Keeping oil prices in check

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Keeping oil prices in check

Oil prices are surging amid growing fears of a supply shock as the possibility of civil war in Libya emerges and as violence disrupts the country’s oil production and export activities.

Dubai crude, which makes up the bulk of our oil imports, has topped $100 per barrel, and there are no signs that the upward climb will stop anytime soon. This is eerily similar to the big spike in oil prices nearly three years ago, when West Texas Intermediate crude oil - the U.S. benchmark - soared to $147.5 a barrel. Libya, the eighth-largest producer in the Organization of Petroleum Exporting Countries, has cut daily output by more than 20 percent due to the bloody clash between antigovernment protesters and a military loyal to the country’s longtime leader, Muammar el-Qaddafi.

Saudi Arabia announced plans to increase output to cover for the production decrease in Libya, and the International Energy Agency may decide to release extra supplies. But a short-term solution might not be enough. The turmoil in Libya is different than in Egypt and Tunisia, where popular revolutions succeeded in toppling dictators in a relatively short period of time. The conflict in Libya could continue for a long time if the situation develops into a power struggle among different tribes. Moreover, the political unrest in the Middle East may have a domino effect on other major oil producers, which could send oil prices to new heights.

Minister of Strategy and Finance Yoon Jeung-hyun said that the environment for consumer prices is “terribly unfriendly,” meaning inflation is a real threat. A 10 percent rise in global oil prices can slash growth figures by 0.3 percentage points and raise consumer prices by 0.68 percentage points in Korea, whose industrialized economy depends heavily on oil imports. If the trend continues, the country would have a difficult time meeting its economic growth target of 5 percent and keeping inflation to 3 percent or less this year. The capital flight to safer investments is also threatening the local economy. The equity and currency markets have been rocked by a massive exodus of foreign capital.

We must prepare emergency plans in case the situation deteriorates. The government must consider cutting the tax on oil for a temporary period. It must also release strategic stocks to stabilize the market. At the same, it must seek international cooperation to contain speculators who can heavily influence the price of oil.

We’ve battled this situation before and won with coordinated measures. We have to unite once more.
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