Oil Price and Korean Economy

Full text


Oil Price and Korean Economy

April 17, 2015

Jaerang Lee


- Contents -

I. Oil Price Outlook

II. Effects on Korean Economy

III. Conclusion



Oil prices have lowered to around mid 50 dollars per barrel.

OPEC’s decision to leave its production target in Nov.

triggered the rapid drop in prices.

Increase in oil inventory,

Strong dollar has contributed.

I. Oil Price Outlook

Oil Prices U.S. Oil Inventory1)

Notes : 1) Month-end(3.13 for March)

Notes : 1) Excluding Strategic Petroleum Reserve Source : EIA

Source : Bloomberg



Oil prices are forecast to rise moderately.

Falling U.S. crude oil rig counts,

Moderate inventory builds provide support to prices.

Supply side factors are dominant.

I. Oil Price Outlook

U.S. Rig Count

& Crude Oil Production1)

Note : 1) 3.13 for March Source : EIA

Oil Price Forecasts1)

Note : 1) Brent Oil, period average Source : EIA, CERA, OEF



High level of uncertainty and risk remain.

U.S. – Iran Nuclear deal agreed but details under talk.

Disputes in Middle East unsolved.

IS, Yemen

Oil producer countries’ budget relied heavily on oil

revenues, that might cause potential supply disruptions.

I. Oil Price Outlook



II. Effects on Korean Economy

Growth in Korea has been very modest, and BOK forecast is revised downward.

Lower oil prices is not showing as much spillovers as expected. Why?

(S.A., QOQ, MOM, %)

2014 2015

3/4 4/4 Oct Nov Dec Jan p Feb p Jan~Febp

Retail Sales 1.3 0.4 -0.1 2.1 1.5 -2.8 2.8 0.0

Facilities Investment

-0.9 8.6 -4.4 11.4 2.1 -7.4 3.6 -2.1

Exports(YOY,%) 3.6 0.9 2.3 -2.7 3.1 -0.9 -3.3 -2.1

Import(YOY,%) 5.4 -2.8 -3.3 -4.1 -1.0 -11.1 -19.7 -15.2

CA(billion U$) 22.6 27.2 8.9 11.3 7.0 6.6 6.4 13.0



Oil price increase in 2000s and regulations on green house gas emission control has increase the demand on energy saving and oil substituting technology.

It is required to reduce 30% of green house gas by 2020.

Alternative energy technology has lowered reliance on oil.

II. Effects on Korean Economy

Oil Prices1) and Energy Consumption2)

Notes : 1) Dubai Oil Notes : 2) per real GDP

Source : Korea Energy Economics Institute, The Bank of Korea, Bloomberg

Energy Source

Notes : Ratio of Petroleum consumption = Petroleum Dependence Source : Korea Energy Economics Institute



II. Effects on Korean Economy

Industrial structure gradually has become less-oil consuming.

Heavy industry -> IT

Manufacture -> Services

Source : The bank of Korea

Renewable Energy Production &


Note : 1) compared with total primary energy production Source : Korea Energy Management Corporation

Ratio of petroleum-guzzling Industries to Gross value added



Oil prices pass through to the limited extent.

Gas prices are down at the market, but public

transportation fees, electricity, heating fares are regulated.

Limited increase under higher oil prices means limited decrease under lower ones.

Taxes are lump sum.

From July 2014 to March 2015, oil refineries dropped their supply price by 33%, but retail price fell 19%.

Gas tax per $: Korea 0.45$, U.S. 0.15$

U.K 0.61$, Germany 0.58$

(Source: OECD)

Upside risk in oil prices support floor.

II. Effects on Korean Economy



Uncertainties and risk make consumption and investment decision delayed.

Uncertainties in energy market increases volatilities in financial market.

If oil prices decline further, oil dependent countries may face tough economic and financial conditions.

Korea has almost no financial linkage to oil exporting countries, but about 10% of exports head to them.

Low inflation may increase the risk of deflation, leading to uncertainties in the monetary policy.

II. Effects on Korean Economy



Lower oil prices will eventually act as a boost to Korean Economy.

Korea has:

The 10th largest oil consumption, and the 5th largest oil imports in volume.

The net oil imports/GDP ratio, 7.6%(2013), the 2nd highest.

II. Effects on Korean Economy

Note : Based on 2013 figures

Source : EIA Note : Based on 2010 figures

Source : EIA Note : Based on 2013 figures

Source : UNCTAD, IMF

Oil Consumption Oil Imports Net Oil Exports



Cheaper oil brings benefits to Korean consumers and investors.

BOK macroeconomic model predicts 10% of international crude oil price decrease lead to 0.1%p increase in growth.

II. Effects on Korean Economy

(Bills saved

per GDP, %) U.S.A. China Germany Japan India Korea Singapore

0.5 0.8 0.8 1.2 1.8 2.4 5.8

Note: Assuming crude oil price decrease from 109$ to 71$ per barrel.

Source: Rhodium Group, Wall Street Journal 2014.12.7



Boosting effects might not as big as models project.

Demand shock explains about 20% of oil price decrease.(IMF, Dec.2014)

Under 20% demand and 80% of supply shock, 10%

decrease in oil price bring less than 0.1%p growth effects.(BOK12, BOK macro model)

Models are linear, but real world is not.

II. Effects on Korean Economy



Economic and non economic factors limits the boosting effects of cheaper oil.

Lower dependence on petroleum

uncertainties and risks in the market

Mixed shocks: supply and demand shocks

Regulations and taxes

Deflation risks are overstated.

Inflation expectations are anchored.

Core inflation is stable.

Oil price drop is not passing through to the larger extent.

III. Conclusion



We may need patience!!

Model projects that it takes at least about a year to take a full effect of the oil price shock.

III. Conclusion





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