S. Korea should prepare for a possible oil shock

Discussions between the U.S. and members of the European Union (EU) on a ban on Russian oil imports aimed at responding to Russia’s invasion of Ukraine are driving up international oil prices. There are warnings that there could be a third oil shock, triggering oil prices to move to 200 U.S. dollars a barrel. Russia warned of a surge in oil pricesㅡmore than 300 dollars per barrelㅡif Western allies ban oil imports from Russia. As South Korea depends mainly on imports for meeting its oil needs, the nation will inevitably see consumer spending decrease due to inflation and the competitiveness of export companies weaken.

The government expects the economy to grow 3.1 percent and consumer price to rise 2.2 percent this year. But the projection is based on the premise that the oil price stays at 73 dollars a barrel. If oil prices rise, the growth rate will drop and prices will go up. The Hyundai Research Institute predicts that the economic growth will decline by 0.4 percentage point and consumer price will increase by 1.4 percentage points if oil prices reach 120 dollars a barrel. The impact will grow exponentially if oil prices soar higher than that.

Despite the circumstances, Deputy Prime Minister and Finance Minister Hong Nam-ki last week naively said that the economy is on a path to recovery. A meeting of ministers related with prices, which was held in five years, stopped short of coming up with patch-up solutions, such as extending fuel tax cut and asking companies to refrain from raising prices.

The situation is even more worrisome in that the epicenter of the crisis is Russia, the second largest oil exporter, and that there is a high possibility of a prolonged confrontation between great powers, unlike the first and second oil shocks of the 1970s. Coupled with the spread of the omicron variant, South Korea has already entered the threshold of stagflation, where inflation and recession occur at the same time, according to some experts. The government should come up with countermeasures with the mindset that an oil shock is imminent. The country needs comprehensive measures, encompassing fiscal and monetary policies as well as energy supply and demand plans in case of an emergency, consumption reduction strategies, and support measures for companies and ordinary people.