October 1, 2005｜Korean Peninsula
Jai Min Lee
Director General, Overseas Economic Research Institute, The Export-Import Bank of Korea
Recently, following the sharp rise in the international price of crude oil, the price of WTI crude exceeded the $70 mark at one point, while the price of Dubai crude posted a record high of $60. The high price of crude oil seems likely to continue, due to the depletion of the capacity of oil-producing countries to increase production, limits in the refining capacity of consumer countries, and political instability in the Middle East.
The surge in the price of crude oil is a catastrophe for the economy of the ROK, which is showing no prospects of a recovery. The rise in the price of crude oil leads to increases in the price of consumer goods, causing the consumer mentality to atrophy and giving rise to concern that this will extinguish the sparks of an increase in domestic demand in the ROK, which has been showing signs of a gradual recovery this year. At the same time, it also has a negative impact on exports, which have so far fulfilled an important role in powering growth, and the decline in exports is likely to surface before long as a deterioration in the profitability of companies arising from the rise in crude oil prices, and a slowdown in the global economy. Naturally, it goes without saying that the current account surplus will decline due to a rise in imports.
As a result of a positive analysis based on experience to date, it is estimated that a 10% rise in the price of crude oil would lead to consumption atrophying by about 0.6% and domestic production declining by 0.3%, with exports falling by about 0.6%. Given that the ROK imported 825.8 million barrels of oil in 2004, a $5 rise in the price of crude oil would induce a $4.1 billion increase in imports. This year’s average unit price of oil imports was set at $35 using the Dubai standard, but the price of crude oil is already $20 higher than this and it looks likely that this year’s level of crude oil imports will be much higher than anticipated.
Some economists in the ROK are pointing out that the current price of crude oil is not as high and the speed of its rise not as fast as they were during the oil crises of the 1970s, and are suggesting that the outlook is such that the domestic economy will not suffer the kind of shocks during the first and second oil crises of the past. In fact, if we compare the current price of crude oil (real price level) to the price during the first oil crisis, we can see that the current level is just 60% of that during the first oil crisis. Moreover, the degree of reliance on crude oil in domestic production has been low ever since the 1980s.
A significant number of people are calling for a more circumspect approach in responding to the high price of crude oil, because the recent rise in the international price of crude oil has been due to structural factors in oil markets, such as a sustained imbalance between supply and demand, and there is a strong possibility that the long-term trend towards a high crude oil price will continue.
Although no crude oil can be produced in the ROK, there is still a tendency towards the excessive consumption of oil. This is evident from the fact that the ROK, which is 12th in the world in terms of the scale of its GDP, is 7th in the world in terms of oil consumption. Consequently, as far as an appropriate response to the high price of crude oil is concerned, efforts on the part of the entire country, aimed at forming both an industrial and a consumption structure that conserve energy, are needed more than anything else. Moreover, the country should take this opportunity to take groundbreaking steps to develop overseas oilfields, in order to procure a stable supply of crude oil. The necessity of developing overseas resources has been emphasized every time the price of crude oil has risen, but the effects of this have, in fact, been small and the share of crude oil developed independently by the ROK stood at just 3.6% as of the end of June 2004. Given that, through sustained development of overseas oilfields, Japan, which is in the same position as the ROK, has achieved an independent crude oil development rate of more than 10%, and that China has recently been engaging in an all-out battle with all oil-producing countries, with the goal of securing crude oil overseas, I think that the ROK should be more proactive in tackling the development of overseas oilfields.