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For global oil markets, latest Middle East conflict throws up new pricing concerns

While prices are relatively stable, conflict to other parts will set off a trigger.



The latest Middle East war can cast its influence on oil markets and economies in multiple ways. That's a risk the global economy is staring at.
Image Credit: Shutterstock

In contrast, the rest of the world had moved on, initiating development processes that gave rise to new economic powers in Asia and Latin America.

This raises several questions: Is what’s happening related to the region's oil and gas wealth? In most of these countries, this wealth has transformed from a catalyst for construction and development into a driver of conflicts.

Except for the GCC, tapping into the region's natural resources has been limited, either due to ongoing wars or mismanagement and corruption, leaving all-round repercussions on the living standards of unstable economies in the region.

These conflicts usually lead to significant fluctuations in oil prices, affecting the economic conditions of producing countries - positively and negatively according to the rise and fall in prices. As a result, exporting countries need to exert substantial efforts to adapt to such volatility.

The ongoing war in Gaza is no exception, especially since some there are indications it can continue for a relatively long time. Worse is that there is a possibility of its involving other parties, further complicating – or exacerbating - the situation.

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Oil exporting and importing countries must draw up a strategy for all potential scenarios to mitigate any element of surprise. Prices are hovering within a narrow $80-90 a barrel range, but there is a possibility of supply shortages if the war continues.

First, because any potential extension of the conflict could include some oil production areas, which will cause disruptions. Secondly, because of the exposure of logistical supply routes to high risks and obstruction, as happened during similar events of the past.

Worse-case scenarios

This has prompted the World Bank to develop three potential scenarios for oil prices and their relationship to supply. In the first, there is a possible shortage of 2 million barrels per day, which would raise prices to $103.

The second scenario envisions a supply shortage of 5.3 million barrels, leading to a price of $121 per barrel.

The third scenario suggests a potential decrease in supply by 8.6 million barrels per day, a substantial amount constituting 8.5 per cent of global demand, which will push prices to levels never seen before, of $157 per barrel.

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In such scenarios, the impact will extend beyond oil-producing countries, influencing the global economy at large. Exporting countries distant from the conflict zone will benefit significantly from the price surge, as they will have additional financial capabilities.

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There will be negative effects on oil exporting countries within the conflict zone, which will lose part of their revenues due to the decline in production by a substantial percentage that may not be offset by the increase in prices.

‘Imported’ inflation

Concerning oil-importing countries, the surge will result in significant inflation gains, undermining their efforts to reduce it through financial and monetary measures such as interest rate hikes. This situation will have repercussions for the global economy, given the economic weight of oil-consuming nations, which will lead to an increase in the value of their exports and raise inflation in other countries.

Considering the persistent escalation in the ongoing conflict, despite efforts by various parties, it is crucial to prepare for all possible scenarios. If these scenarios are not adequately addressed, their effect may be catastrophic if the element of surprise is not dealt with.

There is a fourth scenario if de-escalation efforts prove successful and leading to a cessation of the war. In this case, production and supply rates would remain within current levels, ensuring stability in oil markets and prices and helping the global economy.

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Mohammed Al Asoomi
The writer is a specialist in energy and Gulf economic affairs.
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