US exit from Iran deal threatens South Korean economy
By Yoon Ja-young
The United States' withdrawal from the Iran nuclear deal and decision to levy fresh sanctions is expected to deal a blow to the Korean economy, which depends heavily on oil imports. A further rise in oil prices will be inevitable, leading to contractions of both consumption and investment. Industries sensitive to oil prices such as airlines and petrochemicals will be hit hardest, according to analysts, Wednesday.
U.S. President Donald Trump announced Tuesday the U.S. would pull out of the nuclear deal since the “defective” agreement would not stop Iran from developing nuclear weapons.
Analysts expect increasing fluctuations in global oil prices, with the geopolitical risk coupled to surging demand adding upward pressure. Prices of Western Texas Intermediate (WTI) reached $70.73 Monday, surpassing the $70 mark for the first time in three-and-a-half years.
“Global oil prices are likely to reach $80 per barrel if Trump's sanctions on Iran become a reality,” said Hwang Sung-hyun, an analyst at Eugene Investment and Securities. He pointed to decreasing production by OPEC as well as hampered output in Venezuela, Angola and Libya that is negating increasing output in the United States.
Analysts explain the risk of the U.S. deserting the Iran nuclear deal has been reflected in recent global oil prices. Lim Jae-kyoon, an analyst at KB Investment and Securities, said Iran's crude oil exports won't face much problem since China, India and Europe, which are its biggest customers, aren't likely to join in fresh sanctions. The United Kingdom, Germany and France jointly condemned Trump's move while Israel and Saudi Arabia supported him.
However, economic fundamentals will likely further pull up oil prices, according to Lim.
“OPEC has made it clear that it intends to decrease oil production, and the growth of shale oil production will continue to be limited. There also is surging demand for oil following global economic growth,” he noted. Saudi Arabia, which is the biggest oil producer in the world, wants a price of $80 per barrel.
Analysts warn surging crude oil prices will hinder economic recovery in Korea, the world's sixth-largest oil importer.
“Rising oil prices can add downward pressure on the economy, negatively affecting both consumption and investment,” said Baek Da-mi, a researcher at the Hyundai Research Institute.
She estimated Korea's GDP will fall by 0.96 percent if the crude oil price reaches $80 per barrel. High oil prices will pull down consumption by 0.81 percent as households lose purchasing power due to inflation. It will also lead to a 7.56 percent decrease in investment due to falling corporate sales coupled with rising costs, according to Baek.
The analysts said key industries will lose their competitive edge due to rising production costs, especially for oil products, chemicals and transportation.
“Though there is a question whether the high oil prices will continue over the long term, short-term overshooting seems inevitable. Petrochemical industries will suffer deteriorating sentiment,” Hwang said.
Baek advised the government to prepare risk-hedging measures to lessen the negative impact of fluctuating oil prices. “Businesses will have to reassess their production processes,” she said.