Oil spike rattles economic policy
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Oil spike rattles economic policy
[KOREA HERALD] JAN. 04, 2008 05:10(A.M)

Crude oil prices briefly rose to $100 per barrel Wednesday, casting dark clouds over Korea's economic recovery and equity markets.

The price of West Texas Intermediate for February delivery closed at a record high of $99.62 due to intensifying geopolitical tensions in several oil-producing states.

Economists warned that a further spike in energy prices can seriously hurt the Korean economy this year.

"The level of $100 is somewhat symbolic, but a further increase in the price of oil will weigh on the economy." said Kim Jin-seong, an economist at Prudential Investment & Securities Co.

The biggest concern is the growing burden on manufacturers and households.

The soaring fuel prices will increase costs for domestic manufacturers such as electronics makers and automakers, which import all of the oil they consume.

This could dent the bottom lines of local companies, economists warned.

They also cautioned that the rising energy costs could cool the ongoing recovery in consumer spending.

Skeptics are particularly concerned that the oil woes came alongside a global credit crunch.

Local banks and stock markets have been increasingly feeling the pinch in recent months, as the U.S. subprime mortgage crisis hit the global capital market.

The rate spread between local corporate bonds and government bonds is fast widening as investors withdraw from risky assets.

The rising risk premium raises the borrowing cost for companies and households.

Despite growing anxieties, experts did not expect the price of oil to remain over $100.

"The $100 level is unlikely at the moment," said Go You-sun, an economist of Daewoo Securities Co.

"If the annual average price stands below $95, there will be no big shock to the economy."
Though the economy may suffer some setbacks due to oil prices and a U.S. economic downturn, economists largely forecast that it will maintain a healthy growth of around 5 percent rate this year.

But they showed overall concern about the Lee Myung-bak administration's attempt to increase the growth rate.

The president-elect has set a target of 6 percent growth for 2008 through deregulating industries and investing in large infrastructure projects.

"We can raise the growth rate if the government spends more money," Go said.

"But the aftermath of such policies could be substantial. The growth rate of 4 to 5 percent is appropriate for the economy."

By Ko Kyoung-tae

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