"It's Different from the Past"... Why Construction Sites Remain Calm Despite Surging Oil Prices [Weekend Money]

Comparison with the 2022 Oil Price Surge Period

Cost Increase Driven by Labor Supply, Not Oil Prices

Interest Rate Environment Also Different from the Past

Despite the rise in international oil prices due to the ongoing war between the United States, Israel, and Iran, it has been analyzed that the construction and real estate sectors are relatively less affected.

Apartment buildings along the Han River in Seoul. Photo by Yonhap News

On March 14, IBK Investment & Securities assessed that it would be difficult for construction costs to surge significantly as a result of higher oil prices. The company judged that the current situation differs from 2022, when periods of rising oil prices and increasing construction costs overlapped.

According to Opinet, the oil price information system of Korea National Oil Corporation, the price of Dubai crude stood at $119.55 as of March 11, similar to the high level recorded on the same day in 2022 ($110.49). As recently as February 11, the price of Dubai crude was only $68.59.

In 2022, both oil prices and construction costs rose together. The Korea Institute of Civil Engineering and Building Technology reported that the Construction Cost Index increased by 20.0% from January 2020 to January 2022. This was a greater increase than the 10.0% rise from January 2022 to January 2024, and the provisional 3.5% increase from January 2024 to January 2026.

At that time, it was not the oil price that drove up construction costs. Instead, labor supply issues played a leading role. Factors such as the expansion of Samsung Electronics’ plant construction, the recovery of shipbuilding orders, and increased housing starts led to higher labor demand. However, the shortage of foreign workers due to the impact of COVID-19 resulted in insufficient labor supply. In other words, while construction starts increased, the labor shortage caused project delays and a rise in labor costs, thereby worsening the cost ratio.

Currently, labor supply is more stable than in 2022. As a result, the increase in outsourcing costs at construction sites is also likely to be limited. In fact, the daily wage for general workers at a typical construction site in 2023 was 140,000 won before tax, and this year it stands at around 144,000 won, showing little difference.

From the outset, the impact of oil price increases on construction costs is limited. According to the 2022 Input-Output Table from the Bank of Korea, the direct input coefficient of coal and petroleum products in the construction sector is 0.0194. This means that if oil prices rise by 10%, the direct effect on construction costs is only 0.19 percentage points. Even when considering indirect effects through chemical products, the initial cost pressure stands at around 0.35 percentage points, and the total effect, including the chain reaction across all industries, is about 0.77 percentage points. Therefore, it is unlikely that a scenario of widespread cost collapse would emerge due to oil price increases alone.

Cho Junghyun, a researcher at IBK Investment & Securities, stated, "Currently, there is some cost pressure stemming from rising oil prices, but it will be difficult for construction costs to surge as they did in 2022." He added, "In 2022, financial costs also increased due to a sharp rise in the base interest rate, which is another aspect that distinguishes that period from the present."

This content was produced with the assistance of AI translation services.