[Viewpoint] Lessons from oil shocksOil prices have lost a sense of gravity, swept up by the wave of protests to oust autocrats in oil-rich North Africa and the Middle East. Prices turned north on antigovernment protests in Algeria and Egypt, and U.S. oil prices jumped over the psychologically resistant level of $100 a barrel last week, prices unseen since 2008, on supply concerns after bloodshed in Libya caused disruption in one of the largest oil producers in North Africa.
Prices retreated after the big swing producer, Saudi Arabia, vowed to increase output to account for reduced shipment from Libya. But investors are still jittery about the political developments in the oil-producing Middle East.
The global oil supply line won’t be devastated if Libyan turmoil leads to a complete halt in oil production. Libya pumps out 1.65 million barrels of oil a day, making up a mere 1.7 percent of global shipment volume. Oil will be flowing in uninterrupted volume if Saudi Arabia provides an extra 4 million barrels per day.
And most industrialized economies, after undergoing two major oil shocks in the 1970s, have stocked up strategic reserves that could last nearly two months on average. The immediate spike in oil prices won’t likely take a heavy toll on the global economy unless the political unrest in the Middle East and North Africa stretches out.
But factors in the oil equation are not that simple. A recent surge in prices is not merely caused by trade based on quantity, but future expectations on the supply axis.
International oil prices tumbled to as low as $36 per barrel on a steep fall in demand when the global economy slipped into recession in the wake of the 2008 financial meltdown.
Prices recovered after Asian and other emerging economies gained steam. The pro-democracy revolt erupted in North Africa and beyond as the market geared up for greater demand. Benchmarks shot up as growing demand was coupled with concerns for disrupted supplies from Arab oil producers.
The world applauds and welcomes the courageous wave of democracy fever in North Africa and the Middle East. But it cannot shake off the self-serving anxieties about the cost on the global economy from rising oil prices.
The explosive increase in oil prices will exact a tipping point - cuts in spending elsewhere and inflationary side effects - culminating in a slowed global economy.
The world economy slumped after the last two oil shocks. Oil prices fan inflation and dampen consumer spending, slackening overall economic activities. Central banks would be pushed to employ monetary tightening to stem inflation, another recipe for economic slowdown.
The Korean economy, which depends on imports from the Middle East for 97 percent of its energy supply, inevitably is in the eye of the storm.
The country might as well throw this year’s economic targets - of 5 percent growth in economy and 3 percent inflation based on oil prices of $85 per barrel - out the window.
The Bank of Korea estimates that a spike of 10 percent in oil prices would send consumer prices up by 0.12 percentage points and cut the economic growth rate by 0.21 percentage points. Samsung Economic Research Institute is more pessimistic in its predictions, expecting the same rise would increase inflation by 0.3 percentage points and erode the growth rate by 0.35 percentage points.
A surge in the cost of oil imports would also naturally be translated into a worsened current-account balance. Local equity prices have been plummeting on such negative prospects.
The government said it is on alert on energy control and will release strategic oil reserves if oil supplies are disrupted. But such measures won’t help that much in weathering the storm. Some call for more aggressive steps such as a cut in oil tax, but that, too, won’t be more than a stopgap measure. Whether one likes it or not, the best policy is to stay put, as it is a case of seeking any port in the storm.
The oil shocks in the 1970s provided valuable lessons for the global economy. They encouraged energy awareness and efficiency in economies worldwide and spurred the race to develop alternative energy sources. They built more resilience against oil turbulence. The recent spike had been unannounced, but prices are still well below the 2008 record-high of $147 per barrel. There is no need to raise a fuss over the possibility of a third global shock.
The Lee Myung-bak administration is facing an energy crisis while it is fumbling with the president’s signature platform of “green growth” through aggressive programs on new energy sources and efficiency campaigns.
The increase in prices may deal an immediate blow to the economy and consumer lives, but in the longer run it can serve as an impetus to push the economy toward more energy conservation and a more clean-energy consuming structure. It may, in reality, be a valuable gift from the fall of Libyan strongman Muammar el-Qaddafi.
*The writer is an editorial writer of the JoongAng Ilbo.
By Kim Yeong-ook