[VIEWPOINT]Oil security is a long slogInternational oil prices hover at record high prices almost every day. The recent parade of high oil prices is fundamentally due to the risk premium of the situation in Iraq and other unstable Middle East conditions. The high growth rate of the Chinese and Indian economies and the increased demand for oil after the recovery of the U.S. economy are also important factors. The present level of oil price is about $10 per barrel higher than last year, and $7 of the $10 is estimated to be risk premium.
One thing we have to take note of in the present international oil market is that reserves are insufficient. The extra production capacity of the Organization of Petroleum Exporting Countries (OPEC) is only 1 million barrels a day, and the average inventory is the lowest in the last five years. Therefore, if even a small event takes place in the major supplier countries like Iraq, Russia or Venezuela, there can be short-term setbacks in the supply of oil due to insufficient capacity for increased production by OPEC countries. Out of fear of such a situation, the risk premium suddenly goes up when there are signs of instability in these countries, and oil prices rise sharply.
Considering this point, there is a chance that the present high level of oil prices will be sustained at least until the U.S. presidential election. So how are we going to handle the situation of rising oil prices? In short-term strategy, other than measures like economizing on consumption, policy alternatives are very limited.
In order to conserve energy, the people will have to be educated clearly on the effects of rising oil prices on the national level. As for the government, not just the Ministry of Commerce, Industry and Energy, which is in charge of energy, but all agencies such as the Ministry of Construction and Transportation, Ministry of Information and Communication and the Ministry of Science and Technology, will have to participate actively in coming up with a solution. The role of civic organizations is especially important in conserving energy.
In the longer term, comprehensive solutions such as reducing our reliance on oil, improving our industrial capacity to stand up to rising oil prices, expanding overseas resource development and training professional oil dealers to utilize the futures market will have to be deliberated.
First of all, securing a stable supply of natural gas is very important to reducing our reliance on oil. The present project of bringing in natural gas from Russia must be completed quickly. This will not only contribute to multiplying the import sources of our resources, but will also contribute to raising the competitiveness of natural gas through competition with liquefied petroleum gas.
Changing the structure of our industry is also an important task, but since it is related to the whole economy, it is not an easy task at all. It would only be possible if the development of low energy-consumption industries were expanded, or by reducing the effect of energy expenses by increasing the value added of manufactured goods. In other words, it is possible when the quality of products in general is raised to a higher standard. We need a pan-national level of effort, like Japan and Western Europe are attempting.
Expanding overseas resource development is an attractive solution in that it would not only raise the stability of supply and strengthen our position in negotiating for imports, but would also allow part of the higher prices to be recaptured as profits. But a lot of risks are involved in this method ― especially technical risks. It is because of such risks that Japan, which started its economic development push more than 20 years before us, still imports less than 10 percent of total energy demand from its overseas energy extraction businesses. Korea needs more effort and investment to lift the present 3 percent level to the targeted 10 percent level.
In addition, we need to use the futures market, improve our import methods and consumption flexibility, and expand our reserves. Naturally, we need to maintain cooperative relations, especially with oil producing Middle East countries, Russia, and other countries with a potential for expanding oil production, and we also need to improve our cooperative relations with oil importing countries.
But a lot of time and effort is necessary to prepare such measures. Also, despite the fact that it is advantageous to pursue such solutions when the market is stable, we generally get negligent when oil prices go down even a little. Such practices should be ended, once and for all.
To handle energy problems, a comprehensive longer-term strategy will have to be consistently pursued rather than temporary, short-term efforts.
* The writer is the president of the Korea Energy Economics Institute. Translation by the JoongAng Daily staff.
by Bang Ki-yual