The World Bank issued a warning on Thursday that the start of a new conflict in the Middle East may lead to an energy shock that drives up oil prices to above $100 per barrel, increases inflation, and keeps interest rates higher for longer.

As Israel and Iran, an OPEC member, appeared to be on the verge of conflict earlier this month, tensions in the Middle East reached a breaking point, sparking concerns that this could hinder the flow of crude oil.

After trading direct strikes on each other’s land for the first time, the governments in Tehran and Jerusalem seem to have decided against escalation. Since investors have written off the likelihood of a wider battle in the region, oil prices have fallen by over 4% from their previous highs.

However, the situation is still uncertain, the World Bank warned.

“The world is at a vulnerable moment: A major energy shock could undermine much of the progress in reducing inflation over the past two years,” said World Bank Chief Economist Indermit Gill.

According to the World Bank’s most recent commodity markets outlook study, if a conflict involving one or more Middle Eastern oil exporters causes a disruption in supply of three million barrels per day, oil prices might average $102 per barrel. This kind of price shock may virtually completely halt efforts to combat inflation, the research said.

According to the World Bank, the roughly 40% decline in commodity prices was a major factor in the 2% drop in global inflation between 2022 and 2023. The global banking organisation predicts moderate falls of 3% this year and 4% in 2025, indicating that commodity prices are already plateauing.

“Global inflation remains undefeated,” Gill said. “A key force for disinflation — falling commodity prices — has essentially hit a wall. That means interest rates could remain higher than currently expected this year and next.”

Even while there are upside pricing risks related to the Middle East crisis, if OPEC+ decides to begin undoing its production restrictions this year, the world could experience relief. According to the World Bank, if the cartel were to reintroduce 1 million barrels per day into the market in the second half of the year, oil prices would average $81 a barrel.

(Adapted from CNBC.com)

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