As the price of oil has fallen from $100 per barrel a year ago to $40 today, oversupply and strategic decisions by OPEC are the main culprits. While low oil prices are hurting the oil refining industry, they are having a positive impact on the shipping and airline industries. Korea should closely analyze the economic changes caused by low oil prices and prepare strategies to respond to them.
International oil prices are falling day by day. According to the New York Mercantile Exchange (NYMEX), West Texas Intermediate (WTI) crude oil, which was priced at $100 per barrel just a year ago, has fallen to around $40 per barrel. The decline in oil prices began slowly in the second half of last year and hit a six-year low late last year and early this year. So what are the causes of the oil price decline and how does it affect us? That’s what we’re going to focus on in this article.
The reason for the drop in oil prices is simple: there is more supply than demand. The overall supply of energy has increased while the demand for energy sources has remained the same. In recent years, shale gas has become an increasingly popular alternative to oil as the United States has gained the technology to produce it economically, making it less valuable as an energy source. Another factor is the slowdown in economic growth in China and India, which has led to lower than expected growth in energy demand in these countries. However, these are only partial explanations for the decline in oil prices and are not enough to explain the current collapse in oil prices. To understand more about the causes of the oil price crash, we need to look at how the price of oil is regulated.
The price of oil is controlled by the Organization of the Petroleum Exporting Countries (OPEC). OPEC is an organization created by leading oil producers and exporters such as Iran, Iraq, and Saudi Arabia to prevent the price of crude oil from falling, and they control their own oil production in order to control the price of oil. Therefore, unlike normal economic phenomena, the price of oil has an artificial component, namely OPEC. So why doesn’t OPEC reduce its production despite the drop in international oil prices? It’s to make US shale gas production less competitive and drive it out of the market. If OPEC does not cut production despite the falling oil price, the price of oil will fall further, which will hit OPEC members hard, but if shale gas becomes uncompetitive as the price of oil plummets, oil’s position as an energy source will be strengthened.
From this perspective, it makes sense for OPEC members not to cut oil production. In fact, according to the Center for Global Energy Cooperation at the Ministry of Foreign Affairs, the decline in U.S. oil production is currently happening faster than initially expected, as shale producers are cutting back on shale drilling at a rapid pace. However, the Financial Times (FT) reports that “the US shale industry has been largely unscathed by the fall in international oil prices,” noting that while the number of shale rigs in the US has fallen by 46%, production has not dropped significantly. In addition, price competition between Russia and Saudi Arabia is also driving down international oil prices. In the end, although experts in various fields are currently giving their opinions on how the OPEC and US hegemony battle will turn out, it is impossible to know which one will be right, and only posterity will be able to evaluate them.
It is difficult to predict the future of international oil prices, but it is possible to analyze the current situation in Korea. The impact of the drop in oil prices on Korea’s industries varies depending on the industry. The first to be affected is the oil refining industry. Korea’s oil refining industry imports oil from the Middle East and sells it, but as the price of oil continues to fall, the industry continues to lose money. On the other hand, the industries that have benefited the most are the shipping and airline industries. For these industries, a significant portion of their costs are fuel, so lower oil prices directly translate into lower fuel costs. For the shipbuilding industry, the situation is more complicated. While the industry suffered losses last year as global oil companies postponed orders for offshore plants due to lower oil prices, shale gas development has led to a significant increase in orders for LNG carriers, which have emerged as the industry’s mainstay. The automotive and chemical industries have also been positively impacted by lower oil prices, and consumers have been able to cut back on household spending due to lower fuel costs.
The impact of low oil prices on industries is complex. Depending on the industry, it can be good or bad. But what is the impact of low oil prices on Korea as a whole? While there are reports that low oil prices have had a positive impact on Korea’s economy by reducing production costs and increasing household income, there are also reports that the economic downturn in oil-producing countries has had a negative impact on Korea, which relies heavily on exports from oil-producing countries. In fact, Korean companies’ exports to major oil-producing countries have been on a downward trend since the second half of last year. In addition, low oil prices may lead to a decrease in oil-related tax revenues, which may put pressure on government finances.
So far, we have discussed the causes of low oil prices and their impact on Korea’s industries. While it is difficult for anyone to predict the future of low oil prices because it is an ongoing process, it is important to recognize the current low oil price situation and understand the impact of low oil prices so that we can be more proactive in dealing with future changes. In this situation, governments and businesses will need to develop strategies to prepare for low oil prices and find ways to make the most of the economic opportunities they present.
