Is another oil crisis on the way?

The soaring crude prices caused a sharp slide in the local stock market, sending a danger signal to Korean economy.

A drastic decline in the quotation of shares of Korean Air, one of the major consumers of fuel oil here, on September 7, started triggering widespread fear of another energy crisis. People fear a 3rd oil shock. The macroeconomic policies of the government based on the assumption of a price level of US$25 per barrel are bound to flounder. Officials are busy ironing out countermeasures to cope with the unusually high oil price, but none are yet in sight.

* Is an economic typhoon coming as a result of the high oil cost? The ripples of the oil crisis are already being felt in the local bourse. A marked downslide was visible in both Korean Stock Exchange quotations and Kosdaq transactions on the day. The bad news of oil prices going over US$30 per barrel coupled with the prospect of increased fuel consumption in the coming quarters spanning winter months have weighed down on the struggling economy of the country. Korean industry is too heavily dependent on oil and only 1.6 percent of the crude supply is locally available. These disadvantages make its economy devastatingly vulnerable to an energy crunch.

* How high will oil prices rise? The Organization of Petroleum Exporting Countries conference opening on September l0 holds the key. The outcome of the meeting will force Korean government to readjust its oil consumer price. The future looks bleak unless the OPEC members come up with a decision to increase oil production by 1 million barrels daily. Hong Byung-Ki, research fellow with the LG Institute of Economics, cited a prediction that failure of the OPEC to agree on boosting production could push up oil price to US$40-50 a barrel. Government sources also consider such a steep upturn in energy cost as inevitable although they foresee the price would fall below US$30 level in and after the 2nd quarter of next year.

* Sweeping change of macroeconomic index unavoidable: Economic affairs ministers and Prime Minister Lee Han-Dong meet on September 8 to discuss ways of dealing with the oil price shock, including extensive measures to save energy. Saving is the only way open to Korea which does not produce any oil.

Macroeconomic figures are bound to suffer as oil price jumps to fuel a price spiral and slow down export and growth while increasing imports. The possibility of a renewed foreign exchange crisis cannot be ruled out.

Skyrocketing oil prices prompted the Bank of Korea to withhold a plan to raise call interest in September. The bank authorities say it had to keep the interest rate as its revision is certain to adversely affect other macroeconomic indexes such as overall price hikes, international balance of payment and economic growth.

* Inadequate government reaction: Government economists are also at a loss to find a timely answer to the problem. The Ministry of Finance and Economy called the staff of its Economic Policy Bureau into an emergency session to review the impact of the oil price rise on major macroeconomic indexes.

Officials agreed that they have to wait and see how the price swing will turn, remaining undecided on the timing of possible change of the macroeconomic indexes. One of them said on a few occasions in the past that oil prices rose above US$30, then returned to a lower level. Therefore, he regarded it untimely to attempt an immediate overhaul of those vital indexes now. Possible fluctuations make it risky in his view to carry out policy readjustment aimed only at addressing the exigencies of the day for prices may soar and then subside soon. On the other hand, Kang Sin-Woo, an executive with Templeton Investment and Management, said the gravely unstable market conditions call for the revision of economic indexes to ride out the general recession and steep oil costs.

Choi Young-Hae moneychoi@donga.com