International crude oil prices have once again surpassed 100 USD per barrel. This surge is a result of escalating military tensions between the U.S. and Iran, raising concerns about potential disruptions in oil transportation. Market analysts suggest that if the conflict prolongs or supply disruptions worsen, Brent crude could potentially rise to between 120 USD and 150 USD per barrel.
The sharp increase in global oil prices is expected to put upward pressure on domestic prices in the U.S. as well. Starting with petroleum products, the ripple effect could spread to transportation and production costs, eventually impacting processed food and service prices.
With the upcoming holiday season, there’s growing concern that the recent spike in international oil prices may soon be reflected in domestic fuel costs. This situation is likely to increase pressure on the government’s management of maximum oil product prices and fuel tax reduction measures.
Oil prices breach 100 USD mark… Could soar to 150 USD if situation deteriorates
As of Friday, the international oil market shows Brent, West Texas Intermediate (WTI), and Dubai crude all trading above 100 USD per barrel.
Brent crude closed at 107.63 USD per barrel on Thursday, marking a significant 6.3% jump from the previous session. WTI also saw a substantial increase of 6.7%, closing at 102.48 USD per barrel. Both Brent and WTI have reached their highest levels since May 19.
The upward trend continued, with WTI trading around 103.7 USD per barrel as of 8:00 a.m. on the day of reporting.
The surge in global oil prices is a direct consequence of renewed military clashes between the U.S. and Iran. Both sides have exchanged attacks on oil tankers, while Iran has tightened its control over the strategically crucial Strait of Hormuz.
The volume of oil and gas transported through the Strait of Hormuz, which previously accounted for about 20% of global supply, has significantly decreased. With alternative shipping routes through the Red Sea also under threat, supply instability is spreading rapidly.
Market analysts are even discussing the potential for oil prices to rise dramatically if the conflict escalates further.
Bank of America (BofA) forecasts that if the conflict restricting oil supply continues until year-end, Brent crude will likely trade between 95 USD and 120 USD per barrel. They warn that prices could skyrocket to 150 USD if major energy infrastructure suffers extensive damage.
Goldman Sachs Group, Inc. also predicts that Brent crude could surpass 120 USD per barrel if maritime transport disruptions in the Middle East intensify.
Jae-hoon Jang, a senior researcher at the Korea Energy Economics Institute, stated that the current market turmoil is comparable to the early stages of the war. Unlike then, significant portions of strategic oil reserves have been depleted globally. If the situation prolongs, the market may react more sensitively to supply disruptions.
He further noted that if China increases its crude oil imports again, the effect of reduced Chinese demand that had previously suppressed oil prices will disappear. If the conflict deepens and prolongs, prices could easily surge above 150 USD.
Analysts also point out that the supply-demand balance for oil products has become tighter than before. If transportation through the Red Sea faces disruptions following the Strait of Hormuz, the necessary diversions will significantly increase transportation time and costs.
An Kuk-hun, director of the Sustainable Management Division at the Korea Petroleum Association, remarked that while the situation is not as dire as a complete blockade of the Strait of Hormuz, it expects significant bottlenecks to occur. He explained that as transportation distances increase, shipping costs will rise, and crude oil will remain at sea for about a month longer, putting pressure not only on the cost of crude oil imports but also on cash flow for refiners.
He added that the recent increases in diesel and kerosene prices have outpaced crude oil, which could burden various economic sectors and countries in the coming months.
Inflation Faces Renewed Upward Pressure… Fuel Price Control Becomes Crucial Ahead of Holiday Season
The rise in global oil prices is expected to exert upward pressure on domestic prices once again.
This year, the consumer price inflation rate rose sharply from 2.0% in January and February to 2.2% in March, following the outbreak of hostilities between the U.S. and Iran on February 28. It continued to climb, reaching 2.6% in April, 3.1% in May, and 3.2% in June.
After a brief dip to 2.8% in July, it rebounded to 3.1% in August.
The surge in international oil prices due to the conflict has cascaded into oil and industrial product prices, intensifying inflationary pressures.
The Bank of Korea anticipates that the resurgence of rising oil prices will contribute to pushing inflation higher.
Kwang Beop-jun, head of the Bank of Korea’s Economic Trends team, stated during a press briefing on the Monetary and Credit Policy Report on Thursday that while the recent drop in exchange rates is expected to exert downward pressure on import prices, it’s also seeing a recent uptick in oil prices.
He continued that it expects that the cumulative shocks from oil prices will also transfer through the economy, and upward pressure from demand-side inflation will expand. Considering these factors, it anticipates inflation to maintain a high level in the near term.
The rise in international oil prices typically reflects first in import prices and domestic oil prices, then transfers through transportation and production costs to processed food and service prices. While this recent surge in oil prices may not immediately impact overall consumer prices for the upcoming holiday season, it could increase the upward risk for future inflation trajectories.
A more immediate concern ahead of the holiday season is the price of gasoline and diesel.
The government has implemented a maximum price system for oil products since March 13. After reducing the maximum price by 150 KRW (about 0.11 USD) per liter on June 27, it has frozen prices for the 7th to 9th rounds. The current maximum prices are 1,784 KRW (about 1.34 USD) per liter for gasoline, 1,773 KRW (about 1.33 USD) for diesel, and 1,380 KRW (about 1.04 USD) for kerosene, applicable until September 18.
With international oil prices once again exceeding 100 USD, the government faces increased pressure over whether to freeze or raise the next maximum price.
Maintaining the current maximum price would increase the government’s financial burden to compensate for refiners’ losses, while raising prices could burden consumers with higher fuel costs ahead of the holiday season.
The extension of fuel tax reductions also remains a variable. The government currently applies a fuel tax reduction rate of 15% for gasoline and 25% for diesel and liquefied petroleum gas (LPG) butane. This results in a tax burden reduction of 122 KRW (about 0.09 USD) per liter for gasoline, 145 KRW (about 0.11 USD) for diesel, and 51 KRW (about 0.04 USD) for butane. The current measures are set to expire on September 30.
However, some experts suggest that it’s premature to conclude that the existing inflation trajectory has changed significantly due to the recent surge in international oil prices.
Park Jong-woo, the Bank of Korea’s vice governor, stated, “Although oil prices have suddenly risen and surpassed 100 USD in a short period, it’s too early to say how the scenario has changed. He added that given that the risks related to the Middle East suddenly emerged just two days ago, it would be premature to claim that the overall economic scenario has fundamentally shifted.
