Low oil prices more bane than boon to Korea

Wild fluctuation likely to continue amid sluggish demand

By Lee Kyung-min

The recent nosedive in oil prices will do more harm than good to Korea, leading to a substantial drop in exports of refined oil products and petrochemical goods, the key growth drivers of Asia's fourth-largest, export-reliant economy alongside semiconductors, experts said Tuesday.

The unexpected price drop is the result of an ongoing power struggle between key global oil powers ― Russia and Saudi Arabia ― that will continue to hamper the growth prospects for local businesses already hit hard by demand shock caused by the COVID-19 pandemic.

The oil price drop should have otherwise been a boon, strengthening household purchasing power with a lowered price of gas and many other petroleum goods. Corporate investment would have also jumped thanks to costs savings from the reduced prices of raw materials, shipping and logistics.

Yet, the much-desired scenario of economic vibrancy that would have helped Korea snap out of the economic downturn has become no more than “wishful thinking” in the face of the ongoing virus scare and subsequent halt to many major consumer activities.

Korea, instead, continues to see the virus-triggered demand shock more than dwarfing the limited reduction in costs for airline, shipbuilding, marine and logistics firms ― the industries that usually enjoy lower oil price-induced operating cost reductions.

Also fueled by the shock is the sharper fall in already declining consumer prices, a key factor that fans deflation concerns amid an overall economic slowdown already in progress, triggered by the drawn-out U.S.-China trade dispute.

Expert say the much-awaited recovery in the oil industry would come no sooner than in the third or fourth quarters of 2020 at the earliest, because the twin shock of both supply and demand would not easily rebound amid the severity of the ongoing global pandemic.

Oil prices hitting 18-year low

International oil prices have sunk to their lowest since 2002 as the coronavirus pandemic crushed demand for crude products. Crude oil demand is expected to drop 15 to 20 million barrels per day, 20 percent lower than a year ago.

Brent crude dropped to $22.58 a barrel, Monday (local time), its lowest level since November 2002, while the price of U.S. West Texas Intermediate (WTI) fell below $20 a barrel, close to an 18-year low.

Oil prices has tumbled by half in the month of March, dropping not only due to demand shocks but a price war between Russia and Saudi Arabia. The feud began after Russia rebuffed a production cut proposed by Saudi Arabia, the de facto leader of Organization of the Petroleum Exporting Countries (OPEC). Saudi Arabia retaliated by slashing its April official selling prices by $6 to $8 and pledged to dramatically ramp up production.

Yet Russia, instead of showing signs of compromise, said they would “make their own decisions on what to do” from April 1, indicating the war would continue for the time being.

No near end in sight

Korea experienced a similar oil price drop about four times in the past, but this time is like no other, according to an expert.

“In the past, demand was more than strong enough to endure oversupply,” Korea Energy Economics Institute (KEEI) oil policy research team head Jung Jun-hwan said.

The price fluctuated between a range of $60 and $70, but was still on the path toward a clear recovery with the only variable being the level of OPEC members' production cuts. But that is not the case anymore, he said.

“The ongoing feud is cause for much heavier concern because the oversupply shock will only be amplified by virus-induced tanking demand.”

While some global institutions forecast the price would crash further to $10 per barrel, it is no longer about the numbers, in his view, but about demand recovery.

“It is about when ― or should I say whether under this gloomy circumstances ― demand would recover.”

Drawing from what China experienced, he judges that a moderate recovery is expected no sooner than in six months from now. As for the U.S. and European countries, it will be in the fourth quarter at the earliest.

Also scrambling are many local refinery and petrochemical firms rushing to revise their business plans due to the unexpected demand shock, mostly over unused stockpiles of products.

“Large-volume stockpiles in the Asia Pacific region are quite the major concern. It is no longer about how to adjust sales prices, an issue that becomes meaningless and a far off-point when there simply is no demand. Korea's export goods gaining competitive edge in the global market via lowered oil price is a discussion for another time with no buyers in the market,” Jung said.