Special Focus The Effects of Geopolitical Oil Supply Shocks © 2026 World Bank Group,

https://openknowledge.worldbank.org/server/api/core/bitstreams/41246f76-a94b-4fc6-b411-260878758ae6/content The last few years have seen more frequent surges in geopolitical tensions, as exemplified by the recent outbreak of war in the Middle East. Many of these surges have led to sharp increases in oil prices which, if sustained, can create severe headwinds for the global economy. This special focus examines the behavior of oil markets during periods of rising geopolitical risk and quantifies the effects of geopolitical oil supply shocks, as distinct from other sources of oil supply variation, drawing on a novel methodology. It estimates that during times of surging geopolitical risk, a 1 percent reduction in oil production generates a peak oil price increase, on average, of more than 11 percent, nearly twice the increase reported in previous studies for oil supply shocks in general. Outsized oil price responses to geopolitical supply shocks suggest additional layers of precautionary behavior in oil markets, which can have different forms over time. First, at the onset of a significant geopolitical oil shock, a surge in uncertainty over future supplies and global economic conditions can drive risk premia higher, reflecting both efforts to secure physical stocks and speculative market responses. Second, the experience of geopolitical disruptions prompts greater inventory building in the medium-term as a form of self-insurance. Oil supply shocks arising out of conflict have significant and persistent spillover effects on other commodity markets— particularly natural gas and fertilizers. Overall, geopolitically driven oil supply disruptions tend to be especially destabilizing for commodity markets, with likely knock-on consequences for inflation, growth, and poverty. These results highlight the importance of policy measures to mitigate exposure to such shocks. © 2026 World Bank Group,