Global economy braces for major supply chain disruptions, increase in food and oil prices

By Zion Rufus

Amidst ongoing geopolitical tensions and the ever-evolving global economic landscape, the potential for a ‘dual shock’ to the world’s commodity markets looms large. The latest conflict in the Middle East, coupled with disruptions resulting from Russia’s invasion of Ukraine, has set the stage for a precarious situation in the world of global commodities. This is the warning sounded by the World Bank’s latest Commodity Markets Outlook.

While the global economy is undoubtedly more robust today than during the oil crises of the 1970s, the combination of recent geopolitical events, especially the Middle East conflict, poses a significant challenge to global commodity markets. The World Bank’s preliminary assessment of the conflict’s near-term implications suggests that the impact will be limited as long as the conflict doesn’t escalate further.

In line with the World Bank’s baseline forecast, the price of oil is expected to average $90 per barrel in the current quarter, before gradually declining to an average of $81 per barrel next year, as global economic growth decelerates. Overall, commodity prices are projected to decrease by 4.1% next year, driven primarily by rising supplies of agricultural commodities. Base metals are also expected to see a 5% drop in prices in 2024, with stability anticipated in 2025.

While the conflict’s impact on global commodity markets has been relatively restrained thus far, a more significant escalation could have dire consequences. The World Bank’s report explores potential scenarios based on historical experiences since the 1970s, taking into account the extent of disruption to oil supplies. In a “small disruption” scenario, where the global oil supply decreases by 500,000 to 2 million barrels per day, oil prices could initially rise by 3% to 13%, reaching a range of $93 to $102 per barrel. In a “medium disruption” scenario, akin to the Iraq war in 2003, where the global oil supply drops by 3 million to 5 million barrels per day, initial oil price hikes could range from 21% to 35%, reaching $109 to $121 per barrel. In a “large disruption” scenario, resembling the Arab oil embargo in 1973, with a 6 million to 8 million barrel per day reduction in global oil supply, prices could surge by 56% to 75%, with oil reaching $140 to $157 per barrel.

Indermit Gill, the World Bank’s Chief Economist and Senior Vice President for Development Economics, remarked, “The latest conflict in the Middle East comes on the heels of the biggest shock to commodity markets since the 1970s—Russia’s war with Ukraine. That had disruptive effects on the global economy that persist to this day. Policymakers will need to be vigilant. If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades—not just from the war in Ukraine but also from the Middle East.”

Ayhan Kose, the World Bank’s Deputy Chief Economist and Director of the Prospects Group, further emphasized the ramifications, stating, “Higher oil prices, if sustained, inevitably mean higher food prices. If a severe oil-price shock materializes, it would push up food price inflation that has already been elevated in many developing countries. An escalation of the latest conflict would intensify food insecurity, not only within the region but also across the world.”

Remarkably, the fact that the conflict has had only modest impacts on commodity prices thus far reflects the global economy’s enhanced ability to absorb oil price shocks. The report highlights that since the energy crisis of the 1970s, countries worldwide have significantly reduced their dependence on oil, diversified their base of oil exporters, and expanded their energy resources, including renewable sources. Some countries have established strategic petroleum reserves, coordinated supply arrangements, and developed futures markets to mitigate the impact of oil shortages on prices. These improvements suggest that, compared to the past, an escalation of the conflict might have less severe effects.

Despite these improvements, the report underscores the need for policymakers to remain vigilant. Notably, certain commodities, such as gold, are already displaying warning signs. Gold prices have risen by approximately 8% since the conflict’s onset, as they often do during periods of conflict and uncertainty, signaling potential erosion of investor confidence.

In the event of further escalation, policymakers in developing countries are advised to manage potential increases in headline inflation by avoiding trade restrictions like food and fertilizer export bans. Such measures often exacerbate price volatility and food insecurity. Policymakers are also encouraged to refrain from implementing price controls and subsidies in response to higher food and oil prices. A more effective approach involves improving social safety nets, diversifying food sources, and enhancing efficiency in food production and trade. In the long term, transitioning to renewable energy sources can enhance energy security for all countries and mitigate the impact of oil price shocks on the global economy.