The Korean economy will face greater risks this year as the Seoul government has agreed to reduce its oil imports from Iran gradually in response to a U.S. request to participate in global sanctions against the Middle East country.
Washington has officially asked Seoul to cut its purchases of oil from Iran and unwind financial dealings with the Central Bank of Iran as part of its campaign to drive the Tehran government toward more serious negotiations over its nuclear program.
Given its close relations with Washington, Seoul has no choice but to accept its request. Yet it needs to play its hand well to minimize the impact that its cooperation with Washington will have on the national economy as well as domestic companies doing business with Iran.
Iran accounted for 9.6 percent of South Korea’s oil imports in 2011. This means cutting oil supply from Iran all at once would deal a lethal blow to the nation’s economy. Therefore Seoul officials need to insist during their talks with Washington that Korea be given enough time to reduce its reliance on Iranian oil.
It is heartening that the United Arab Emirates and Oman have reportedly promised visiting Korean Prime Minister Kim Hwang-sik that they would help Korea should it have difficulty importing crude. The UAE and Oman accounted for 10 percent and 2 percent of Korea’s oil imports last year, respectively.
Yet even if Korea manages to find alternative oil suppliers, it would not be able to avoid adverse effects if global sanctions are imposed on Iranian oil exports.
In the first place, Korea’s oil import bill would go up. Iranian oil is cheaper than oil from other countries. Last year, Iranian oil was priced $5.9 and $3.1 lower per barrel than oil from Saudi Arabia and Kuwait, respectively. As a result, domestic refiners that import oil from Iran ― SK Innovation and Hyundai Oilbank ― are likely to suffer deep cuts in profit.
Other oil refiners ― GS Caltex and S-Oil ― could also face a rise in oil import costs as global crude prices would rise if Iranian oil supply is reduced significantly.
It’s not just oil refiners that would be hit. Many Korean companies would find it difficult to maintain their operations in Iran as Washington is set to punish corporations that have financial dealings with the Central Bank of Iran.
According to the government, some 2,300 Korean companies are engaged in trade with Iran, with about 400 firms relying on Iran for more than half of their exports. If sanctions kick in as planned, these companies would not be able to continue to do business with Iran as before.
Korean builders will also be affected. They would be forced to give up the Iranian plant market, where they normally get orders amounting to $1 billion a year.
To cushion the potential negative effects of the sanctions against Iran, the government needs to ramp up efforts to diversify oil imports. Exporters for their part need to explore ways to bypass the U.S. dollar in trade deals with their Iranian partners.
The government also needs to help Korean companies explore new markets and should be ready to provide financial support for exporters who are hurt by Iran sanctions. Trade officials will have to meet with exporters frequently to listen to their problems and discuss ways to support them.
At the same time, Seoul policymakers need to keep an eye on global crude prices. If an oil embargo is imposed on Iran, global oil prices could shoot up, putting a damper on global growth.
Last year, global oil prices averaged at $107 per barrel, up 14 percent from 2010. According to a recent forecast of Deutsche Bank, if oil prices go up to $125 per barrel, global economic growth would slow to 2.5 percent this year from a projected 3 percent to 3.5 percent. If crude prices soar to $150, the global economy would grow at a dismal 1 percent.
Since Korea is more vulnerable to oil price hikes than other countries, the government should step up monitoring on oil price movements and remain alert to risks associated with Iran.
