Record High Oil Prices to Slow Growth

Won Hits 10-Year High of 910 Against Dollar

By Yoon Ja-young
Staff Reporter

Concern is growing over the negative effect of the record high oil prices and 10-year high of local currency against the dollar on the Korean economy.

Crude oil prices rose in Asia Friday _ climbing above $91 a barrel at one point _ on renewed concerns about oil supplies and news that OPEC won't further increase output.

The won closed at its highest level since the Asian financial crisis in 1997 on a globally weak dollar sentiment. The won-dollar rate fell below 910 to the dollar.

The local currency closed at 909.9 won to the dollar Friday, rising 6.7 won from a day earlier. It's the strongest level for the won in more than a decade since Sept. 18, 1997 when it stood at 909.60.

Expectations of further U.S. rate cuts prompted currency dealers to dump the dollar on expectations of further falls in the value of the dollar against major currencies.

The won's gains are expected to negatively affect local exports as a stronger won makes exports overseas more expensive.

The subprime crisis in the United States has already had a spillover effect on the domestic economy.

``If international oil prices surge above $100 per barrel, it will deal a severe blow to the economy,'' Goodmorning Shinhan Securities analyst Hahn Ki-shin said. ``On top of weakening domestic consumption, rising oil prices will threaten the stability of consumer prices.''

Economists had a positive outlook on the economy, thanks to solid export and domestic consumption. GDP grew 5.2 percent year-on-year in the third quarter, and the Korea Development Institute (KDI) and the Bank of Korea had estimated that the economy would grow five percent next year. The estimation was based on the outlook that the international oil price would be $75. The central bank estimated consumer prices to rise by 0.45 percentage points and the growth rate to fall 0.4 to 0.5 percentage points if the oil price hits $90.

High oil prices and a weakening dollar can deal a blow to exporters. It could ignite inflationary pressure and dampen consumption.

Sluggish facility investment and construction are also giving negative signs. The facility investment grew only 2 percent in the third quarter and investment in construction expanded a mere 1.1 percent. The global credit crunch issue can pop up again any time, and the Chinese economy, which pulled up the global economy despite the slow U.S. economy, is not that rosy now.

The government, meanwhile, has no plan to cut taxes on oil to stabilize retail oil prices. Yim Jong-ryong, director general for Economic Policy at the Ministry of Finance and Economy, said Friday that the government would cope with the oil prices following market principle rather than cutting taxes.

``The rising oil price may add burden to the inflation, economic growth or current account balance, when considering that the economy is highly dependent on import,'' Yim said. He refused, however, to cut oil taxes.

Crude oil prices posted $91.10 a barrel at one point in Asia Friday, continuing the recent rise. Dubai prices soared above $80 a barrel for the first time Thursday, on energy crunch concern during the winter. The Middle East crude benchmark rose $2.14 to settle at $80.53 a barrel, up almost 70 percent from January when it fell below $50. The West Texas Intermediate also closed at $90.46 at New York Mercantile Exchange, setting a new record.

International oil prices are rising on concerns of an energy shortage and the geopolitical tension around the Middle East.

The U.S. Energy Department had reported supplies dropped by 5.3 million barrels last week, a fall bigger than analysts' expectations. The multiple tensions between the United States and Iran, between Lebanese and Israeli, Turkish and the Kurdish rebels added to the concerns on supply shortage. OPEC, meanwhile, said it has no plan to further increase the daily production.

Some also point out that speculative funds are pushing up oil prices. The dollar lost its strength following the U.S. rate cut and international funds started rushing to the oil and raw material market, pushing up the prices.

chizpizza@koreatimes.co.kr

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