Minimize the oil shock

Korea will likely be one of the first countries in Asia to cease oil purchases from Iran starting later this month. Iranian oil accounts for 10 percent of our oil imports. Prices at gas stations will likely shoot up after the halt due to reduced import volume and the fact that Iranian supply was cheaper than other imports. Prices are expected to go up as much as 10 percent to 20 percent.

As a result, small- and medium-sized exporters across the nation will likely be hurt by the ban on trade with Iran. The companies have been paid by Iran with the funds local refiners pay Iran for oil imports. We may see a number of small companies go bankrupt due to a cease in payment from Iran.

The ban is part of international sanctions led by the United States and European Union to contain Iran’s nuclear program. But the government has worsened the potential damage to local companies and markets because it was less attentive and scrupulous. The government entirely focused on the U.S. sanctions. The Obama administration said that it was imposing sanctions on financial companies transacting with Iran’s central bank. The government worked to waiver this clause.

But it came upon an unexpected setback from the EU. As part of the ban on Iranian oil trade in January, European insurers were prohibited from providing insurance to oil carriers shipping oil from Iran starting July 1. If an oil carrier runs into an accident, the damage can amount to at least 1 trillion won ($859 billion).

Korean refiners must insure with European companies because there are few local insurers who can afford such a guarantee. Without insurance from European companies, Korean refiners cannot get oil from Iran. The government tried to negotiate with the EU, but so far has made little progress. Insurance may be cut off from July and since oil freighters take more than a month to arrive on Korean shores, shipments will likely stop later this month.

So far there are no other options but to continue to negotiate with the EU. Meanwhile, authorities must prepare other countermeasures. They must secure more imports from other oil producers.

A price hike is unavoidable. But in order to lessen the burden on consumers, the government should consider releasing state reserves. It must explain the reasons behind the price rise and seek public understanding and cooperation.