The World Bank, in its recent Commodity Markets Outlook report, has issued a warning about the potential for a global oil crisis due to escalating tensions in the Israel-Hamas conflict. The report suggests that under a “large disruption” scenario, similar to the Arab oil embargo during the Yom Kippur War or 1973 Arab-Israeli war, global oil supplies could decrease by 6-8 million barrels per day. This could lead to a price surge of 56% to 75%, potentially reaching a record high of $157 per barrel, surpassing the trading record of $147.5 set in July 2008.
The World Bank’s report also outlines “small” and “medium” disruption scenarios, drawing parallels to the Libyan civil war in 2011 and the Iraq war in 2003 respectively. These potential crises follow closely on the heels of the Russia-Ukraine war, which was the largest shock to commodity markets since the 1970s.
Despite these risks, Indermit Gill, Chief Economist at the World Bank, expects oil prices to average $90 per barrel in the current quarter, declining to $81 by 2024 due to a projected slowdown in global economic growth.
The report also recalls how oil prices quadrupled during the Yom Kippur War when Arab energy ministers imposed an oil embargo on exports. It mentions that as of December 2023, is at risk of a dual energy shock from both Ukraine and Middle East conflicts, even though Palestine is not a major oil player.
In light of this potential crisis, countries like the UK face the risk of importing inflation, leading to a possible cost-of-living crisis. The typical response from institutions such as the independent Bank of England has been to increase interest rates, a strategy that fails to address global crisis management.
The report suggests that resilience should be built through support measures for low-income individuals most affected by inflation. This includes raising pensions and benefits in line with inflation and compelling employers to offer pay raises to cope with price hikes. The government needs to shift its focus from inflation being the primary economic issue to maintaining economic activity and preventing debt crises. This involves managing the economy without hiking interest rates and adopting a new narrative focusing on government capabilities, including money creation during crises balanced by the taxation of wealth, to prevent asset price inflation.
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