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International crude oil prices are soaring at an unprecedented pace, sending stock markets plunging across the globe and raising the possibility of a "third oil shock."
Surging oil prices in particular are putting pressure on the Korean economy, which imports all of its energy needs from overseas, as the country has to pay more for imports, raising costs of goods and services, cutting consumer spending and slowing business activities.

Higher oil prices are also making it difficult for the Bank of Korea (BOK) to cut its base interest rate in coming months, despite mounting calls for an easing of the monetary policy to counter growing downside risks to the economy.

On Wednesday, the West Texas Intermediate (WTI) for July delivery surged to an all-time high of $133.17 per barrel in New York, up $4.19, or 3.3 percent, from the previous trading. Oil price soared on the news of a larger-than-expected drop in the U.S. strategic oil reserves.

Despite a slowing U.S. economy, oil prices have increased at a faster pace since the beginning of the year on the surging demand from China and other developing economies. Also, investors have flocked to oil and other commodities, expecting raw material prices to continue to show an upward curve due to falling dollars.

Credit Suisse projected the WTI will average $120 per barrel this year, sharply up from its earlier forecast of $91, while billionaire hedge fund manager Thomas Pickens said oil price will exceed $150 per barrel this year, citing tight crude supply and strong demand from China and other developing economies. Early this month, Goldman Sachs forecast the price could reach $200 a barrel by 2010.

According to the Korea National Oil Corp., Dubai Crude, which accounts for most of South Korea's oil imports, also soared to an all-time high of $123.69 per barrel, up $3.29 from the previous trading. The Dubai Crude price is widely projected to show an upward curve in line with the WTI, hitting the world's 13th largest economy hard.

Samsung Economic Research Institute warned that if the Dubai price exceeds $151 a barrel, the Korean economy could shrink as it did following the second oil shock in the late 1970s.

But high crude prices are already worsening Korea's macroeconomic fundamentals, including the current account balance, private consumption and business activity.




# The Korea Times [MAY 23, 2008]