End of Iranian oil imports could be costly

The average price for a liter of gasoline is edging closer to 1,700 won ($1.51), the highest level since December 2014, and a potential halt to imports of Iranian crude oil could send prices shooting up even higher.

The most expensive gasoline in Seoul is selling for 2,229 won per liter as of Thursday, and the market is expecting that gasoline prices will move higher as U.S. President Donald Trump’s administration is requesting that its allies halt their imports of crude oil from Iran.

A U.S. State Department official reportedly said on Tuesday that the Trump administration has called on its trading partners, including Japan and China, to end imports of Iranian oil by Nov. 4 or face being cut off from the U.S. financial system.

After the news broke, international crude prices reached their highest level in more than three and a half years.

Iran is the third-largest oil producer in the Organization of the Petroleum Exporting Countries.

As of Wednesday, Dubai crude oil prices rose 1.82 percent compared to the previous day to $74.36 per barrel. West Texas Intermediate prices rose 3.16 percent to close at $72.76 per barrel, and Brent Crude added 1.31 percent to close at $77.62.

The Korean government did not confirm if the Trump administration made an official request that it stop imports from Iran. However, the Korean Ministry of Trade, Industry and Energy said it is currently negotiating with the U.S. government to get an exemption from the restriction, as it did in 2012.

“We are currently explaining to the U.S. government that Korea has relatively more imports [from Iran] than Japan,” said a ministry official.

When the U.S. government, under President Barack Obama, applied economic sanctions against Iran in 2012, Korea was included in the 11 countries, including Japan, that were given exemptions. In exchange, Korea promised to reduce its crude imports from the Middle Eastern country.

Iranian crude, which accounted for 9.6 percent of all crude oil imported to Korea in 2011 fell to 4.1 percent by 2015. Crude imports from Iran increased to 13.2 percent last year after the U.S. government lifted the sanctions after the Obama administration’s nuclear deal with Iran in 2016.

The Korean government, however, said it has been taking preemptive steps to reduce Iranian oil imports. Trump announced on May 8 that the United States would withdraw from the deal and added that the U.S. government will place the “highest level” of economic sanctions on Iran. In the first five months, Korea’s crude imports from Iran have fallen by 33 percent. They now account for 6.3 percent of the crude imported to Korea.

The drop is faster than Japan which, in the first four months, saw a 15.7 percent drop compared to the same period a year ago. China, on the other hand, has seen a 17.3 percent increase.

Despite the Korean government’s actions, market experts say that, in the long-term, the U.S. call to halt imports from Iran will have a major impact.

“Iranian crude is preferred because it is relatively cheap,” said Park Young-hoon, a researcher at Hanwha Investment & Securities. “If [Iranian crude] imports shrink, this would translate to a cost increase for local refiners.”

More concerning, however, are growing tensions between the United States and China, Korea’s two largest trading partners, over the issue. China has reportedly refused the U.S. request.

“China and Iran are friendly countries to each other,” said Chinese Foreign Ministry spokesperson Lu Kang on Wednesday’s briefing. “We maintain normal exchanges and cooperation on the basis of conforming to our obligations under international law, including in the fields of the economy, trade and energy. This is beyond reproach.”

China is Iran’s biggest crude oil importer, followed by India. This new conflict affected the Korean stock market, and the benchmark Kospi index lost nearly 28 points on Thursday, or 1.19 percent, to close at 2,314.24.

BY LEE HO-JEONG, HA HYUN-OCK [lee.hojeong@joongang.co.kr]