Dive Brief:
- Global oil prices could experience significant price hikes if the Israel-Hamas war escalates, according to a new report from the World Bank.
- Although the conflict’s effects on global commodity markets have been limited so far, a prolonged or widened war could drive oil prices up by as much as 75% to between $140 and $157 a barrel, the bank’s Commodity Markets Outlook report said. Overall oil prices have risen about 6% since the start of the conflict, according to the World Bank, but the cost of most other commodities “has barely budged.”
- The bank said prolonged turmoil could “push global commodity markets into uncharted waters.” Absent a long war, the bank said it expects global oil prices to average $90 a barrel in the fourth quarter and fall to an average of $81 in 2024.
Dive Insight:
Construction experts and contractors closely watch the price of supplies and materials such as diesel fuel and gasoline.
“Diesel prices affect construction more than most other industries,” said Associated General Contractors of America Chief Economist Ken Simonson. “Some contractors use a lot of fuel to power trucks and equipment, especially for earthmoving.”
In the past two years, diesel prices have been volatile, hitting a record high in June 2022 following Russia’s invasion of Ukraine, then falling 18.6% between September 2022 and September 2023. Prices are now ticking back up, rebounding 32.9% from July to August and 4.3% from August to September.
Contractors pay either directly through fuel surcharges or embedded in freight bills for the deliveries of equipment and materials and hauling away of dirt, debris and equipment from jobsites, Simonson said, noting that many of the materials used in construction require a lot of energy, much of it from petroleum, to mine, mill, manufacture and mix ingredients.
“Some state DOTs allow highway contractors to pass along a portion of diesel or asphalt price increases,” he said. “But otherwise contractors are exposed to price risk.”
Unlikely scenario
While the Mideast conflict represents a risk factor for U.S. contractors, crude oil prices currently hover in the mid-$80-a-barrel range, said Anirban Basu, chief economist for Associated Builders and Contractors. Unless there is a significant escalation to the war, gasoline prices are unlikely to approach the levels seen in mid-2022, he told Construction Dive.
“In the unlikely scenario that gasoline prices were to return to record levels, it would represent a headwind to the construction industry,” he said.
Construction input prices have been relatively flat over the past year yet remain up more than 40% since the start of the COVID-19 pandemic. That inflation, along with severely elevated borrowing costs, has reduced the number of projects that can secure financing, Basu said.
“Were gas prices — or more impactfully, diesel prices — to increase, it would raise the cost of providing construction services, ultimately reducing construction activity,” he said.
The latest conflict in the Mideast, which began on Oct. 7, comes on the heels of the Russia-Ukraine war, which has had disruptive effects on the global economy since it began in February 2022, according to Indermit Gill, the World Bank’s chief economist and senior vice president for development economics.
“If the [Mideast] 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,” he said in a release announcing the report.