It’s innovation time
Crude oil futures prices slipped to near seven-year lows on Monday after the Organization of the Petroleum Exporting Countries (OPEC) failed to reach a consensus to cut production in response to the supply glut and depressed demand. The West Texas Intermediate benchmark for U.S. crude settled at $37.65 a barrel, the lowest since February 2009, amid expectations that low gasoline prices will continue after indecision on a production cutback at an OPEC policy meeting on Friday.
As the meeting underscored, oil producers have drastically different views on how to face new challenges from the flood of cheaper oil coming from U.S. shale fields. Smaller members of the cartel, like Venezuela, are desperate to moderate output, with their economies shaken by tumbling oil prices. Major nations like Saudi Arabia, meanwhile, want to keep up this game of chicken to push the U.S. shale industry out of the playing field.
Complicating matters is that oil producer Iran will start to boost output starting in the first half after Western trade sanctions are lifted. Pundits expect crude prices could slip to $35 per barrel.
Low oil prices are a boon to the economy of Korea, which relies on imports for its petroleum supply to save on energy costs. Korea has been making hefty surpluses in its current account despite sluggish exports, thanks to low oil prices. The country is able to maintain the status quo entirely due to cheaper oil costs because it also contributes to aiding domestic demand by saving consumers from spending on fuel to drive and heat their homes.
But in the long run, low oil prices can do more harm than good for the economy. Export turnover is shelved from the fall in export and import prices, while the refining industry is directly hit. Overseas infrastructure and export demand is dwindling due to worsening fiscal problems in oil-producing nations. The international bond and equity market could turn volatile when oil money shifts to developed markets after interest rates in the United States rise. The deflationary risk from depressed oil prices can upset or interrupt the fragile recovery of the global economy.
Neither the government nor corporations can do anything about commodities prices. But we can work to minimize the ill effects by rationalizing industrial structure and productivity. How hard and well the country copes with these new challenges will define Korea’s status after this trend of low oil prices finally ends. JoongAng Ilbo, Dec. 9, Page 34