Potential Uncharted Territory for Oil Prices Amid Israel-Hamas Conflict, Warns World Bank

On Monday, the World Bank issued a report cautioning that an escalation in hostilities between Israel and Hamas could propel oil prices into unforeseen levels, with a subsequent global impact on food prices.

According to the World Bank’s Commodity Markets Outlook, the ramifications on oil prices would be relatively restrained unless the conflict widens. The situation could, however, deteriorate rapidly if tensions escalate between the two parties.

The recent military actions taken by Hamas against Israel, followed by Israel’s counter-operations, have fanned concerns about a broader conflict erupting in the Middle East.

Heightening the potential for escalation, Israeli forces advanced into Gaza over the past weekend, following an announcement of a “second stage” in military operations by Israeli Prime Minister Benjamin Netanyahu. Simultaneously, Hamas leadership has sought additional regional support from allies, including the Iran-supported Hezbollah group in Lebanon.

Israel-Hamas Conflict Updates

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The World Bank study outlined three different scenarios that could impact global oil supplies depending on the level of conflict disruption: small, medium, and large.

A “small disruption” in the conflict would not significantly affect oil prices, which are expected to average around $81 per barrel next year, according to World Bank projections.

In the case of a “medium disruption,” analogous to the disruptions seen during the Iraq war, global oil supplies could diminish by 3 to 5 million barrels per day, potentially pushing oil prices higher by up to 35%.

A “large disruption,” comparable to the 1973 Arab oil embargo, could result in a decline of 6 to 8 million barrels per day in global oil supply, with oil prices soaring by 56% to 75%, ranging from $140 to $157 per barrel.

Indermit Gill, Chief Economist at the World Bank, noted that Russia’s ongoing invasion of Ukraine has already generated lasting disruptions in the global economy. Gill warned that an exacerbation of the Israel-Hamas conflict could yield a dual energy crisis, affecting not only the situation arising from Ukraine but also the Middle East.

Ayhan Kose, Deputy Chief Economist at the World Bank, indicated that increased oil prices would invariably lead to a rise in global food prices. “An exacerbated conflict could worsen food security globally, not just within the affected region,” Kose stated.

Since the onset of the Israel-Hamas conflict, oil prices have increased by approximately 6%, while gold prices—typically a reliable indicator during periods of instability—have surged about 8%, as reported by the World Bank.

Analysts remain divided over the likelihood of significant oil shortages affecting the United States, given the country’s record-level oil production. At a recent Bloomberg event, U.S. Treasury Secretary Janet Yellen acknowledged that while global consequences have been minimal thus far, an expanded conflict could result in more severe repercussions.

Finally, Fatih Birol, the Executive Director of the International Energy Agency, argued that the combination of Russia’s invasion of Ukraine and the escalating Israel-Hamas conflict undermines the notion that oil and gas are secure energy options for nations or consumers.

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More about Israel-Hamas Conflict and Oil Prices

• World Bank’s Commodity Markets Outlook
• Israel-Hamas Conflict: Latest Updates
• Russia-Ukraine Invasion and Its Global Impact
• Current U.S. Oil Production Statistics
• Bloomberg Event with Treasury Secretary Janet Yellen
• International Energy Agency on Oil and Gas Security
• Global Food Prices: FAO Index
• Gold Prices During Conflicts
• 1973 Arab Oil Embargo: A Brief History
• Iraq War and Its Impact on Oil Markets