By Gu Bon-sung
Research fellow, Korea Institute of Finance

Unexpected sharp rise of crude oil price has spread over to global concerns and emerged as an imminent challenge after the global crisis in 2008, not just from the economic perspective but also for the political leaders.

Rising oil prices may badly impact the economic recovery in many aspects as well as through different channels. Especially, as it had already experienced during the oil shock during the 1970s and 1980s, the current movement of world oil prices appears retrospectively threatening.

The upward trend of crude oil prices has a direct effect, unsurprisingly on the Asian economies. In the case of Korea, the street oil price per liter has already surpassed 2,000 won on average. Also considering the trend of inflationary pressures in the recent years across Asia, it may be necessary to take both precautionary and preparatory measures against unintended impacts from the high oil price. Even though there exists widespread consensus that the current situation would not result in the oil shocks similar to those in the 1970-1980s, it is still timely and necessary to examine both structural and mid- and long-term challenges that may be caused by the future oil price for the Asian economies.

One of the potential challenges is the nexus effect from globalization. The global economy has continued to broaden and deepen in the geographical aspects such as China and India. Especially, the oil demand not just for corporate production, but also for individual consumption is likely to accelerate despite the development of new energies and technological innovations.

Such a demand may be effectively managed through price mechanism or the consorted efforts for releasing emergency reserves or increasing the daily productions in the short-term. However, for the long-term it will be necessary to improve energy efficiency through technological innovation such as oil sand or oil shale and preemptively enlarge energy investment which will broaden the base of renewable energies in the whole economy.

Also the growth pattern of Asian economy including Korea may be more vulnerable to high oil prices compared to other countries such as Brazil or Australia. The export-driven economy may lose its growth momentum if the high oil prices lead to dampen the global demand and the rising energy prices cause the fall in productivity. On the other hand, the structural rise in the oil prices demand may require that the Asian economy be more susceptible to energy efficiency.

The financial market may be broadly hit by the negative outlook and by the monetary tightening if the rising oil prices cause to increase speculative inflationary pressures. Since the global crisis in 2008, the monetary policy such as quantitative easing has been very lenient and proactive.

But with oil prices rising and inflationary pressures mounting, the current expansionary monetary policy would be challenged or restricted. And the shift into tightening monetary policy may reduce the overall liquidity in the global financial market. Furthermore, it may momentarily reverse the capital flows from emerging markets to advanced markets as well as from the export-driven economies to the resource-affluent ones. That is to say, the financial market might be heavily hit by squeezed liquidity and rebalanced portfolio of investment on the global basis.

The potential impact caused by rising oil prices would neither be confined nor excluded for certain regions. Rather, the rising oil prices will become more challenging over time and more comprehensive for the Asian economies.

The Asian economies require more conservative and reserved approaches for shielding themselves from the upward pressure on energy prices in two respects. First, the Asian economies have been a true engine for growth of the world economy through higher productivity, better skills and fast-catching technology.

To maintain such competitiveness, the overall economy should be promptly prepared for future energy prices by improving energy efficiencies and investing in low-cost, renewable and environment-friendly energies.

Second, the Asian economies need to excavate energy resources both internally and externally by expanding a level of emergency reserves and strengthening strategic partnerships with energy-rich countries in order to alleviate the side effects from any potential price shocks in the future ― although it may be better that those do not become a reality.