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Oil Price Hike to Slow Korean Economy

Posted June. 09, 2008 08:28,   


The price of West Texas Intermediate crude gained more than $16 last Thursday and Friday combined, setting a high of almost $140. The soaring price indicates that the “third oil shock” may no longer be just grounded in imagination.

Given Korea’s high dependence on oil imports, skyrocketing oil prices have already rung serious alarm bells in the nation’s economy such as the looming danger of stagflation.

What is worse, some have raised concerns that Korea’s exports, the most reliable pillar of the nation’s economy, may be adversely affected if the oil shock translates into a worldwide economic slowdown when the U.S. economy is still reeling from the sub-prime mortgage disaster.

○ Oil prices step closer to $150

The WTI price rose to $138.54 per barrel Friday (local time) by $10.75 right after Israel’s Transport Minister and Deputy Prime Minister Shaul Mofaz’s remark: “Israel will attack Iran if it doesn’t abandon its nuclear program.”

According to Korea National Oil Corp., U.S. investment bank Morgan Stanley’s projection that oil prices could jump even to $150 per barrel by July 4 may have also contributed to the price hike.

However, the U.S. bank is not the first institution that gave out such projection.

Goldman Sachs had already predicted an era of “Super Spike” in global oil prices three years ago. In its recent report, it added that oil prices could reach $150 to $200 in six to 24 months’ time.

Together with the recent oil price bubble theory, a series of other factors at play in the oil market indicate a further rise in oil prices: geopolitical instability in some oil producing nations, the weakening U.S. dollar, rising demand from emerging markets, diminishing U.S. energy inventory and inflow of global speculative capital.

Furthermore, daily fluctuations in oil prices expanded from just a couple of cents a year ago to $4-$5 this month, and even to $10 last week. The vacillation in oil prices shows that if anxiety aggravates in the market, oil prices could climb to $150 in no time.

○ Global economic wobble spells disaster for Korean economy

Soaring oil prices coupled with skyrocketing prices of commodities such as agricultural products and metals have sharply pushed up consumer prices. According to the National Statistical Office, consumer prices grew by 4.9 percent last month, posting the highest growth rate in six years and 11 months since June 2001 (5 percent).

The current consumer price shock is highly likely to continue haunting the market unless oil prices stabilize in the near future as the oil hike drives up the prices of imported goods, which in turn raises costs in manufacturing and services.

Rising oil prices have forced institutions to lower their forecasts for Korean economic growth this year.

While Samsung Economic Research Institute and LG Economic Research Institute lowered the projected economic growth rate for this year from 5.0 percent to 4.7 percent and 4.9 percent, respectively. The Organization for Economic Cooperation and Development also took down the figure by 0.9 percentage points from 5.2 percent to 4.3 percent.

As the “third oil shock” becomes real, anxiety is also growing in the global economy already under high inflationary pressure from oil price hikes with the looming danger of a slowdown.

On Friday alone when the WTI price rose by more than $10 in a single day, stock prices plunged in the United States as well as in Europe.

The latest economic indicators released by the U.S. government, such as the producer price index and unemployment index, indicate that the oil price hike may prompt a vicious cycle of worsening consumer confidence, deteriorating corporate performance and diminishing employment.

AFP quoted Ethan Harris, an economist at Lehman Brothers, as saying, “Skyrocketing oil prices have brought down consumer confidence to a point where a deep economic recession is inevitable.”