THE ongoing crisis in the Middle East will have a muted impact on commodity prices, based on the World Bank’s latest estimates which showed the increase in commodity prices slowing despite the geopolitical disruption.
Based on its latest Commodity Markets Outlook (CMO) released on Monday, the World Bank said commodity prices are still projected to fall 4.1 percent next year and stabilize in 2025.
geopolitical disruption—Russia’s invasion of Ukraine in early 2022—which had dislocating effects on commodity markets and on the broader global economy that persist.”— World Bank report
However, the Washington-based lender warned that the continuation and escalation of the conflict could cause oil and food prices to rise.
“The latest conflict is coming on the heels of another recent major geopolitical disruption—Russia’s invasion of Ukraine in early 2022—which had dislocating effects on commodity markets and on the broader global economy that persist,” the report stated.
“The continuation and escalation of either or both conflicts would raise the specter of dual and compounding shocks to commodity markets that could test the resilience of the already fragile global economy,” it added.
The World Bank called on policymakers in developing countries like the Philippines to be vigilant and take steps to manage a potential increase in headline inflation.
Given the risk of greater food insecurity, the World Bank said governments should avoid trade restrictions such as export bans on food and fertilizer. Such measures often intensify price volatility and heighten food insecurity.
“Policymakers are also advised to 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,” the World Bank said.
“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,” it added.
The report said agriculture prices are expected to fall by 7 percent this year and another 2 percent in 2024 and 2025, given ample supplies.
The grains price index, the World Bank said, could decline by over 11 percent this year and as much as 4 percent on average in 2024 and 2025.
However, rice prices are expected to remain high well into 2024 on account of the export restrictions imposed by India. Notably, the Philippines is one of the world’s largest rice importers.
Under the Bank’s baseline forecast, oil prices are expected to average $90 a barrel in the current quarter before declining to an average of $81 a barrel next year as global economic growth slows.
The World Bank noted that the conflict’s effects on global commodity markets have been limited so far. Overall oil prices have risen six percent since the start of the conflict.
“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 and Senior Vice President for Development Economics.
Dual shock
“That had disruptive effects on the global economy that persist to this day. Policymakers will need to be vigilant. 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,” Gill said.
In a “small disruption” scenario, the World Bank said 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.
Under this scenario, the Washington-based lender said the oil price would initially increase between 3 percent and 13 percent relative to the average for the current quarter—to a range of $93 to $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. That would drive oil prices up by 21 percent to 35 percent initially—to between $109 and $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. That would drive prices up by 56 percent to 75 percent initially—to between $140 and $157 a barrel.
“Higher oil prices, if sustained, inevitably mean higher food prices,” said Ayhan Kose, the World Bank’s Deputy Chief Economist and Director of the Prospects Group. “If a severe oil-price shock materializes, 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.”
Earlier, the Philippine Statistics Authority (PSA) reported that inflation rose to 6.1 percent in September on the back of a 17.9-percent increase in rice prices. While the average headline inflation rate was a four-month high, the spike in rice prices was the highest in 14 years. (Full story here: https://businessmirror.com.ph/2023/10/05/inflation-posts-4-month-high-in-september/).
Data from the PSA showed rice inflation averaged 17.9 percent. This is the highest in 14 years, or since March 2009 when rice inflation reached 22.9 percent.
Rice has a weight of 8.87 percent in the Consumer Price Index (CPI) for All Income Households and as much as 17.87 percent in the basket of goods for the Bottom 30 percent of households.
Meanwhile, the inflation rate for the bottom 30 percent income households increased to 6.9 percent in September 2023 from 5.6 percent in August 2023.