"If Oil Prices Reach $100, Growth Rate Drops by 0.3%P and Inflation Rate Rises by 1.1%P"

Hyundai Research Institute Crude Oil Dependency Analysis Report
Rising Oil Prices Lead to Higher Inflation, Increased Production Costs, and Lower Consumer Confidence

As international oil prices rose to around $90 per barrel, the highest in seven years, domestic gasoline prices have been on the rise for 25 consecutive days. On the 6th, the gasoline price at a gas station in downtown Seoul reached the 2,000 won range. Photo by Yoon Dong-joo doso7@

[Asia Economy Reporter Choi Dae-yeol] An analysis has emerged that if international oil prices exceed $100 per barrel this year, South Korea's economic growth rate will drop by 0.3 percentage points. It is expected that high oil prices will stimulate inflation while also reducing foreign currency earnings from external trade.

Hyundai Research Institute presented this forecast in its report titled "South Korea's Top OECD Economic Oil Dependence, Urgent Need for Improvement," released on the 8th. The report explains that rising international oil prices lead to higher inflation, worsening consumer sentiment, and a sharp increase in raw material costs, which raises production costs for companies. The rise in import prices deteriorates trade terms, acting as a factor that lowers the economic growth rate.

Joo Won, head of the Economic Research Office and author of the report, fixed other domestic and external economic variables at current levels and projected that if oil prices average $100 per barrel, there would be a pressure causing the economic growth rate to fall by 0.3 percentage points, from 2.8% to 2.5%. If prices reach $120 per barrel, a 0.4 percentage point decline is expected, slowing growth to 2.4%.

Consumer prices are expected to rise by 1.1 percentage points when oil is $100 per barrel and by 1.4 percentage points at $120 per barrel, according to Joo. Compared to previous forecasts, this corresponds to inflation rates of 2.7% and 3.0%, respectively. The current account balance is also expected to decrease by $30.5 billion to about $47.4 billion at $100 per barrel, and by $51.6 billion to approximately $26.3 billion if oil reaches $120 per barrel.

South Korea's oil consumption relative to GDP is 5.70 barrels (based on 2020 data), the highest among OECD countries. Per capita oil consumption is also the fourth highest at 18.0 barrels. While the economy ranks 10th in size (2020 data), oil consumption ranks 7th. Due to its manufacturing base and continued reliance on oil for industrial development and energy consumption, South Korea is particularly sensitive to international oil price fluctuations.

The report explains, "Compared to major competitors, South Korea's high oil dependence means that rising international oil prices exert relatively greater cost pressures," adding, "This implies that price pressures on Korean products in the global market are higher than those of other countries, potentially weakening industrial competitiveness."

By industry, costs are expected to surge in sectors including refining, steel, chemicals, electricity/gas/steam, and road/air transportation. Particularly, the refining industry, which uses crude oil as a raw material, is estimated to experience a 24% increase in production costs if oil prices reach $100 per barrel. Joo emphasized, "To escape an economic structure sensitive to international oil price fluctuations, it is essential first to focus on securing stable supply chains for oil and raw materials in preparation for a prolonged oil shock," and added, "In the mid to long term, economic and industrial structural improvements are necessary to enhance energy use efficiency."

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