West Asian conflict could trigger ‘dual shock’ to global commodity markets: World Bank | Delhi News

“Higher oil prices, if sustained, inevitably mean higher food prices. If a severe oil-price shock materialises, it would push up food price inflation that has already been elevated in many developing countries. At the end of 2022, more than 700 million people—nearly a tenth of the global population—were undernourished. An escalation of the latest conflict would intensify food insecurity, not only within the region but also across the world,” said Ayhan Kose, the World Bank’s Deputy Chief Economist and Director of the Prospects Group.

The World Bank underlined that if the conflict escalates, policymakers in developing countries will need to take steps to manage a potential increase in headline inflation.

“Given the risk of greater food insecurity, governments should avoid trade restrictions such as export bans on food and fertilisers. Such measures often intensify price volatility and heighten food insecurity. They should also refrain from introducing price controls and price subsidies in response to higher food and oil prices. A better option is to improve social safety nets, diversify food sources, and increase efficiency in food production and trade. In the longer term, all countries can bolster their energy security by accelerating the transition to renewable energy sources—which will mitigate the effects of oil-price shocks,” the report said.

Noting the export ban on non-basmati rice by India, the World Bank said rice prices will remain high in 2024 assuming India maintains export curbs. It also said that even though the demand for fertilisers is recovering, a cut in India’s subsidy for the second half of the season (beginning October) could further impact demand.

“India banned exports of non-basmati rice in response to increased domestic prices (due to flooding in northern India) and fears of potential El Niño impacts in crucial rice-growing areas. These measures have roiled global markets since mid-July. Rice prices in August and September 2023 reached the highest levels since the 2007/08 food price crisis,” it said. India accounts for nearly 40 per cent of the world’s rice exports.

Oil prices are expected to average $90 a barrel this quarter before falling to $81 a barrel next year as global economic growth slows, the World Bank said. “Overall commodity prices are projected to fall 4.1% next year. Prices of agricultural commodities are expected to decline next year as supplies rise. Prices of base metals are also projected to drop 5% in 2024. Commodity prices are expected to stabilise in 2025,” the report said. However, the outlook for commodity prices would darken quickly if the conflict were to escalate. Outlining three risk scenarios based on historical experience since the 1970s, the World Bank said in a “small disruption” scenario, the global oil supply would be reduced by 500,000 to 2 million barrels per day—roughly equivalent to the reduction seen during the Libyan civil war in 2011 and the oil price would initially increase to a range of $93-$102 a barrel.

In a “medium disruption” scenario—roughly equivalent to the Iraq war in 2003—the global oil supply would be curtailed by 3 million to 5 million barrels per day, which could drive oil prices to $109-$121 a barrel. In a “large disruption” scenario—comparable to the Arab oil embargo in 1973— the global oil supply would shrink by 6 million to 8 million barrels per day, which could drive prices to $140-$157 a barrel.

The conflict’s effects on global commodity markets have been limited so far, with the overall oil prices having risen about 6 per cent since the start of the conflict and prices of agricultural commodities, most metals, and other commodities having barely budged. But, the report said the outlook for commodity prices would darken quickly if the conflict were to escalate.

Taking note of the redirection of Russian exports from EU and G7 countries to China, India and Türkiye, the World Bank said the price cap on Russian crude oil introduced in late 2022 appears increasingly unenforceable given the recent spike in Urals prices and that the price cap has not created significant supply disruptions, with the volume of Russian oil production and exports remaining relatively constant. “The cap has not created significant supply disruptions, with the volume of Russian oil production and exports remaining relatively constant, in part reflecting the redirection of Russian exports from EU and G7 countries to China, India and Türkiye. There has been increasing uncertainty regarding the discount at which Russian oil trades, as the price quote for Urals benchmark are opaque, and shipping cost estimates from European brokers have become more uncertain as their market share has dropped,” it said.

Going ahead, policymakers need to remain alert, with some commodities—gold in particular—flashing a warning about the outlook. “Gold prices have risen about 8% since the onset of the conflict. Gold prices have a unique relationship to geopolitical concerns: they rise in periods of conflict and uncertainty often signalling an erosion of investor confidence,” it said, adding that in the event of a more widespread conflict in the Middle East, gold prices would likely increase from already high levels as investors shift to safe-haven assets.