It’s Deja vu all over again, for anyone old enough to remember the 1973 Yom Kippur war.Although the world is in a much better position than it was in the 1970s to cope with a global oil price shock, an escalation of the latest conflict in the Middle East could push global commodity markets into “uncharted territory,” according to the World Bank’s latest economic outlook.In its worst-case scenario — akin to the 1973 Arab oil embargo — all bets are off. Global oil output would shrink 6-8 million barrels per day (bpd) and cause prices to spike anywhere 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, World Bank Chief Economist.In its “medium disruption” scenario — akin to the Iraq war in 2003 — global oil supply would be curtailed by 3 to 5 million bpd amid a moderate escalation of hostilities in Israel and neighbouring countries such as Iran, driving prices up anywhere from 21% to 35% to USD$109 to $121 per barrel. The difference this time is it’s compounded by Russia’s war in Ukraine which has already upset global flows of both oil and natural gas, especially to the European Union.“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 VP for Development Economics. “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.”It wouldn’t just be motorists who feel the pinch. Higher oil prices would inevitably spark a food security crisis that could affect nearly 1 billion people worldwide.“Higher oil prices, if sustained, inevitably mean higher food prices,” said Ayhan Kose, the World Bank’s deputy chief economist. “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.”Fertilizer prices are often tied to oil and natural gas prices, being a primary input in food production.But it’s not actually oil prices that are flashing the biggest warning signal — crude prices are actually down from last year although they’ve been rising in recent weeks. In fact, it’s the price of gold that ought to be top of mind for the world’s policy makers, says World Bank.Bullion prices are up more than 8% since the onset of the latest conflict on October 7 and generally track leading geopolitical indicators such as inflation..“Gold prices have a unique relationship to geopolitical concerns: they rise in periods of conflict and uncertainty often signalling an erosion of investor confidence,” the report notes..However, it also notes the world economy is in generally better shape to withstand oil price shocks.Since the energy crisis of the 1970s, the report says, countries across the world have reduced their dependence on oil — the amount of oil needed to generate $1 of GDP has fallen by more than half since 1970. Some countries — especially the US — have established strategic petroleum reserves and developed futures markets to mitigate the impact of oil shortages on prices. “These improvements suggest an escalation of the conflict might have more moderate effects than would have been the case in the past,” it said.
