The escalation of the Israeli-Palestinian conflict poses a serious threat to the global economy, with commentary highlighting the potential impact on energy markets and market volatility. Analysts from EY, including chief economist Greg Daco, weigh in on possible paths for recovery and risk management in the near term.
Two primary scenarios emerge from the discussion. In a worst case described as uncontrollable, oil prices could surge by about 50 dollars per barrel, potentially reaching 150 dollars by the end of 2023. Such a spike would likely push the VIX volatility index higher by around 18 points, signaling a sharp rise in market anxiety and risk premia across asset classes.
Daco cautions that a sustained energy shock could inflict visible damage on the world economy. Global GDP might contract by approximately 1.4 percent by the end of 2024, and the overall value of global economic activity could shrink by close to 2 trillion dollars. The knock-on effects would touch production costs, consumer prices, and investment decisions across industries and regions.
For policy makers, the report suggests that central banks would face heightened inflation pressures while simultaneously losing some room to lower policy rates to zero as aggressively as before. Inflation is projected to rise by about one and a half percentage points by 2024, complicating monetary policy and debt dynamics for many economies.
EY also outlines less severe scenarios. In a more favorable path, oil prices would rise modestly by around seven dollars, then ease to roughly three dollars higher, and market volatility would edge up by roughly four basis points over the next six months. These outcomes imply a milder effect on inflation, growth, and financial markets compared with the riskier scenario.
In related commentary, Russian Deputy Prime Minister Alexander Novak, speaking in mid-October, suggested that oil prices could stabilize near one hundred dollars per barrel by 2035, signaling a longer horizon for supply and demand balancing and potential shifts in energy policy in major economies.
Earlier projections referenced the escalation of conflicts in the Middle East as a catalyst for higher energy costs, noting a significant market response that reflected tighter supply expectations and geopolitical risk premiums. Market observers emphasize that the path forward will depend on diplomatic developments, supply management, and demand resilience in major consuming countries like the United States and those across Canada and Europe. The broader takeaway is that energy markets and financial conditions are likely to remain interconnected, with oil prices and volatility shaping central bank strategy, business planning, and global economic performance in the near to medium term. As events evolve, stakeholders are urged to monitor energy fundamentals, policy responses, and geopolitical developments to assess potential implications for growth, inflation, and financial stability.