US oil spill impacts Korean economy

By Kim Tong-hyung

Staff reporter

There are worries that the massive oil spill in the Gulf of Mexico could devastate the economies of several U.S. coastal regions and spread to leave a lasting scar in the fallout. And with volatile international oil prices starting to dance again, Korea is feeling the effect too.

The country was already reeling from appreciating crude oil prices before the massive U.S. oil leak, as the prices of Dubai crude, Korea's benchmark, averaged around $83.64 last month, nearly a 70 percent year-on-year increase and the highest monthly average since hitting $96-plus in September 2008.

After peaking at $87 last Tuesday, the price of Dubai crude has dropped somewhat, but remains considerably high, finishing at $80.76 on Monday (KST). Some predict that the price-tag will eventually hit triple digits in the coming months, and the slow recovery process of the Gulf of Mexico disaster and the stunted development of oil wells adds weight to such gloomy prospects.

Economists are raising concerns that high oil prices could further rattle Korean companies who are struggling to cope with rising raw material costs, and eventually add upswing pressure to consumer prices at a time when possible inflation looms.

``It wouldn't be like the price spark of 2008, but in the mid-to-long term, a rise in crude prices would be inevitable,'' said Lee Mun-bae, a researcher from the Korea Energy Economics Institute (KEEI).

``The Gulf of Mexico oil spill has heightened concerns about a shortage in supply, and there was also expectation of increasing demand in Asia, which is recovering faster from the economic downturn, so these factors have been combining to push up the prices for Dubai crude.''

There are worries that the rising oil prices, coupled with the decisions by some oil-producing nations to cut back on production before securing a safer way to operate the oil wells, would snag a Korean economy that has been recovering quicker than expected from the global economic turmoil.

Some observers believe that the strengthening Korean won will provide a cushion to the rising prices of raw materials such as steel, copper and aluminum, and prevent them from reflecting entirely on consumer prices.

However, others predict that the effect from the hike in raw material prices will become increasingly noticible toward the end of the year, or the moment the local currency starts losing value, as the rise in oil prices have been steeper than expected. A Samsung Economic Research Institute report predicts that the country's consumer prices will rise 0.2 percent when the international oil prices rise 10 percent.

``At the current level, the oil prices aren't high enough to deal a severe hit to the local economy and the competitiveness of companies. However, should the prices continue to rise, exporters could get hurt in profit and also the cost competitiveness of their products,'' said Park Sang-hyun, a researcher from Hi Investment and Securities.

The concerns over the effect of rising raw material prices is adding fuel to the debate on whether the country should retire the economic stimulus policy, based on aggressive monetary easing, it had maintained since the collapse of the Lehman Brothers in 2008.

The Bank of Korea has currently kept its benchmark interest rate at a record low of 2 percent for over a year, but some observers believe it's time to raise interest rates to guard against inflation and prevent an asset bubble from developing.