Plummeting oil prices are plague for today’s Korea

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Plummeting oil prices are plague for today’s Korea

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As international oil prices fell below $40 per barrel, concerns are rising in several industrial sectors, including construction, petrochemicals and shipbuilding, which are already having a tough time due to weak export markets.

The Korea National Oil Corporation (KNOC) said on Tuesday that Dubai crude oil was traded at $38.85 per barrel on Monday, the lowest price since December 2008. West Texas Intermediate (WTI) crude was traded at $37.65 per barrel on the New York Mercantile Exchange, a drop of 5.8 percent, or $2.32, from last week. In June last year, WTI was traded at $107 per barrel.

“Just as Goldman Sachs predicted last month, we believe the price could fall to nearly $20 per barrel, which we think will be rock bottom,” Ko Sang-mo, a researcher at KNOC, told the Korea JoongAng Daily. “OPEC members and non-OPEC nations are not willing to lower their crude oil output. The competition between the two sides will eventually make them to sell oil at lower prices.”

The Organization of the Petroleum Exporting Countries (OPEC) failed to reach an agreement Friday on reducing the production of crude oil. The world needs an average of 94 million barrels of crude oil per day, but 95.7 million barrels are being supplied, according to the KNOC.

In another economic era, the 1980s, low international oil prices would have been a blessing for the Korean economy, but times have changed. The recent price collapse is caused by slumping global demand, never a good thing for an export-reliant economy like Korea.

In addition, Korea has industries that thrive on higher oil prices, including construction, shipbuilding and petrochemicals. The first two do a lot of their business with oil-producing nations including in the Middle East, Russia and other emerging markets.

Meanwhile, Korea’s petrochemicals are made from crude, and their prices fall with it.

According to industry data, Korea’s exports of oil products in November dropped by 36 percent from a year earlier, while exports of petrochemical products declined 24 percent year on year.

The number of contracts won by Korean shipbuilders abroad in November was $40.6 billion, which was only about 70 percent of last year’s $57 billion.

“While oil prices were falling this year, the average export price dropped by about an average of 30 percent from a year ago,” researcher Oh Jung-il of Shinyoung Securities said. “Under such a trend, the volume of exports generally increases, but it didn’t happen this year, meaning overall global industrial demand is decreasing.”

An impact is also being seen in the construction business. The International Contractors Association of Korea said on Tuesday that local builders won a total of $49.445 million worth of contracts overseas as of last week, a 31.3 percent decline from last year’s $59.56 million. The number of contracts won in the Middle East regions dropped by 52 percent year on year, from last year’s $36.333 million to $14.714 million this year, the lowest amount of contracts won in the Middle East since 2006. The culprit is a slump in the region’s economy that forced companies to cancel or delay projects.

In January, Saudi Arabia’s state-run oil giant, Aramco, suspended plans to build a $2 billion clean fuels plant at its largest oil refinery in Ras Tanura in response to the halving of the oil price. In the same month, Qatar Petroleum said it decided not to proceed with a $6.4 billion Al Karaana petrochemical project for the same reason.

“As the overall economy is slumping in the region, some companies aren’t even being paid for their work,” a local construction company executive said. “Due to falling oil prices, the number of orders in businesses like oil refining plants and petrochemical plant development is significantly decreasing. Many Korean companies aren’t even considering bids on projects unless they guarantee a big profit.”

Of course, some businesses enjoy oil prices falling. Around the world, the popularity of SUVs is growing even though they’re known as gas-gobblers.

Airline companies are able to improve their balance sheets. The nation’s leading carrier, Korean Air, reported an operating profit of 289.5 billion won ($245.1 million) in the third quarter, the most since the third quarter of 2012, mainly due to lower operation costs including in fuel expenses, which account for about 35 percent of an airline’s overall annual operation costs.

“Low oil prices could cause the deflation of the global economy,” researcher Park Sang-hyun of HI Investment & Securities said. “That means it will take more time to recover from slumps expected for Korean businesses such as petrochemicals, shipbuilding, construction and steel.”

BY KWON SANG-SOO [kwon.sangsoo@joongang.co.kr]

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