Global oil prices surge: what is expected in Azerbaijan's economy?

By Azernews

Volatility in the global oil market continues due to the ongoing conflicts throughout the world. The world has not coped with the side effects of the Ukrainian crisis on global oil and gas prices yet, another conflict, the Israeli-Hamas confrontation, erupted in the Middle East. Actually, because of its scale, the confrontation has not caused a surge in oil prices drastically so far.

The World Bank says that “energy prices have often registered substantial volatility following previous episodes of military conflict in the Middle East. Since the beginning of the latest conflict, overall energy prices have increased by 9 percent. Oil prices have risen 6 percent amid uncertainty about the impact of the conflict on supply.”

But in retrospect, we know that the little conflicts in the region could flare up into big wars easily. Besides, the news on the ground gives us reason to presume that the conflict could turn into a big war at any time, which will force the prices to skyrocket.

On November 3, the Leader of Lebanon’s Hezbollah Sayyed Hassan Nasrallah made a speech about the Israeli-Hamas conflict and noted there was a possibility of fighting on the Lebanese front turning into a full-fledged war.

He added that American interests, soldiers, and fleets would pay the price if the conflict turned into a war.

It should be mentioned that prior to Nasrallah’s speech the World Bank warned that if the conflict expanded beyond the borders of the Gaza Strip, oil prices could surge to $157 per barrel.

The Bank reminded the Arab oil embargo in 1973 and stressed that the possibility of repeating the same scenario is possible. Note that the Arab countries imposed an oil embargo on the US, as retaliation for its support to Israel.

However, the World Bank predicts that energy prices, after dropping by an estimated 29 percent in 2023, are expected to fall 5 percent in 2024 as subdued global growth reduces demand pressure. They are then projected to edge further down 0.7 percent in 2025.

The Brent crude oil price forecast for this year has not changed since the April edition of the Commodity Markets Outlook and is expected to average $84/bbl for 2023, which implies that prices will average almost $90/bbl in the last quarter. Continued concerns about the conflict in the Middle East and other geopolitical risks, the contraction of OPEC+ supply, and pressures from middle-distillate demand are also expected to support prices in the last quarter.

However, these forecasts as a whole highlight the expectation that the conflict will have a limited impact—assuming it does not escalate into a wider conflict. The forecast also assumes that global oil production will increase within and outside OPEC+, provided that some OPEC+ supply cuts are reversed in early 2024.

But the question is: can the increase in oil prices caused by global influences and the instability of prices in the general commodity market have any effect on the oil of Azerbaijan and the economy in general?

According to the opinions of the Azerbaijani economists, the Middle Eastern conflict cannot cause any serious impact on Azerbaijani oil. However, the emergence of a general economic crisis can certainly affect regional states in a certain way, creating a chain reaction. For example, the global pandemic followed by the Ukrainian War and the impact of both crises on the economic situation can be a common example.

Another influencing factor may be the escalation of conflicts. For example, during the last week, the US military bases in Iraq and Syria were attacked by Iran with missiles, which can be considered the emergence of a new source of conflict in the region. The fact that Iran is a neighboring country to Azerbaijan and confronts the United States in the Middle East can somehow bring the Israel-Hamas conflict closer to the South Caucasus. This may cause not only a serious problem in the increase of the oil price, but even in security issues.

At a time when global needs are increasing and the economy is just starting to recover, our world needs more peace and economic development today. Conflicts have the power to affect not only two or three countries, but many countries and even the world.

In order to get rid of this influence, Azerbaijan also calls on the countries of the world to stop the conflicts. Today, Azerbaijan is signing serious projects in the field of green energy, taking into account the health of the environment, and calls on other countries to be close and cooperative around this initiative.