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Navigating energy shocks resulting from Middle East conflicts
Higher oil prices have a domino effect, influencing prices for food, industrial metals and even precious metals like gold.
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The Apollo Voyager crude oil tanker is seen on Nov. 16, 2021, anchored in the Pacific Ocean off the coast near the Chevron El Segundo oil refinery, near Manhattan Beach, California, the United States. (AFP/Patrick T. Fallon)
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n today's interconnected world, geopolitical events in one region can have far-reaching consequences. Two key areas of concern regarding the current global landscape are the potential for energy shocks from conflict in the Middle East and the strategies nations must adopt to withstand these challenges.
The Middle East has historically been a hotspot for conflict and political tension, many of which are deeply intertwined with energy resources. Recent conflict escalations in the Middle East have sparked concerns about potential energy shocks, especially in light of ongoing disruptions caused by the conflict in Ukraine.
The World Bank has been analyzing these challenges and offering valuable insights. Their reports emphasize the intricate interplay between Middle East conflicts and energy markets, and shed light on the potential consequences for the global economy.
One of the most immediate and significant concerns arising from Middle East conflicts is the potential for oil price shocks. The current global oil price stands at approximately US$85 per barrel, with projections from the World Bank estimating an increase to $90 per barrel this quarter. However, these projections remain subject to change, contingent on the conflict's intensity and duration.
The World Bank's reports outline a worst-case scenario, reminiscent of the 1973 Arab oil embargo. In this scenario, a severe disruption could remove up to eight million barrels of oil per day from the market, resulting in oil prices soaring as high as $157 per barrel. Such a spike could have severe consequences for economies heavily reliant on oil imports, particularly in the context of the post-pandemic recovery.
The report also discusses less severe but still disruptive scenarios based on other historical conflicts. For instance, a situation resembling the 2003 Iraq war, leading to a reduction of five million barrels per day in oil supply, could result in a 35-percent price increase, pushing oil prices to $121 per barrel. A more moderate outcome, similar to the 2011 Libyan civil war, with a loss of two million barrels per day in global oil markets, could cause a 13-percent price increase, raising oil prices to $102 per barrel.
The potential economic consequences of these energy shocks are not confined to the energy sector. The duration of the conflict and the sustained period of elevated oil prices play a crucial role in determining the extent of these consequences.
