Soaring oil prices, weakening won weigh on Korea's economy

International oil prices feared to hit $100 a barrel

By Yi Whan-woo

A toxic mixture of soaring oil prices and a weakening Korean won are expected to put a further drag on the Korean economy, with international oil prices forecast to surpass $100 per barrel soon and the local currency hovering around the worrying threshold of 1,200 won per dollar.

Benchmark crude oil prices have surged to the highest levels in seven years, with Dubai, Brent and West Texas Intermediate (WTI) all rising above $90 per barrel, Feb. 4.

Analysts said Monday the upward trajectory will continue at least through the second quarter of this year, fueled by optimism over a decline in Omicron coronavirus variant infections and a recovery of international travel. Escalating Ukraine-Russia tensions also remain as a critical variable as supplies of Russian natural gas can be jeopardized.

A bigger cause of jitters, according to experts, is that the won will continue to weaken unless uncertainties over U.S. tapering are resolved.

A simultaneous rise in oil prices and the won-dollar exchange rate is particularly worrisome because they are all associated with an increase in import prices, trade deficit and inflation.

“Such a simultaneous rise negatively affects the economy,” said Kim Jung-sik, professor emeritus at the School of Economics at Yonsei University, referring to the price hikes of imported raw materials that are used to make everyday products.

Under the circumstances, Byun Joon-ho, an analyst at Heungkuk Securities, said a fall in crude oil prices is not likely in the coming months considering the fact that the spring and summer months witness increased travel worldwide.

“The possibility of a decline in Omicron variant infections is also adding to demand for international travel,” the analyst said.

He noted that international oil prices have shown an average 12 percent increase in the second quarter of every year from the previous three-month period, and accordingly, the April-July price of WTI is estimated to reach $103 per barrel.

His forecast is similar to a projection Goldman Sachs made in January. Back then the Wall Street bank expected the price of Brent crude to hit $100 a barrel in the third quarter of this year and $105 a barrel next year.

The won's depreciation, according to the Bank of Korea (BOK), is steeper than other currencies, due to multiple factors in addition to the Fed's faster-than-expected tapering. It has mostly been hovering around the worrying threshold of 1,200 won per dollar. It closed at 1,200.70, Monday.

“This is very worrisome because consumer prices can rise to above 4 percent,” a financial industry source said, referring to inflation which hovered over 3 percent for four-straight months in January, exceeding the BOK's mid-term target of 2 percent.