Panoramic view of the Isfahan refinery in Iran on November 8, 2023. The refinery is one of the largest in Iran and is considered the first in the country in terms of diversity of petroleum products.
Fatmeh Bahrami | Anadolu | Getty Images
The World Bank warned on Thursday that a major conflict in the Middle East could trigger an energy shock, sending oil prices above $100 a barrel, exacerbating inflation and leading to longer-term interest rates.
Tensions in the Middle East reached a boiling point earlier this month, with Israel and OPEC member Iran appearing to be on the brink of war, raising concerns that crude supplies could be disrupted.
The governments of Jerusalem and Tehran appear to have decided not to escalate the situation after carrying out their first direct attacks on each other’s territory. Oil prices have fallen nearly 4% from recent highs as investors underestimate the possibility of a wider war in the region.
However, the World Bank warned that the situation remains uncertain.
“The world is at a fragile moment: a major energy shock could undo much of the progress made in lowering inflation over the past two years,” said Indermit Gill, chief economist at the World Bank.
According to the World Bank’s latest Commodity Market Outlook report, oil prices could average $102 a barrel if conflict involving one or more oil producers in the Middle East resulted in supply disruptions of 3 million barrels per day. Such a severe price shock could bring the fight against inflation to an almost complete standstill, the report said.
According to the World Bank, global inflation fell by 2% between 2022 and 2023, mainly due to a nearly 40% plunge in commodity prices. Commodity prices have now stabilized, with global financial institutions predicting a slight decline of 3% this year and 4% in 2025.
“Global inflation remains undefeated,” Gill said. “A key force in deflation – falling commodity prices – has essentially hit a wall. That means interest rates this year and next are likely to remain higher than currently expected.”
While conflict in the Middle East poses upside pricing risks, the world may breathe a sigh of relief if OPEC+ decides to begin unwinding production cuts this year. The World Bank said if the cartel supplied 1 million barrels per day of oil to the market in the second half of this year, oil prices would fall to an average of $81 per barrel.
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