The Effect of International Oil Price on Korea
The Effect of International Oil Price on Korea
  • Reporter Yun Seok-chan
  • 승인 2016.02.19 18:04
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In a stark contrast to the oil shock in which the price of crude oil skyrocketed, the price of crude oil has plummeted recently. Based on WTI (West Texas Intermediate), the price of crude oil from June, 2014 to Jan, 2016 declined from 105.2 dollars per barrel to 32.6 dollars per barrel, a 69% decline. This phenomenon is believed to have been caused by OPEC’s deliberate overproduction. It seems illogical for countries in the Middle East to produce oil beyond the market’s demands since it is clear as day that the price of oil will drop, making them suffer from deficits. However, the development of methods to extract shale gas accounts for the reason why they did so. Conventionally, although shale gas got the limelight as a prospective alternative for fossil fuels, the difficulty in extracting it hindered it from being put into practical use. In other words, the procedures taken to extract shale gas cost more than the shale gas itself. On the contrary, as more cost-effective methods were devised to extract shale gas, countries that possess shale gas reserves started extracting it on a larger scale, which came as a big threat to oil producing countries. Hence, oil producing countries decided to make oil cheap enough for people stick to using oil and not even consider using shale gas. This decision has brought about numerous ramifications in a great number of nations including South Korea.
According to research conducted by KDI (Korea Development Institute) from 2001 to 2014, per every 10% decrease in the price of oil, it is estimated that there will be 0.16% increase in GDP, 0.06% increase in consumption of common people, 0.1% increase in total investments, 0.14% increase in CPI (consumer price index), 5.2 billion dollar increase in balance on current account, and 0.33% increase in GNI. Specifically, industries that will benefit from low oil price mainly include airlines, shipping, logistics and automobiles. For airlines and shipping industries, oil price accounts for about 40% and 20%, respectively, of the total prime cost of the two industries. When the price of oil hit 80 dollars per barrel, Korean Air could save 65 million dollars and Hanjin Shipping saved about 100 million dollars solely from the decline in the oil price. With the oil price fluctuating around 30 dollars, the profit is expected to have increased by many folds. Also, as the price of oil declined, sales in cars with big engines increased for car manufacturers. For instance, a hybrid vehicle named IONIQ by Hyundai Motors and a luxury sedan named K7 by Kia Motors were released at the same time. Due to the fact that gas became much more affordable these days, a lot of people chose to purchase K7 despite its lower gas mileage.
In contrast, there are industries that are negatively affected by low oil price. These include construction, oil refining, and petrochemical industries. Construction industries that build oil plants in the Middle East get less volume of orders from oil companies. Oil refining companies such as SK Innovation, S-Oil, and GS Caltex experience a loss of inventory valuation. Fortunately, in 2015, as the decline in the price of refined gasoline was not as drastic as that of crude oil, they still managed to make a decent profit. Petrochemical industries also sustained a loss as the value of petrochemical products is expected to decline along with the price of crude oil.



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