Cheap oil, a double-edged sword for Korea

Cheap oil is a boon for Asia’s fourth-largest economy, as costs of production decrease for businesses, particularly for those heavily dependent on fuel inputs. Korea, the world’s fifth-largest importer of oil, buys from overseas nearly all the oil it consumes. Consumers, too, benefit from lower energy prices and an increase in purchasing power, as the cost savings lead to falls in overall consumer prices.

The latest free fall in oil prices has many concerned as well, as it is one of the main sources of global economic uncertainty, often pounding global and local financial markets.

“To understand this, one needs to understand what drives oil prices down,” Park noted.

Global oversupply is the most immediate reason, but a key underlying factor is the weakening demand, with a slowdown in China and a prolonged slump in other major economies.

The U.S. West Texas Intermediate, a global crude oil benchmark, sank below the much-watched $30 per barrel mark for the first time in 12 years on Tuesday, with some analysts now warning of $20 a barrel. Standard Chartered said oil could dip to $10.

Korea’s benchmark, Dubai crude, also hit a 12-year low, trading below $26 per barrel.

Other commodity prices, such as natural gas, copper and aluminum, have been sliding on sluggish demand as well.

A weak global economy weighs down on Korea’s economy, as it relies on exports for growth.

“Last year, despite a significant fall in oil prices, Korea’s economy struggled because weak demand weighed down on exports,” said Lee Jun-hyuk, an economist at Seoul-based Hyundai Economic Research Institute. “Trade with oil-producing countries suffered a heavy blow.”

Park also noted that tumbling oil also heightens caution among global investors, as they stoke fears of global deflation and defaults in some vulnerable oil-producing countries, such as Venezuela.

By Lee Sun-young (milaya@heraldcorp.com)