from the reserve, an emergency stockpile of crude oil that is stored in underground salt caverns near the Gulf of Mexico.
Biden administration officials have publicly downplayed their concerns about the economic impact of the conflict, saying it was too soon to predict the fallout. Treasury Secretary Janet L. Yellen noted at a Bloomberg News event last week that oil prices had so far been generally flat and that she had not yet seen signs that the war was having global economic consequences.
“What could happen if the war expands?” Ms. Yellen said. “Of course there could be more meaningful consequences.”