Escalated ME conflict could result in $150 oil: Report

Dubai, UAE – Thus far, the IsraelHamas conflict has had limited impact on the global economy. However, an escalation to a direct war between Israel and Iran, could result in oil prices rising to $150 a barrel and global output cut by $1tn, according to a new analysis by Bloomberg Intelligence (BI) and Bloomberg Economics (BE).

The new study from BI and BE – Middle East Energy Scenarios– looks in detail at four broad scenarios and their potential impact on global GDP and inflation, from a sustained ceasefire to a confined conflict, a multi-front proxy war and a larger war involving direct conflict between Israel and Iran.

Ziad Daoud, Chief Emerging Markets Economist at Bloomberg Economics and co-author of the report said, “Our base case is that the war will remain largely confined, as it has been since October, with limited impact on the global economy. But this could change. A risk scenario involving a prolonged conflict could result in a global recession that takes about $1tn off global GDP, with surging oil prices and plummeting sentiment dropping growth to 1.7%.

“The world economy is still recovering from an inflationary cycle exacerbated by Russia’s invasion of Ukraine in 2022, and another conflict in a critical energy-producing region could significantly recharge inflation to nearly 7% this year. The Fed’s 2% target would then be far out of reach and costlier gasoline would be a hurdle for President Joe Biden’s re-election campaign.”

Significant disruption of production in the Persian Gulf region, which produces almost 20% of the world’s oil, or to transport of oil in the extreme case of a potential blockage of the Strait of Hormuz, could shift OPEC+ policy to maximum output, according to BI and BE. In this case the spare production capacity in Saudi Arabia, the United Arab Emirates and Kuwait would become “irrelevant” if the strait is shuttered.

In a press release, Salih Yilmaz, Senior Oil Analyst at Bloomberg Intelligence and coauthor of the report, said, “OPEC+ members with spare capacity, like Russia and Kazakhstan, would benefit as they would have room to maximise production at higher prices to compensate for reduced output from the Gulf countries in the cartel. The US would likely have to tap its Strategic Petroleum Reserve to make up for some of the lost barrels and limit the impact on prices at the pump.

“In addition, a direct war in the Middle East could push prices for liquified natural gas up by at least 35% if a Gulf-region conflict disrupts flows from Qatar, which sends more than 10bn cubic feet of LNG through the Strait of Hormuz every day.”

A proxy war, where Iran and Israel clash through proxies such as Lebanon and Syria, while less destructive than a direct war, may cost the global economy up to $300bn, as prices jump up around $10 a barrel and investor confidence subsides.