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  • Slight Rise of Oil Prices amid Heightened Middle East Tensions will be Positive on Exports,
    2020-01-16 hit 796

    Slight Rise of Oil Prices amid Heightened Middle East Tensions will be Positive on Exports, 

    Prolonged High Oil Prices will Deteriorate Trade Balance  

     

    - KITA’s report, if oil prices soar, exports will decline due to weak competitiveness in export prices and slow overseas demand, and increase in international raw material prices and decrease in domestic consumptions will burden on imports -


     

    If oil prices rise slightly due to the recent tensions in the Middle East, exports may increase in the short term. However, it is projected that if oil prices surge above 80 dollars a barrel, exports will decline due to weak competitiveness in export prices and fall off in overseas demand. It is also anticipated that if oil prices continue to rise, increasing international raw material prices and reducing domestic consumptions will burden on imports.


     

    The Institute for International Trade (President: Shin Seung-kwan) of the Korea International Trade Association issued a report titled Impact of Middle East Tensions on International Oil Prices, and Imports and Exports on January 16th. The report estimates that if international oil prices increase by 10 percent from the steady flow, exports to the world will increase by 3.2 percent with rising export unit prices, fiscal improvements in oil-producing countries, and expansion of offshore plant orders. When oil prices rise 10 percent, imports increase by 3.3 percent due to higher crude oil import prices, resulting in deterioration in the balance of trade.


     

    By sector, exports of petroleum products, petrochemicals, steel products, ships, and automobiles are expected to expand when oil prices rise due to unit prices increase. Of the 13 export items, 10 items (52.2% of the exports) showed a positive correlation between oil price and export.


     

    Meanwhile, the impact of oil prices on Korea’s exports has expanded compared to the past. The export portion of petrochemical and petroleum products, which are affected by oil prices, rose sharply from 10.9 percent in 2000 to 16.0 percent in 2018 and the exports to emerging markets such as China and oil producing countries expanded by more than 50 percent after the financial crisis.


     

    International oil prices (Dubai oil) rose to nearly 70 dollars a barrel in January due to the Organization of the Petroleum Exporting Countries (OPEC)’s oil production cuts, expectations for the US-China trade agreement, and tensions in the Middle East but the uptrend eased as the United States announced further economic sanctions instead of military response.

    However, if the new nuclear deal between the United States and Iran is deadlocked again and goes into military confrontation over the in the Strait of Hormuz, which accounts for 30 percent of the world's crude oil transportation, oil prices could jump above 80 dollars a barrel. If rising Middle East tensions prolong high oil prices, exports are likely to decline due to weak competitiveness in export prices and slow overseas demand. Increasing international raw material prices and less domestic consumption are also likely to weigh on imports. In the mid-to long-term, it is concerned that rising energy costs for companies and rising gasoline costs for consumers, especially in developed countries that are oil importers, may result in the global economic slowdown.


     

    In May 2018, President Trump, who called for a renegotiation of the nuclear agreement, pulled out of the Iran nuclear deal and continued sanctions against Iran. In May 2019, the United States ended waiver granted to South Korea for sanctions on Iranian crude oil and it severely affected South Korea’s trade to Iran as well as overseas expansion as the Korea-Iran won-based settlement system was frozen. Between January and November in 2019, South Korea's exports to Iran and imports from Iran decreased 88.6 percent and 47.8 percent, respectively, year-on-year.


     

    Moon Byung-ki, a senior researcher at the Institute for International Trade of KITA, said, It is necessary to identify trends in real economy and exporters’ difficulties caused by the Middle East tensions and come up with countermeasures. The researcher also stressed, As higher geopolitical risks in the Middle East and deterioration in profitability and weak competitiveness in export prices are expected when oil prices hike, diversification of export markets and crude oil import channels, and development of new energy industries are required.” 






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