The Shadow of Stagflation Looms as International Oil Prices Cross $100.

Recently, international oil prices surpassed $90 per barrel, reaching the year's highest levels. This trend is expected to continue, potentially crossing the $100 mark. Such an increase in oil prices raises concerns about inflation, slowing economic growth, and deteriorating trade balances, casting a shadow of stagflation (simultaneous economic stagnation and inflation) over our economy. The Bank of Korea has analyzed that for every $10 increase in oil prices per barrel, the annual current account balance would worsen by $9 billion.

 

Next year, it is expected that commodity price uncertainty caused by supply-side factors will continue, so policies should be implemented to minimize risks and at the same time maintain growth potential.

 

According to Bloomberg, on the New York Mercantile Exchange (NYMEX), October delivery of West Texas Intermediate (WTI) crude oil, as of the 18th local time, closed at $91.48, up 0.78% from the previous trading day, marking the year's highest point. On the London ICE Futures Exchange, November delivery of Brent crude oil rose by 0.53% to close at $94.43, recording this year's highest level. Both WTI and Brent crude oil prices have surged more than 30% since March.

 

The primary reason for the increase in oil prices is a supply shortage. Saudi Arabia has decided to extend its voluntary production cut of 1 million barrels per day until December, and Russia has also committed to maintaining its reduction of 300,000 barrels per day in oil exports until year-end. Furthermore, U.S. shale oil production has declined for three consecutive months, with October oil production expected to be the lowest since May, at 9.393 million barrels per day.

 

In contrast, oil demand remains robust, largely influenced by China and other countries. The Organization of the Petroleum Exporting Countries (OPEC) anticipates a demand shortfall of over 3 million barrels per day in the fourth quarter, while ANZ Bank predicts a 2 million barrel per day deficit. Citigroup forecasts that Brent crude oil prices will surpass $100 this year, and global oil company Chevron also predicts that oil prices will reach $100 per barrel.

 

In August, the Bank of Korea projected average oil prices of $80 in the first half of the year and $84 in the second half. However, if oil prices rise to $94 in the second half, the monthly current account balance could deteriorate by approximately $750 million, and if the import reduction rate exceeds the export reduction rate, there is a high possibility of a "recessionary surplus."

 

Furthermore, the rise in oil prices leading to higher import prices could contribute to inflation, which, in turn, may result in reduced consumer spending, production, and investment, thereby hampering economic growth.

 

Gasoline prices in Korea have also increased for ten consecutive weeks, with the average selling price rising by 9.6 won per liter compared to the previous week, reaching 1,759.6 won per liter in the second week of September. Rising oil prices are expected to put upward pressure on costs for industries indirectly or directly related to oil, such as refining, steel, chemicals, electricity and gas, and transportation. According to the Korea International Trade Association, if oil and other raw material prices rise by 10%, the average production cost of companies is expected to increase by 0.43%. Companies that use oil as a raw material for electricity generation, such as KEPCO, are expected to incur even greater losses, and additional increases in electricity rates may be inevitable. The Bank of Korea, which is working to stabilize prices, should consider response measures in such circumstances.

 

Next year, it is expected that commodity price uncertainty caused by supply-side factors will continue, so policies should be implemented to minimize risks and at the same time maintain growth potential.