ED War and energy crisis
After Russia’s invasion of Ukraine, oil prices surged. It took markets until this March to begin to recover, but prices are rising again due to the conflict between Israel and Hamas. These price increases directly impact the Korean economy due to its dependence on imports of petroleum. However, shifts in market prices for crude oil due to volatility in the Middle East are a risk that Korea can reduce.
In its Indo-Pacific strategy, the Korean government noted that “The instability in the global energy market caused by the war in Ukraine highlights the need for closer international cooperation to achieve both energy transition and energy security in parallel.” As long as Korea is dependent on fossil fuels, its economy is susceptible to problems halfway around the world. The war between Israel and Gaza highlights this and should only hasten efforts at energy transition to reduce Korea’s dependence on energy from unstable parts of the world.
Among high-income countries, Korea’s economy is one of the most dependent on fossil fuels. According to Our World in Data, 83 percent of Korea’s primary energy consumption in 2022 came from fossil fuels. This is similar to the United States’ dependence on fossil fuels. However, the EU is only 71 percent dependent on fossil fuels, the United Kingdom 75 percent, and Canada only 64 percent.
Among fossil fuels, petroleum is the most significant for Korea, accounting for 43 percent of Korea’s total energy consumption. In contrast, it only accounts for 38 percent in the United States and European Union and just 30 percent in Canada.
These differences may seem small, but the impact is different on each. As major producers of oil the United States and Canada are relatively protected against shortages of fossil fuels from conflicts in the Middle East, if not market-driven price shocks. However, more than 60 percent of Korea’s imports of petroleum come from the region making it highly vulnerable to disruptions from the Middle East.
And these disruptions are relatively frequent. Since the 1970s, there have now been six conflicts in the Middle East that have resulted in higher energy prices beginning with the Arab oil embargo in 1973 in response to the Arab-Israeli War. That war saw prices of crude oil rise 52 percent within three months. The Iraqi invasion of Kuwait drove prices of crude oil up 105 percent. In the current crisis, the World Bank estimates that in a wider regional war prices for crude oil could exceed $150 per barrel.
One direct way to reduce Korea’s need for petroleum is to increase the rate of adoption of electric vehicles and put in place a deadline for phasing out the sale of new vehicles with combustion engines.
Korea’s transportation sector is highly dependent on the use of fossil fuels. Transitioning to electric vehicles would save roughly 11 barrels of oil a year per vehicle in a country with 25.5 million cars. While it would not eliminate Korea’s need for petroleum, it would significantly reduce it.
Transitioning to electric vehicles would need to be coupled with a quicker transition to renewable power and increased nuclear power. After petroleum, coal accounts for 26 percent of Korea’s power consumption. While charging vehicles with power produced with coal would reduce Korea’s dependence on Middle Eastern oil, it would increase Korea’s emissions of carbon dioxide, another area where policymakers increasingly need to focus.
According to the initial report card from the 2015 Paris Climate Agreement, countries' efforts to reduce emissions have put the planet on track to see temperatures rise by 2.5 degrees Celsius by 2100 ― well above the target of a 1.5 percent increase and the point at which flooding, heatwaves, droughts and other consequences of climate change become much more severe and potentially unmanageable.
A quicker transition to electric vehicles would have benefits here as well. The transportation sector is the second largest source of emissions in Korea and in 2021 oil accounted for 171 million tons of Korea’s CO2 emissions. Cutting back more rapidly on these emissions by changing Korea’s energy mix would help Korea meet its own emission reduction targets. It would also provide a larger domestic market for electric vehicle sales as Hyundai and Kia work to achieve the economies of scale needed to drive down prices.
The war between Israel and Hamas only highlights the need for Korea to speed its transition to alternative fuels and technologies. While Israel has set the goal of eliminating Hamas, that is an unrealistic objective. The potential exists for a wider conflict that involves Iran and its proxies in the region. Even if Israel is successful in eliminating Hamas, the possibility of a future conflict between Israel and Iran will remain. The one way to limit Korea’s exposure to energy disruptions from the Middle East is to hasten its own energy transition.
Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.