Middle East Conflict Escalation May Lead to Increase in Oil Prices

The Israel-Hamas conflict has been a source of tension for years, but the recent analysis by Bloomberg Intelligence (BI) and Bloomberg Economics (BE) suggests that the situation could escalate to a direct war between Israel and Iran, with potentially catastrophic consequences for the global economy.

According to the new study, titled Middle East Energy Scenarios, there are four possible scenarios that could unfold, ranging from a sustained ceasefire to a larger war involving direct conflict between Israel and Iran. The most alarming scenario involves a direct war between Israel and Iran, which could result in oil prices skyrocketing to $150 a barrel and global output being cut by $1 trillion.

The Persian Gulf region, which produces almost 20% of the world’s oil, could face significant disruption in production if a direct war breaks out. This could lead to OPEC+ countries increasing their output to maximum capacity, with spare production capacity in Saudi Arabia, the United Arab Emirates, and Kuwait becoming irrelevant if the Strait of Hormuz is blocked.

Even a proxy war between Iran and Israel, fought through proxies in Lebanon and Syria, could have a significant impact on the global economy. Prices could jump by $10 a barrel, leading to a potential $300 billion cost to the global economy and a 0.3% drag on global growth in 2024.

On the other hand, a confined conflict scenario, characterized by limited Israeli airstrikes on Gaza and Hamas rocket attacks, may have a muted impact on the global economy. Oil prices have remained stable despite recent attacks, suggesting that markets see a confined war as the most likely scenario.

However, the report warns that a prolonged conflict could result in a global recession, with oil prices surging and sentiment plummeting. This could take about $1 trillion off global GDP and drop growth to 1.7%, the worst since 1982.

The impact of such a conflict would not be limited to oil prices, as liquified natural gas prices could also rise by at least 35% if flows from Qatar are disrupted. This could have far-reaching consequences for energy markets and global inflation.

In response to the potential crisis, OPEC+ members with spare capacity, like Russia and Kazakhstan, may benefit from higher prices. The US may also need to tap into its Strategic Petroleum Reserve to mitigate the impact on prices at the pump.

Overall, the analysis paints a grim picture of the potential consequences of a direct war in the Middle East. With the global economy still recovering from previous shocks, another conflict in a critical energy-producing region could have devastating effects on growth, inflation, and global stability.