A recent conflict in the Middle East, coupled with disruptions caused by the Russian invasion of Ukraine, has raised concerns about the impact on global commodity markets, warns the World Bank’s latest Commodity Markets Outlook. While the global economy is better equipped to handle an oil-price shock than in the 1970s, the convergence of these geopolitical challenges could push commodity markets into uncharted territory.

The initial assessment of the conflict’s impact on commodity markets suggests that the effects will be limited if the conflict remains contained. Under the World Bank’s baseline forecast, oil prices are expected to average $90 a barrel in the current quarter, with a decline to an average of $81 a barrel next year due to a slowdown in global economic growth. Overall, commodity prices are projected to fall by 4.1% in the following year, and agricultural and base metal prices are also expected to decrease.

Thus far, the Middle East conflict has had limited effects on global commodity markets, with minor increases in oil prices and minimal movement in agricultural and metal prices. However, if the conflict escalates, the outlook could quickly change.

The report outlines three risk scenarios based on historical experiences since the 1970s. The effects would depend on the extent of disruption to oil supplies. In a “small disruption” scenario, with a global oil supply reduction of 500,000 to 2 million barrels per day, oil prices could increase by 3% to 13% initially, reaching a range of $93 to $102 a barrel.

In a “medium disruption” scenario, equivalent to the Iraq war in 2003, where the global oil supply is curtailed by 3 million to 5 million barrels per day, oil prices might surge by 21% to 35%, initially ranging from $109 to $121 a barrel. A “large disruption” scenario, similar to the Arab oil embargo in 1973, could lead to a global oil supply reduction of 6 million to 8 million barrels per day, causing a substantial price hike of 56% to 75%, reaching between $140 and $157 a barrel.

“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,” said Indermit Gill, the World Bank’s Chief Economist. “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.”

Higher oil prices, if sustained, can lead to increased food prices, potentially exacerbating food insecurity. Governments need to remain vigilant to prevent the situation from worsening, and developing countries should take steps to manage potential headline inflation increases. Trade restrictions, such as export bans on food and fertilizer, should be avoided as they can intensify price volatility and food insecurity. Instead, improving social safety nets, diversifying food sources, and enhancing food production and trade efficiency are recommended.

In the long term, countries can enhance their energy security by accelerating the transition to renewable energy sources, which can help mitigate the impact of oil-price shocks. Despite the challenges posed by these geopolitical events, the report highlights that the global economy has made significant progress in reducing its dependence on oil and improving its ability to manage such shocks.