Market Update: Research institute warns energy shocks from Iran may fuel inflation, weaken growth – Full Analysis

 

A 10 percent rise in global oil prices would raise Korea’s manufacturing costs by an average of 0.71 percent, a state-run research institute said Monday, warning that prolonged energy shocks from the Iran war could fuel inflation and weaken growth.

 

Korea must “prepare for worst-case scenarios” as tensions in the Middle East threaten energy markets and supply chains, according to a report released by the Korea Institute for Industrial Economics & Trade (KIET).

 


 

Rising oil prices and supply chain instability pose the biggest risks to the Korean economy, which relies heavily on energy imports from the Middle East, the report said. 

 

Korea imported 70.7 percent of its crude oil from the Middle East last year, with 99 percent of those shipments passing through the Strait of Hormuz, where shipping has largely halted after Tehran moved to block the waterway amid conflicts with Israel and the United States.

 

Dubai crude — a benchmark commonly used for oil imported into Korea — reached $145.51 per barrel on Friday, roughly double the $71.24 recorded on Feb. 27 before U.S.-Israeli strikes on Iran began.

 

Higher energy prices would directly raise production costs for Korean manufacturers, the report said. Energy-intensive industries would be hit the hardest, and production costs may rise 6.3 percent in petroleum products and 1.59 percent in chemical products, according to the report.

 

“The shock could deal a direct blow to energy-dependent industries and add pressure on prices,” the report said.

 

A fire and plume of smoke rise after, according to authorities. debris from an intercepted Iranian drone struck an oil facility in Fujairah, United Arab Emirates, on March 14. [AP/YONHAP]

 

Korea’s exports to the Middle East, which have grown in recent years, could also face risks as regional instability may reduce demand for Korean goods. Still, the direct impact on overall trade may remain limited, as exports to the Middle East account for only about 2.4 to 3 percent of Korea’s total exports, according to KIET’s report.

 

In the past, instability in the region mainly affected Korea through higher energy import costs. But exports to the Middle East have diversified in recent years to include plant construction, automobiles, defense equipment and consumer goods such as cosmetics. Korea’s exports to the Middle East reached $20.44 billion last year, up 3.8 percent from $14.68 billion the previous year. 

 

To prepare for a prolonged crisis, KIET recommended diversifying energy supply chains, expanding government strategic oil reserves and establishing tailored support measures for industries with high energy dependence. 

 

The report warned that policymakers must prepare for the risk of the so-called stagflation — a combination of inflation and economic stagnation — as higher oil prices could raise production costs, push up prices and weigh on real economic activity.

 

“We need to respond to rising manufacturing costs and growing inflationary pressure caused by prolonged increases in global oil prices,” said Hong Sung-wook, a senior researcher at KIET. “The government should establish tailored industrial responses and support systems for companies based on each sector’s energy dependence and supply chain structure.”

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.

BY AHN HYO-SEONG [[email protected]]