Will Skyrocketing Oil Prices Hinder Economic Growth?

Dubai crude oil price has almost reached $95 per barrel, going a step closer to the $100-per-barrel mark. The rapidly increasing price of Dubai crude, which accounts for 80 percent of Korea’s oil imports, is likely to aggravate the current account balance and the nation’s economic growth.

As prices have also soared in wheat, bean, corn and even rice, experts are concerned about ‘agflation’ whereby rising prices of agricultural products lead to overall price increases.

The Korea National Oil Corporation announced yesterday that spot price of Dubai crude had exceeded $94 per barrel last weekend and that it even set a new high of $94.87 per barrel on Monday.

On the New York Mercantile Exchange, the price of West Texas Intermediate for April delivery closed at $102.45 per barrel, up $0.61 per barrel from last weekend. With the dollar continuing to weaken, global investors have channeled their money into the global oil market. This has contributed to rising oil prices.

A source from the Strategic Planning and Finance Ministry said, “Assuming the price of Dubai crude oil reaches $75 per barrel, the government in early January expected Korea’s economy would grow 4.8 percent this year. Given the recent international oil price hike, however, we’ll have to adjust our forecast for annualized average price of Dubai oil to $80 per barrel.”

The government estimates that a 10 percent increase in international oil prices will lower the nation’s economic growth rate by 0.2 percentage points. It also expects the nation’s economic growth rate to stay between 4 and 4.7 percent, unless the government successfully boosts investment and economic growth through deregulation and tax cuts.

Britain’s Financial Times reported yesterday that international prices for rice soared to a new high in 20 years. It also said that Thai rice prices, a global benchmark, surged last week above the level of $500 per ton for the first time since 1989.

“Industrial Trend in January,” released by the Korean National Statistics Office, yesterday, revealed that investment into corporate equipment and facilities decreased 0.9 percent from a year ago and the amount of construction orders received also fell 13.1 percent year-on-year, darkening economic prospects.

Strategic Planning and Finance Minister Kang Man-soo said, “Our plans to reach the 6 percent economic growth target remains unchanged. However, it will not be easy to sustain this due to rising prices.”

higgledy@donga.com