By Lee Hyo-sik
Staff Reporter
International crude oil prices are soaring at an unprecedented pace, sending stock markets plunging across the globe and raising the possibility of a ``third oil shock.''
Surging oil prices in particular are putting pressure on the Korean economy, which imports all of its energy needs from overseas, as the country has to pay more for imports, raising costs of goods and services, cutting consumer spending and slowing business activities.
Higher oil prices are also making it difficult for the Bank of Korea (BOK) to cut its base interest rate in coming months, despite mounting calls for an easing of the monetary policy to counter growing downside risks to the economy.
On Wednesday, the West Texas Intermediate (WTI) for July delivery surged to an all-time high of $133.17 per barrel in New York, up $4.19, or 3.3 percent, from the previous trading. Oil price soared on the news of a larger-than-expected drop in the U.S. strategic oil reserves.
Despite a slowing U.S. economy, oil prices have increased at a faster pace since the beginning of the year on the surging demand from China and other developing economies. Also, investors have flocked to oil and other commodities, expecting raw material prices to continue to show an upward curve due to falling dollars.
Credit Suisse projected the WTI will average $120 per barrel this year, sharply up from its earlier forecast of $91, while billionaire hedge fund manager Thomas Pickens said oil price will exceed $150 per barrel this year, citing tight crude supply and strong demand from China and other developing economies. Early this month, Goldman Sachs forecast the price could reach $200 a barrel by 2010.
According to the Korea National Oil Corp., Dubai Crude, which accounts for most of South Korea's oil imports, also soared to an all-time high of $123.69 per barrel, up $3.29 from the previous trading. The Dubai Crude price is widely projected to show an upward curve in line with the WTI, hitting the world's 13th largest economy hard.
Samsung Economic Research Institute warned that if the Dubai price exceeds $151 a barrel, the Korean economy could shrink as it did following the second oil shock in the late 1970s.
But high crude prices are already worsening Korea's macroeconomic fundamentals, including the current account balance, private consumption and business activity.
Last week, the Korea Development Institute revised down its growth forecast for 2008 to 4.8 percent from an earlier one of 5 percent, citing soaring oil prices and sluggish domestic demand.
Merrill Lynch recently slashed its growth forecast to 4.8 percent from the earlier 5.5 percent. Deutsche Bank and Citigroup put Korea's economic growth forecast for this year at 3.9 percent.
Particularly, skyrocketing oil prices pushed up raw material costs to a 10-year high in April. Raw material prices jumped 56 percent from a year ago, the steepest rise since January 1998, when prices jumped 57.6 percent.
Consumer prices also rose 4.1 percent, the highest level since August 2004 and well above the Bank of Korea's target range of 2.5 percent to 3.5 percent and the government's 3.3 percent.
Weighed down by surging oil and other raw material prices, the country's current account balance has posted deficits for the past five straight months.
Facing worsening macroeconomic conditions, the government recently admitted that Korea has entered a ``downward phase'' after peaking early this year, adding the economy will likely worsen further on a global economic slowdown and aggravating trade terms.
Soaring oil prices are not giving the central bank much leeway either in its monetary policy. The BOK has been pressured to slash the interest rate to prop up the slowing domestic economy but rising inflationary pressure as a result of high import costs of oil and other commodities have kept the bank from easing its policy stance.
The BOK has maintained a hawkish monetary stance since last August, saying growing inflation risks outweigh concerns of an economic slowdown.