Oil and natural gas prices are surging after U.S.-Israeli airstrikes on Iran. If the Strait of Hormuz, the sea lane that carries Middle Eastern crude and liquefied natural gas (LNG), is closed, a serious situation could arise.
The government said crude and petroleum products are stockpiled for more than six months of consumption, and that the share of LNG imported from the Middle East is about 20%, so there is no immediate problem. But if the war drags on, there are concerns that prices will soar and this year's economic growth rate (government forecast 2%) could be shaken.
◇ 70% of crude and 20% of LNG come from the Middle East… supply disruptions are inevitable
On the 2nd (local time), May Brent crude futures settled at $77.74 per Barrel on the ICE Futures Exchange, and April West Texas Intermediate (WTI) on the New York Mercantile Exchange closed at $71.23. That was up 6.7% and 6.3% from the previous session, respectively. Brent and WTI futures prices at one point during the session jumped as much as 12% to 13%.
Dubai crude, the benchmark for the Asian market, stood at $71.2 on the 27th of last month. However, afterward S&P Global Platts (Global Platts), a global commodities price assessment agency, halted its "indications of transaction," effectively making it impossible to gauge trends stemming from the Middle East crisis.
LNG, the feedstock for city gas, is also rising in price. The LNG Japan Korea Marker (JKM), a natural gas price benchmark for Northeast Asia, rose about 40% on the day to $15.068 per 1 million BTU. A day earlier, state-owned energy corporations QatarEnergy (QE) said it had halted LNG production at the Ras Laffan LNG facilities following Iran's attack.
Oil and gas prices could rise further. Iran's Islamic Revolutionary Guard Corps (IRGC) said it would "set fire to all vessels attempting to pass through the Strait of Hormuz." According to the Korea International Trade Association (KITA), Korea imports 70.7% of its crude and 20.4% of its LNG from the Middle East. Most of those volumes must pass through the Strait of Hormuz.
In response, the government said, "Stockpiles of crude and petroleum products are sufficient for 208 days (about 6 months and 3 weeks)," adding, "Although the LNG stockpile period is short, the share from the Middle East has fallen significantly to as low as 20%."
◇ If oil prices surge, Korea's inflation could rise to the 3% range and growth could fall to the 1% range
The problem is if the war is prolonged. U.S. President Donald Trump said on social media (SNS) that he initially expected the war to continue for "4 to 5 weeks," but noted, "We have the ability to continue the war even if it lasts longer," adding, "It doesn't matter how long the war lasts." The Wall Street Journal (WSJ) said, "Facing pressure from higher key energy prices, the U.S. economy could see a chain reaction including higher consumer prices, airfares and distribution costs," adding there are concerns it could trigger "stagflation" (economic slump plus rising prices).
Korea is no exception. According to internal estimates by the Bank of Korea (BOK), when the annual average oil price rises 10%, the inflation rate tends to increase by 0.2 to 0.3 percentage points (p). The BOK forecast this year's inflation at 2.2%, a figure predicated on an annual international oil price (Dubai crude) of $64 per Barrel. If Dubai crude climbs to $90 per Barrel, calculations show the inflation rate could reach the mid-3% range.
Growth could also flash red. Kim Jin-uk, a Citi economist, estimated in a report the same day that "if Brent prices surge and stay in the $82 range through the second to fourth quarters, forecasts for Korea's gross domestic product (GDP) growth this year and next will fall by 0.45 percentage point and 0.24 percentage point, respectively." The government's forecast for Korea's growth this year is 2%.