A general view of the Isfahan Refinery, one of the largest refineries in Iran and considered the country’s first refinery in terms of diversity of petroleum products in Isfahan, Iran on November 8, 2023.
Fatemeh Bahrami | Anadolu | Getty Images
The outbreak of a major conflict in the Middle East could trigger an energy shock that pushes oil prices above $100 a barrel, fueling inflation and leading to longer interest rates, the World Bank warned Thursday.
Tensions in the Middle East reached a boiling point earlier this month as Israel and OPEC member Iran appeared to be on the brink of war, raising fears that crude oil supplies could be disrupted as a result.
The governments in Jerusalem and Tehran appear to have decided against escalation after exchanging direct attacks on each other’s territory for the first time. Oil prices have fallen nearly 4% from recent highs as investors discounted the likelihood of a broader war in the region.
However, the World Bank warned that the situation remains uncertain.
“The world is at a vulnerable moment: a major energy shock could undermine much of the progress made in reducing inflation over the past two years,” said Indermit Gill, chief economist at the World Bank.
Oil prices could average $102 a barrel if a conflict involving one or more Middle Eastern oil producers results in a supply disruption of 3 million barrels per day, according to the World Bank’s latest report on commodity markets. According to the report, a price shock of this magnitude could almost completely halt the fight against inflation.
According to the World Bank, global inflation has fallen by 2% between 2022 and 2023, largely because commodity prices have fallen by almost 40%. Commodity prices are now stabilizing and the global financial institution predicts a modest decline of 3% this year and 4% in 2025.
“Global inflation remains unbeaten,” Gill said. “A key driver of disinflation – falling commodity prices – has effectively hit a wall. This means that interest rates could remain higher this year and next than currently expected.”
While the conflict in the Middle East poses upside price risks, the world could see relief if OPEC+ decides to phase out production cuts this year. According to the World Bank, oil prices would fall to an average of $81 per barrel if the cartel returns to the market at 1 million barrels per day in the second half of the year.