Daily on Energy: Could Israel-Hamas conflict push oil to $157? World Bank lays out scenarios

In its latest Commodity Markets Outlook report, the financial institute maintains the conflict’s effects on the global economy have been contained so far, with overall oil prices rising about 6% since Hamas’s strike on Israel earlier this month. The prices of agricultural commodities, most metals and other goods have “barely budged.” However, the report lays out three risk scenarios that paint a picture of what could happen to oil supplies and prices if the conflict were to escalate and widen.

The scenarios: Using past historical events since the 1970s for comparison purposes, the World Bank lays out three possible scenarios that range from “small” to “large” disruptions. A “large disruption” scenario – which the report compares to the Arab oil embargo in 1973 – could shrink the global oil supply by 6 to 8 million barrels per day, driving prices up 56-75% initially to between $140 and $157 a barrel. In a “medium disruption” scenario, which would be comparable to the Iraq war in 2003, the global oil supply would be limited to 3-5 million bpd – driving prices up between $109-121 a barrel. A “small disruption” scenario would be roughly equivalent to the reduction seen during the Libyan civil war in 2011, increasing prices between 3-13%, or ranging between $93-102 a barrel.

For context: World oil output in September was an average of 101.6 million barrels per day, according to estimates from the International Energy Agency. Oil prices had surged to almost $98 per barrel in mid-September after Saudi Arabia and Russia extended their voluntary production cuts through the year-end.

“Higher oil prices, if sustained, inevitably mean higher food prices,” Ayhan Kose, the World Bank’s deputy chief economist, said in a statement. “If a severe oil-price shock materializes, it would push up food price inflation that has already been elevated in many developing countries.”

However, the report finds it notable that the conflict has only had modest effects on oil prices so far – which could suggest that countries have established infrastructure that can better defend themselves against price shocks. Countries have reduced their dependence on oil, have a more diversified base of oil exporters and expanded their energy portfolio to renewables. Furthermore, some countries have established strategic petroleum reserves to help coordinate for global events that may create a shortage of supply, and developed futures markets to mitigate the effects of oil shortages on prices.

Policy suggestions: Still, the report warns that policymakers will still need to be on high alert regarding how the conflict can play out in the markets. The World Bank suggests that governments should avoid trade restrictions such as export bans on food and fertilizer, which could intensify price volatility and heighten food insecurity. The report also suggests refraining from introducing price controls and price subsidies in response to higher food and oil prices. The better option, the report suggests, “is to improve social safety nets, diversify food sources, and increase efficiency in food production and trade.”

The World Bank also states that countries can strengthen their energy security by accelerating the transition to renewable energy sources, which can help mitigate the effects of oil-price shocks. Read the full report here. 

Welcome to Daily on Energy, written by Washington Examiner Energy and Environment Writers Breanne Deppisch (@breanne_dep) and Nancy Vu (@NancyVu99). Email [email protected] or [email protected] for tips, suggestions, calendar items, and anything else. If a friend sent this to you and you’d like to sign up, click here. If signing up doesn’t work, shoot us an email, and we’ll add you to our list.

GENERAL MOTORS AND UAW REACH TENTATIVE DEAL: General Motors struck a tentative contract agreement this morning with the United Auto Workers union, following Ford and Stellantis in meeting the union’s demands for pay hikes, cost of living increases, and added retirement benefits.

The deal, pending approval from UAW members, could mean the end of the union’s six-week work stoppages against Ford, General Motors, and Stellantis, which snarled production.

Combined, the strikes involved more than 45,000 workers at eight assembly plants and at least 38 parts distribution facilities that spanned roughly two dozen states, the Washington Examiner’s Zachary Halaschak reports.

The UAW, led by president Shawn Fain, reached agreement last week on new contracts with Ford and over the weekend with Stellantis, putting additional pressure on GM as the sole holdout in ending the work stoppages. The new contracts with Ford and Stellantis each included pay raises of at least 25% for hourly employees to be paid over the course of the four-year contract, as well as higher cost-of-living adjustments and added retirement benefits. The terms of GM’s new contract offer have not yet been shared publicly.

GM had remained at an impasse with UAW over retiree benefits through the weekend, prompting UAW to order a 3,200 employee walkout at several additional plant locations this morning. Hours later, however, UAW said it had reached a deal.

President Joe Biden praised news of the agreement this morning, giving reporters a thumbs-up as he climbed aboard Air Force One in Delaware. “I think it’s great,” he said of the deal. Biden joined striking UAW workers on the picket line last month in Detroit, a first for a sitting U.S. president.

COP28 HEAD CALLS FOR TRIPLING RENEWABLE POWER BY 2030: The head of COP28 called on leaders today to triple their renewable energy capacity by 2030, in line with new recommendations from the IEA and other agencies that called for the urgent phasing out of fossil fuels in order to limit warming to the 1.5C target set in the Paris climate agreement.

“I know there are strong views about the idea of including language on fossil fuels and renewables in the negotiated text,” COP28 president and UAE oil industry minister, Sultan al-Jaber, told leaders today at a pre-COP28 meeting in Abu Dhabi.

“I need you to work together to come forward with solutions that can achieve alignment, common ground and consensus between all parties,” al-Jaber said.

“We are heading in the right direction, but nowhere near fast enough,” he added.

Al-Jaber’s remarks at the pre-COP28 meeting echo at least some of the assessments from the IEA’s World Energy Outlook, the annual report released in full this morning.

That report calls for a global tripling of renewable resources by the end of the decade, as well as a 75% methane emissions reduction from fossil fuel generation by 2030—steps the IEA says are “urgent” to help limit warming to the 1.5C target. Based on current growth, it expects renewables to account for 50% of global energy mix by 2030, up from 30% today.

The COP28 summit kicks off next month and is seen as a critical opportunity to accelerate action on fossil fuel reductions. But countries remain deeply divided on how to achieve that goal— with some wealthier nations, including many in Europe, calling for a more ambitious timeline while others pressed for a gradual phaseout.

“You cannot just have the renewables goal and then call the COP a success,” EU climate policy chief Wopke Hoekstra said at an event last week in Brussels.

…MEANWHILE, ‘LOSS AND DAMAGE’ DEBATE DEEPENS GLOBAL DIVISIONS: Tensions are also mounting ahead of COP28 as leaders continue to spar over the so-called “loss and damage” fund, created by wealthy nations to help poorer countries deal with climate disasters.

A 24-member, international “transitional committee” had been tasked with making a list of recommendations for the fund ahead of COP28. But members have butted heads over key issues such as who should lead it, who should benefit, and crucially, who must contribute to the funds—tensions that have reached a fever pitch in recent weeks, threatening to blow up progress completely.

Key areas of debate: Funding, distribution, oversight, and financiers: The U.S. is lobbying for the World Bank to host the fund, but developing nations have pushed back on the idea, as Reuters notes, citing concerns that the entity would skew towards the interests of wealthy governments and make it harder for them to obtain funding.

Other areas of disagreement are who should be expected to contribute, (the U.S, for its part, is pushing to allow some non-government contributions), and whether the donations should be voluntary or compulsory.

In addition, the U.S. and EU are asking for commitments from other wealthy economies, such as Gulf states and China. Until the fund is up and running, Politico reports, Western leaders have also signaled a growing reluctance to invest, which has made observers increasingly anxious.

“The eyes of the world are on you to deliver clear, clean and strong recommendations ahead of COP28 to operationalize the Loss & Damage Fund [and] funding arrangements,” al-Jaber said earlier this month.

For poorer countries, the breakdown in negotiations is a stark reminder of 2009, when the same wealthy countries pledged $100 billion per year in climate finance funds by 2020—and then failed to deliver.

“If this fund ends up as an empty shell, this could revive the calls for liability, historical responsibility and compensation,” Egypt’s outgoing chief COP negotiator, Mohamed Nasr, told Politico. Read more here. 

CANADIAN SOLAR TO BUILD $800M SOLAR PHOTOVOLTAIC CELL PLANT IN INDIANA: The facility, which will begin production in 2025, is expected to produce cells with an output of 5 GW per year, Canadian Solar said, and will be used to power modules at its first U.S. assembly plant in Mesquite, Texas. Read more on the developments here.

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