The World Bank has warned the oil price could spike globally if conflict in Israel and Gaza spreads elsewhere in the region.
If the war has similar regional consequences to the Yom Kippur War in the early 1970s, the Bank says prices could increase by as much as 75%.
In addition to a “grave humanitarian crisis of increasing proportions”, the bank says a wider conflict and oil price spike could worsen global food insecurity and have severe economic consequences.
About oil prices
Oil is a ‘commodity’ — a basic good used all over the world, which is roughly the same quality wherever you buy it.
Other commodities include grain, metals, and gas. Because of these characteristics, the price of commodities is set worldwide. That means a disruption to prices in one part of the world affects prices everywhere.
For example, roughly 90% of the Australian petrol price is shaped by global factors.
Oil price spike
Oil prices have had two recent spikes. First, the war in Ukraine prompted many countries to impose sanctions on Russia, which limited Russia’s supply of oil.
Second, OPEC+, a ‘cartel’ (colluding group) of oil-producing countries led by Saudi Arabia, recently decided to cut their supply of oil to maximise profits.
Both of these have affected global oil prices, including the petrol price in Australia. Since oil has many uses, it can also have a flow-on effect on the prices of other commodities including food.
Some oil history
The Middle East is a major oil-exporting region, so conflicts in the Middle East have often had a major effect on oil prices.
The most famous examples were in the 1970s. In 1974, several Arab countries restricted oil shipments to countries that had supported Israel in the Yom Kippur War against Egypt and Syria. Then, in 1979, oil supply was further disrupted by the Iranian Revolution.
Both spikes contributed to inflation across the world which led to a significant economic downturn.
World Bank warning
The World Bank does not expect the current conflict in Israel and Gaza to directly affect the oil price.
However, a spike is likely if the conflict spreads to include others in the region such as Iran, a possibility which has been of significant concern from the international community.
The World Bank says this could lead to a price spike of 21-35% if the war is a similar magnitude to the U.S.-led war in Iraq in 2003. It could result in a 56-75% spike if it is similarly disruptive to the fallout from the Yom Kippur War.
Oil and food insecurity
The World Bank has also warned a wider conflict could have particularly severe consequences for global food insecurity.
In 2022, there were 900 million people worldwide at risk of food insecurity, compared to 624 million in 2017.
The World Bank says the conflict has already added to this by heightening food insecurity for residents of Gaza. A wider economic disruption could add further pressure worldwide.