Countering the oil bomb again

Although we cannot control the spike in international oil prices, we must minimize losses and change the industry to an energy-saving structure as fast as possible.

Oil prices are spiking, unsettling the global economy. Western Texas Intermediate (WTI), the U.S. crude benchmark, hit a 10-month high above $90 per barrel. Some investment banks in Wall Street are projecting oil prices to breach $100 per barrel again. The latest run was fueled by supply cuts by oil-rich Saudi Arabia and Russia. Saudi plans to keep a daily cut of 1 million barrels and Russia 300,000 barrels by the year’s end.

Oil prices directly affect consumer prices. Their volatility can upset efforts to tame inflation by central banks through their aggressive interest rate hikes. This also means the rate increase may continue to dampen a rebound in the global economy.

The news deals an additional blow to the fragile Korean economy. A renewed inflationary run on top of an economic slump can be devastating. Factory output, consumption and investment all turned negative in July. Exports have been extending a losing streak for the 11th straight month. The consumer prices gain that retreated to the 2 percent level in June and July picked up to 3.4 percent in August.

Trade balance can worsen, too. After a 15-month red streak from March, the balance has been eking out a surplus since June. But the surplus owed more to decreased imports than to increased exports, a typical feature of a recession. But the jump in energy import costs while exports remain in the doldrums could feed the deficit in the trade balance, as well as in the current-account balance.

Everyday inflation is also a concern. Gas stations are already selling gasoline for over 2,000 won ($1.5) per liter. Gas prices in Seoul jumped 12 percent over the last two months. At this rate, hopes for an economic rebound in the second half could be dashed. The oil scare raises questions about the readiness of the Korean economy against contingencies in the future. On top of that, an exports recovery from market diversification has been slow, and domestic demand remains stubbornly lethargic. Household debt is piling back up, too. The Bank of Korea also won’t be able to keep up with the rate gap with the benchmark rate in the United States.

The Korea Electric Power Corporation (Kepco)’s debt has exceeded 200 trillion won as the state utility provider cannot raise power bills as fast as the rise in prices of raw materials. The structure of amassing losses from selling power also has not been fixed despite its snowballing debt. The utility company is shouldering 7 billion won in interest payments per day. Under such circumstances, a hike in electricity charges is inevitable. Although we cannot control the spike in international oil prices, we must minimize losses and change the industry to an energy-saving structure as fast as possible.