International crude prices could jump in the second half due to mounting Middle East geopolitical risks, spelling trouble for South Korea’s struggling economy, think tanks said Monday.
The Korea Center for International Finance and the Paris-based International Energy Agency said concerns are rising that a standoff over Iran’s nuclear program and the crude embargo imposed by the United States and Europe can cause oil prices to rise above the $100 per barrel mark in the coming months.
Fossil fuel prices have been falling steadily from May but started rising again in late June with the implied volatility of West Texas Intermediate surging 29.3 percent last Thursday. The implied volatility figure, which is used as a pricing model, and looks at the theoretical value for the option equal to the current market price of that option, also rose 32.5 percent on July 20.
“Because of the risks there is a need for Seoul to be prepared for sudden fluctuations in global prices,” said Oh Jeong-seok, a KCIF researcher.
The IEA said a recent rise in prices could pose serious challenges for the global economy.
“Crude importers could face inflationary pressure and a slowdown in growth,” the organization said.
These views were echoed by other local energy analysts who predicted that although global crude prices should stay under the $100 mark, this could change suddenly depending on how developments surrounding Iran unfold.
Tehran threatened to block the Strait of Hormuz, which could seriously restrict the supply of oil. If there is a shortfall in supply, it can lead to a spike in prices and directly impact South Korea’s economy.
Forecasts by the Bank of Korea showed if oil prices rise 10 percent, the country’s gross domestic product will contract 0.1 percentage point, while inflation will rise 0.19 percentage points. This is bad news since the government already downgraded the country’s GDP growth target for this year from 3.7 percent to 3.3 percent, due to persistent eurozone woes and a general slowdown in the U.S. and Chinese economies.
Others such as Lee Dal-sok, at the state-run Korea Energy Economic Institute, said despite geopolitical risks, the likelihood of the Iranian standoff spiraling out of control is not great for the time being.
“The situation in Iran should not really cause a spike, but it can limit the fall of crude prices caused by troubles facing eurozone countries that have weighed down the global economy,” he said.
Other experts, echoed this view by pointing out that because the global economy is performing so poorly this year, there is little reason for crude prices to go up in the near future. (Yonhap News)
