The rhino in the room

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The rhino in the room

Nam Jeong-ho
The author is a columnist of the JoongAng Ilbo.An energy security expert at University of Seoul. 
 A huge gray rhinoceros is charging the South Korean economy. Soaring energy and consumer prices pose a rhino-size risk. Geopolitical tensions coupled with a global rush for climate change commitments amid an energy transition have pushed up oil, coal, and natural gas prices from early last year.

However, the Moon Jae-in administration capped utility costs until the presidential election in March. If prices are not raised, the repercussions can be huge as the market buffer against shocks cannot function properly. South Korea imports more than 80 percent of its fuel sources. A surge in the cost can deal a critical blow to the economy. But political circles and the general public are unaware of the danger. Experts warn of dire consequences eight months from now.

In October 2022, five months after a new administration takes over, consumers could be dumbfounded by the numbers on their utility bills. Gasoline could cost more than 2,000 won ($1.67) per liter after Brent crude hits over $100 per barrel and the oil tax relief is removed. Against the beginning of the year, gasoline price would have risen 23 percent from 1,626 won. As forewarned, electricity and gas rates also would have gained 10 percent and 16 percent, respectively. Gasoline, electricity and gas are the fuel of economic activities. Their appreciation would translate into a rise in prices of all products and services. The Bank of Korea would have long given up containing inflation at 2.0 percent. All prices would have soared except for salaries.

This gloomy outlook will mostly likely become a reality. The government has already forewarned a rise in electricity and gas bills. The government exempted 20 percent in oil tax in November to lessen the burden on households amid rising prices. An oil levy that charged 820 won per liter was cut to 656 won. The temporary relief ends in April. The government is mulling extending the cut three to four months longer amid no sign of easing of petroleum prices.

But the government won’t be able to hold the oil tax cut much longer. The tax will likely normalize in October. Crude price gains have accelerated due to supply disruptions from geopolitical tensions from late last year. An oil pipeline connecting Iraq and Turkey exploded last month. Yemen rebels’ attack continues to unsettle fuel depots in the oil-producing United Arab Emirates. Russia’s oil supplies could be cut if the West and Russia clash over the Ukraine crisis. Experts predict the Brent crude benchmark will exceed $100 per barrel. The last time the crude import price reached that threshold in May 2012, gasoline prices were above 2,000 won per liter in Korea. Brent oil is currently trading around $90 per barrel.
Supply conditions in coal and natural gas necessary to generate electricity have been equally unstable. Coal prices have surged more than 500 percent since May 2020. Coal prices soared 23.4 percent per ton last month after coal-rich Indonesia banned exports due to shortages for domestic supply. President Moon in November pledged to halt power generation from coal by 2050. But coal generation made up the highest 44 percent of energy sourcing as of 2020 in Korea. A spike in coal prices translates into higher electricity bills. Deficit-ridden Korea Electric Power Corp. decided to raise power rates by 10.6 percent through increases in April and October, or 11.8 won more per kilowatt-hour.

The natural gas situation is even worse. Wind power was little help in Europe last year due to lack of wind. Countries had to turn to natural gas to generate power, pushing up prices. The Ukraine crisis aggravated the situation. LNG powerhouse Russia has been tightening its gas pipeline to Europe from late last year amid tensions with Western countries over Ukraine. Increased demand for gas to generate power instead of coal due to commitments to emission cuts has led to a further squeeze. Shifts in energy policy have caused the natural gas disaster. Korea Gas Corp. will be raising gas rates 16 percent this year through incremental raises in May, July and October.

The synchronized jump in the prices of all three primary fuel sources from two years ago is dealing a serious blow to the Korean economy. Trade data has already begun to show the damage. Despite exports valuing $55.3 billion in January — the largest sum for the month — imports increased at a bigger pace of 35.5 percent to $60.2 billion to generate a deficit of $4.9 billion in January. The deficit owes much to a jump in the import cost of fuel. Imports of oil, coal and natural gas more than doubled to $16 billion in January from $6.9 billion a year ago.

However, despite the gravity of a collective energy crisis, ordinary citizens do not feel the pinch as the government controlled prices through an oil tax cut and a freeze in utility charges. The suppressed prices are bound to spring up once the presidential election ends. The government’s hasty and bold carbon neutrality timetable — phasing out of coal-fired power plants by 2050 along with removing nuclear reactors — will only worsen the situation. When natural gas and renewables are used more in place of coal to generate power to lessen carbon emissions, production costs and electricity bills will go up. A transition to green energy sources will fan inflation and bring about a new phenomenon called “greenflation.”

“If the government insists on phasing out of nuclear and coal energy to achieve carbon neutrality within the next 30 years, the vacuum must be filled by natural gas,” said Jung Tae-yong, a professor at the Yonsei University Graduate School of International Studies. “Delaying energy price hikes until the presidential election despite a spike in natural gas prices is like dumping the inflation bomb onto the next government.” He advised that the Moon administration share some of the burden now.

Prioritizing the energy crisis over carbon neutrality 

Experts advise the country to leverage the alliance with the United States and other allies to address the energy crisis. The following is an interview with energy security expert Ahn Se-hyun, a professor at University of Seoul.

What is the essence of the current energy crisis?
An energy crisis has been building from Europe and China since late last year. Natural gas prices have skyrocketed. Gas prices in Europe jumped 7 to 8-fold since countries had to rely on natural gas to generate power due to deficiencies in wind. But Russia rolled back gas supplies.
The move forced Europe to suspend its energy transition policies. The United Kingdom has turned on coal plants. Norway, supposed to be a climate leader, passed a law to ramp up oil exploration and production in the Baltic. Europe has referred to the phenomenon as the Revenge of the Old Economy.

How about Korea?
Neither the government nor the media speaks up about this crisis. They are not interested, partly because they are oblivious to the gravity of the situation. The government, academia and even the energy sector appear to be under the collective spell of the so-called green transition. But for now, the energy crisis is more urgent than achieving carbon neutrality.

Is carbon neutrality a wrong direction?
The world is destined to go in that direction. The future generations have the right to live in a clean environment. But natural gas has become too expensive. In such a situation, we must choose coal or oil to power generators. There are just a few countries on the planet that can afford to go carbon-free — such as Finland and Norway or African islets with rich renewable resources and small populations. Even Norway has adjusted its carbon goals. The U.S., Russia, Japan, China, Brazil and almost all European countries generate power from coal. Only Korea refuses to.

How should the crisis be dealt with?
America is rich in oil and natural gas. The U.S. is supplying gas to Europe. The U.S. is connecting energy to security, trade and even job issues. Korea has not utilized its traditional alliance with Uncle Sam to address the crisis. It will be greatly helpful if the U.S. helps Korea bring in natural gas from Qatar. This is a genuine economic security alliance. Korea also must seek a strategic partnership with multinational energy firms like Exxon Mobile as they wield enormous political influence.
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