Outlook for oil prices ‘would darken quickly’ if Israel-Palestine conflict escalates: World Bank

The Israel-Gaza conflict could cause the energy market to “darken quickly” if it further intensifies, the World Bank said in projections released Monday. 

In the estimate, World Bank analysts said the effect of the conflict on commodity markets has been limited so far, and that the international economy is better positioned to weather a major shock to oil prices than the major energy crises set off by the 1973 Yom Kippur War and the 1979 Iranian Revolution.

The World Bank’s baseline forecast projects that oil prices will average $90 a barrel in the final quarter of 2023, falling to $81 next year. So far, oil prices have risen only about 6 percent since the Israel-Gaza conflict began, but three intensification scenarios for the crisis could have further-reaching implications, according to the report. A “small disruption” scenario could disrupt the oil market around the level of the 2011 Libyan civil war, reducing supply between 500,000 and 2 million barrels a day and causing prices to increase between 3 percent and 13 percent.

Under a “medium disruption,” the supply would drop 3 million to 5 million barrels a day, potentially driving oil prices up between 21 percent and 35 percent, a shock roughly equivalent to that of the 2003 U.S. invasion of Iraq. 

The “large disruption” scenario outlined by the World Bank would cut supplies by 6 million to 8 million barrels daily and increase oil prices anywhere between 56 percent and 75 percent, equivalent to the oil embargo that Arab nations imposed in 1973 as retaliation for Western nations backing Israel in the Yom Kippur War. 

All of this occurs in the context of the ongoing war in Ukraine, noted Indermit Gill, World Bank chief economist and senior vice president for development economics.

That conflict has already had major, ongoing implications for the energy market, and “if the [Gaza] conflict were to escalate, the global economy would face a dual energy shock for the first time in decades,” Gill said.