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KDI Economic Outlook 2021-1st Half
Recent Oil Price Hikes and the Ripple Effect on the Korean Economy

May 13, 2021

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After taking a steep downturn in the first half of 2020, international oil prices have recently made a sharp turnaround and are rapidly climbing.

Driving this increase are the growing expectations for an global economic recovery, and OPEC+’s decision to cut oil output.

For Korea, rising oil prices could impede the economic recovery.
Specifically,inflation rises in line with oil prices, which negatively affects households and ultimately, the economic recovery.

So, just how much will this year’s surge in oil prices affect our businesses and homes?

To answer this question, an analysis was conducted based on the assumption that,
global oil prices rose 43% according to the recent uptrend, which, on the one hand, only raised the prices of petroleum products such as gas and diesel, and on the other, also raised the prices of non-petroleum products.

If the price hike is limited to petroleum products, firms who use these products as intermediate input bear the brunt of the burden, and their purchasing power diminishes.
The purchasing power of households also weakens due to the higher prices of petroleum products.

If the impact is examined by industry, we find that firms in the transport services and chemical products are hit particularly hard.

Meanwhile, if the price hike encompasses both petroleum and non-petroleum products, the burden of the sizable contraction in purchasing power primarily falls on households.
Private investment and government spending are also affected.

If the price of oil increases to 60 dollars per barrel, the purchasing power of the overall economy decreases roughly 1%,

and the impact on firms and households varies depending on how much the prices of non-petroleum products have risen due to the higher production costs.

However, a break down of the factors behind the oil price fluctuations reveals that, before the Covid-19 crisis, oil prices fluctuated on speculative demand and precautionary supply and demand, and after, on the increased demand for crude oil due to the global economic recovery and reduced supply.
A separate analysis of the shock of these factors on the economy shows that, the economy grows if the price hike is driven by an increased demand for crude oil, but inflation grows if it is driven by uncertainties over supply.

Then, how will the soaring oil prices since the outbreak of Covid-19 change the Korean economy?

Three scenarios were established for analysis. Oil prices increase to 70 dollars in the first scenario and to 60 dollars and 55 dollars in the second and third.

According to the results, the price hikes raise the economic growth rate by 0.4 to 0.7%p,
and inflation by 0.5 to 0.8%p.
■ This study shows that, as an oil-importing economy, rising oil prices serve to diminish Korea’s household purchasing power and escalate production costs. The level to which economic entities are affected varies greatly depending on the degree of cost shifting.

■ According to the analysis of factors behind oil price fluctuations, the recent oil price hikes are expected to drive up both the rates for economic growth and inflation in 2021.

■ The gradual improvement in the global economy will have a positive effect on the Korean economy. However, the protraction of the Covid-19 crisis and less-than-desirable recovery of the domestic economy means that policy action must be considered to mitigate the negative impact from rising import prices, where necessary.

■ In the long run, consistent efforts should be made to reduce the impact of global oil shocks on the Korean economy, and to also lower its dependence on crude oil and petroleum products so that it can cope with climate change.
 
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Office of Global Economy
Providing Economic Forecast and Macroeconomic Policy Direction, the Groundwork for a Brighter Future

The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.

Main Tasks
  • Economic trend analysis, short- and long-term forecast
  • Policy study on macroeconomic management
  • Basic structural analysis on macroeconomic areas
  • Maintenance of multi-sectoral dynamic macroeconomic model
Department of Macroeconomic Policy
  • LEE. Tae Suk

    Director, Division of Analysis and Evaluation

    82-044-550-4725
  • CHO, Byungkoo On leave

    Director and Vice President, Department of North Korean Economy

    82-044-550-4725
  • LEE, Jongkyu

    Fellow

    82-044-550-4725
  • WEE, Hyeseung Dispatched

    Research Associate

    82-044-550-4725
  • NAM, Jinwook On leave

    Specialist

    82-044-550-4725
  • KIM, Seulki

    Research Associate

    82-044-550-4725
  • CHUN, Eunkyung

    Research Associate

    82-044-550-4725
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