Oil price drop is no longer blessing for Korean economy

By Choi Sung-jin

International oil prices fell below $30 a barrel after OPEC failed to reach an agreement on production cuts Friday. Given that crude prices plunged 37 percent and 24 percent after similar failures in November 2014 and this past June, respectively, they may likely drop further this time, too, say local analysts. 

In the past, low oil prices were a blessing for the Korean economy because people could increase consumption and businesses could save expenditure on production costs. Yet, the ongoing price weakness, a result of demand falling short of available supply because of global economic slump, is dealing a serious blow to Korean exporters. Particularly for oil refining, petrochemical and shipbuilding industries, cheap oil prices are becoming a "great pain." 

As is widely known, the current price fall was caused by a game of chicken between OPEC and non-OPEC producers, including the United States capitalizing on the shale gas boom. If this game prolongs, the Middle East producers will likely emerge as the winners because their production cost remains at about $10 a barrel, compared with $36 for the U.S., industry analysts said. Others say international oil prices will soon bottom out, as financially-pinched Saudi Arabia and other OPEC members will agree to reduce production in the near future. 

If worldwide demand for oil does not rebound anytime soon, hit by a slump in major economies, including China, the price weakness may prolong, the experts say. 

For the Korean economy, which consumes lots of fossil fuel and relies heavily on imported oil, low oil prices have long been synonymous with production cuts. This helped the nation sharpen its competitive edge. 

But that is no longer the case. The low oil prices, when it is the result of weak demand, are only causing revenue loss in most industries that use crude oil as a raw material. Korea's monthly exports declined throughout this year compared with 2014, and outward shipments of petroleum and petrochemical products plunged 36 percent and 24 percent, respectively. The severe losses incurred by local shipbuilders are also due in considerable part to a steep decline in order placements for deep-sea drilling plants, reflecting a soft demand for oil. The dwindling oil revenue being made in Middle East countries has also led to a dearth of work for Korean construction companies there, the analysts said. 

Early this year, the Korea Development Institute forecast that a 10-percent drop in international oil prices would jack up Korea's growth rate by 0.2 percentage point. Crude prices this year have fallen to half the level of last year but the growth rate is estimated to stop at 2.7 percent this year, compared with 3.3 percent in 2014. 

Nor do domestic consumers benefit much from falling oil prices. The price of Dubai light, which account for about 70 percent of Korea's oil imports, fell 34 percent between May and November, but the gasoline price dropped by only 4.5 percent at the pump. An oil company official attributed this gap to the time difference between imports of crude oil and marketing it after it is refined as well as various taxes that can amount to a 60-percent share taken from consumer sales.