The international economy has come through an extraordinary period of turbulence with the Covid-19 pandemic quickly followed by the Russian invasion of Ukraine. Now events in the Middle East bring more uncertainty, mainly though not exclusively related to the prices and availability of oil.
As with the two previous episodes, the economic impact is of secondary importance to other factors, in this case the terrible human suffering and the risk of a wider conflict drawing in other countries. A diplomatic way to end the fighting is urgently needed, but not, apparently, in sight.
As the fighting continues, financial and commodity markets have so far remained relatively calm. Investors and traders are reckoning that the conflict will not spread and draw in other regional players. If it does, this calculation could quickly change. Around one third of the world’s oil comes from the Middle East – any disruption to this could be quickly send oil prices higher. And while the world is less reliant on oil than it was in the times of previous crises, notably in the 1970s, this would still have an impact on inflation and growth.
In a report published this week, the World Bank sketched out a range of scenarios for oil prices, warning of the risks if the conflict spread and particularly if vital supply lines were blocked. It also warned of the potential “double shock” to commodity markets from the war in Ukraine and the Middle East conflict, which as well as increasing oil prices could push up the cost of food – partly by increasing the price of shipping. In turn this could add to hunger and food insecurity in the developed world, already on the rise since 2019.
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For the world economy in general, the risks are of higher oil prices feeding through to another boost to inflation and higher prices. In turn this would hit already-weak growth rates. Economies have cut their reliance on oil by more than half since the 1970s.But there is more to be done both in terms of energy and economic security, as well as meeting the pressing needs to respond to the climate change agenda.