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By Yoon Ja-young
Staff Reporter
The fear over a global oil price hike is increasing as the West Texas Intermediate (WTI) crude oil price breached $80 per barrel. Economists here warn the rising price of oil could pull the economy down from its recovery track, as the country fully relies on imports for oil.
West Texas Intermediate closed at $81.19 per barrel, Thursday, marking its highest level this year. It averaged $41.82 in January, and fell to $39.20 the next month. From then on, however, it started picking up.
``Oil prices are surging steeply on increasing demand following global recovery. The fact that we are entering the peak season for oil demand along with a preference for risk assets are also behind the rise,'' said Lim Dong-min, an analyst at KB Investment & Securities.
The price of Dubai Crude, Korea's main source of oil, also rose to its highest level of the year at $77.80 Thursday, up $2 from the previous day.
``This could be risky for the local economy, which depends totally on imports for commodities,'' Lim said.
Economists explain that high prices could be a warning sign.
They point out that rising prices are seen as a positive sign before they reach a critical point. ``Oil prices were like a barometer to gauge economic recovery,'' said Park Ga-young, an analyst at Korea Investment & Securities. When the economy recovers, the demand for oil increases and the price of oil surges.
The $80 per barrel, however, will be a turning point for the stock market. Concern over inflation is overwhelming the oil prices' function as a signal of economic recovery at this point.
On Oct. 9, 2007, when the Dow Jones hit a record high of 14,164.53, WTI closed at $80.26. It continued surging to $145.29 on July 3 the next year, but the market plunged 20 percent to 11,288.54. The high oil price was seen to have driven inflation, low growth and the stock market plunge.
Upon pressure from inflation, central banks around the world will have to raise key rates earlier than they have planned, which means the economic recovery could lose steam.
Concern Over Trade Deficit
For Korea, rising oil prices means its current account could turn to a deficit. ``Global oil prices are nearing the level that may threaten economic recovery,'' said KTB Securities economist Jeong Yong-taek.
He recalled that after December 2007, rising oil and other commodities prices left the trade account in deficit.
He pointed out that Dubai Crude breached $80 per barrel at the time, meaning the price could be a critical point in terms of trade.
``When considering the high sensitivity of the current foreign exchange and financial market, and the fact that the current recovery is mostly backed up by liquidity and government policy, the economy and the financial market don't have much power to withstand the hike,'' Jeong said.
It also means that consumers in Korea's export markets will be closing their wallets, which will negatively affect Korea's exports.
Analysts, however, expect oil prices to rise further for the time being. Park pointed out that China's production is recovering. ``With China's production coming back on track, the competition to secure commodities, including oil, will get fierce,'' she said.
However, the pace is likely to slow down, as the economic recovery isn't strong yet, most analysts estimate.
chizpizza@koreatimes.co.kr
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