Retail oil prices recently reached their highest so far this year in Korea amid a rapid bounce-back in international crude prices.
Gasoline prices have surpassed the former 2016 record of 1,406.72 won ($1.18) per liter, which was recorded on Jan. 1, after hitting the bottom of 1,339.51 won in early March. Diesel prices have also posted a V-type rebound to break the 1,200-won barrier.
The domestic prices growth reflects an about 90 percent jump in crude prices within just three to four months. Despite a series of failures in reaching a consensus among OPEC members and other oil producers on scaling back petroleum output, crude prices have still been on a gaining streak.
Between 2015 and early 2016, local policymakers frequently cited low oil prices as a key factor deteriorating the profitability of many industrial sectors and the nation’s economic growth. The extraordinarily low prices were rather a good excuse for the government to explain the critical export slump.
However, the situation has reversed in quite a short period. Now few government officials and private analysts use the habitual term “low oil prices era” when they unveil opinions on the current economic conditions.
It is time for the government to reassess how the international oil prices’ recovery will affect the domestic economy. The public has the right to know whether or not the price normalization will have a positive effect on exports and gross domestic product growth.
In the past, many citizens could cast doubts as to why a plunge in oil prices was a bane to Korea, which 100 percent depends on imports in oil consumption for both the industrial and household sector.
By common sense, ordinary households cannot welcome the rising gas and diesel prices due to the growing fuel cost burden. And there must be many manufacturers that would suffer higher processing costs from high oil import prices, while some sectors might benefit from the currency situation.
This week, the Finance Ministry and the state-controlled Korea Development Institute are scheduled to publicize their research on economic conditions. The oil factor should be included in the list in reflection of the price spike.
In addition, the Bank of Korea should take the factor into profound consideration when it decides the benchmark interest rate this Thursday.
Aside from record-high household debt, a rate cut is not desirable in terms of import prices. If the central bank finally chooses to cut the base rate, the Korean currency — which has been weaker against the U.S. dollar — will have no choice but to further lose. And this will cause higher oil import prices as the dollar is the only currency for trading petroleum.
Ordinary households’ capacity to spend is weakening. The primary factor is no doubt their heavy debt. When fuel cost burden is added, the consumption in the private sector could further shrink.
The government needs to drop short-sighted policies to boost the consumption. Providing the Korean version of Black Friday or extraordinary holiday, as it did over the past year, are makeshift.
If there was misjudgment in macroeconomic policies of the Finance Ministry and rate settings of the BOK, it should be corrected as soon as possible. Any repetition of taking risky options would be linked to irreparable policy failure.
