Cheaper oil will boost current account surplus

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Cheaper oil will boost current account surplus

With international oil prices hovering at a five-year low of about $65 per barrel, the Korean economy can expect a $100 billion current account surplus for the first time, said a report by KDB Daewoo Securities Tuesday.

According to the report, when the price of oil was $104 per barrel, Korea’s current account surplus was $79.9 billion. If the oil price plunges to $65, the calculation will produce a current account surplus of $111.7 billion.

Korea posted a $70.7 billion current account surplus for the year through October and is expected to beat last year’s record of $81.1 billion by the end of 2014. China also is likely to see an increase of about $79 billion in its current account surplus, the report estimated. India will be able to narrow its current account deficit by around $48 billion.

Korea, India, China and most other importers will see higher surpluses in their current account balances, while oil exporters such as Russia and Mexico will take a blow, the report added.

“For oil importers, decreases in oil prices help improve trade conditions and induce domestic price falls,” said Choi Jin-ho, a researcher at the securities firm. “On the demand side, Korea can expect increasing consumption by households and investment growth by businesses on the supply side.”

Global oil prices, which were stable for the past five years, suddenly began to plunge in June. The price of oil produced in Dubai hovered about $109 per barrel in 2012 and $105 in 2013. It remained about $105 until early this year, but fell sharply to $90 in September.

Compared to June, the average price of Dubai oil is $77 per barrel, down nearly 30 percent. According to a recent projection by Morgan Stanley, international oil prices could keep declining to reach $43 per barrel.

Causes of the price drop are the increasing supply of shale gas in the United States, the strengthening U.S. dollar and geopolitical risks in the Middle East.

The failure by Organization of the Petroleum Exporting Countries members to cut oil production on Nov. 27 accelerated the price decline, raising worries about a glut.

The Ministry of Strategy and Finance said on Tuesday that lower oil prices will have a positive impact on the Korean economy by lowering consumer prices and increasing the purchasing power of households and businesses.

In a report on current economic trends, the ministry said, “The recent low oil price phenomenon will have positive effects on the Korean economy as it helps companies cut costs and expands the purchasing power of households.”

Lower oil prices will help cut import prices, improving trade conditions for Korea, an export-dependent economy, the report explained. They will also bring down global prices overall, helping the current international economic recovery and improving worldwide trade conditions.

Favorable trade conditions will help raise household incomes and purchasing power, leading to greater consumption, it added. For businesses, lower oil prices will keep the prices of products lower and increase profitability, eventually leading to more investment and production. More household consumption and business investment will lead to economic recovery, the report said.

At the same time, the government also expressed concerns about consumer prices slipping further.

“There are possibilities that the continuing price falls could constrain economic growth while the economy is already experiencing low inflation rates,” it said.

Shipbuilders and petrochemical manufacturers are to see an exacerbation in profitability, the report added.

“In order to maximize the positive effect of falling oil prices, the government will keep carrying out its measures to boost domestic consumption and investment,” one official at the ministry said.

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