[Viewpoint]Burned by oilThe international price of oil is literally skyrocketing. South Korea imports more than 80 percent of the oil it consumes from the Middle East. The average price of Dubai crude, Korea’s benchmark, rose to $79.59 a barrel on Friday, topping the record for the highest price for the 12th time this year. Since earlier this year, when the price fell below $50 a barrel because an unusually warm winter caused less heating oil to be consumed, the price of oil has increased to more than $30 a barrel.
The surge in the price of international oil has been caused by several factors. Fundamentally, the demand has grown.
Developing countries, including China and India, are consuming at a faster rate than the price of oil has been increasing. China, in particular, which is recording double-digit economic growth every year, is sucking up international energy resources like a black hole in the universe.
At the same time, the Organization of Petroleum Exporting Countries are employing a “high oil price policy,” reducing production when there is any sign of a fall in the market price, even though the demand for oil exceeded the supply by 460,000 barrels a day in the third quarter of this year.
In addition, the inflow of large-scale speculative funds into the international oil market from investors hoping to profit from the expected price gap between the sustained imbalance in supply and demand has brought about even more price increases.
After the U.S. Federal Reserve slashed its key interest rate in September to dampen the impact of the subprime mortgage crisis, the devaluation of the U.S. dollar accelerated and the flow of speculative funds moved quickly into raw materials, including oil.
Another cause for the rapid surge in the price of oil is the geopolitical instability in the Middle East.
It was recently reported that the Turkish government plans to launch military attacks in the northern section of Iraq, aiming at the Kurdish separatists based there.
Because the oil pipeline that transports more than a million barrels a day runs through the area, there is a spreading fear that a Turkish air raid would cause an interruption to the oil supply.
The trend of increasing oil prices seems difficult to reverse for now. Although OPEC says its members will increase their oil production in November, it is questionable whether the cartel will keep its word. And even if there is a production increase, it won’t be big enough to make up the gap between supply and demand.
Moreover, as worries about the slowdown in the U.S. economy still linger and keep the possibility of another interest-rate cut alive, the value of the American dollar is plummeting to its lowest level in history.
Of course, some insist that oil prices will start to decline in the near future. They say that people who have oil for sale will jump in the market to take profits.
They also insist that, when the Turkish military launches a large-scale air attack on Iraq’s northern region, it will actually reduce the uncertainty of war, as has happened in the Middle East in the past, and the geopolitical risks will also decline.
However, even if the uncertainties are reduced, the trend of high oil prices in the market seems to be here to stay.
It is frustrating that there is virtually nothing that we can do about the cause of the high price of oil. Therefore, the measures we can take are the usual basic, long-term ones.
They include increasing the efficiency of energy consumption, promoting Korea’s oil exploration abroad and accelerating the development of alternative energy sources, such as wind power and solar energy. Of course, they are all important for the future of our country, but they will take a long time.
The fastest way with which we can absorb the impact of high oil prices domestically is to lower taxes on oil. About 60 percent of the do-mestic price of oil comes from taxes.
But the government insists that it cannot lower taxes because it needs the revenue.
An estimated 20 percent of the country’s total tax revenue comes from the oil tax, so it is difficult to cut.
The argument is not convincing, however, because they also say that revenue this year will be 11 trillion won ($12 billion) more than the budgeted expenses. While the nation waits to see the effects of the long-term measures, ordinary people are the ones who suffer.
*The writer is a senior research fellow at the Samsung Economic Research Institute.
by Lee Jee-hoon