**Expansion of Supply Chain Instability Due to Middle East Risks**
– **Energy-Dependent Industries Face Cost Pressure**
If international oil prices rise for an extended period, an analysis suggests that the production cost burden across the domestic manufacturing sector may increase significantly. Industries with high energy dependence, such as petroleum products and chemicals, are particularly expected to feel a substantial increase in cost pressure.
According to a report by the Korea Institute for Industrial Economics and Trade (KIET) titled “The Spread of U.S.-Iran Conflict Risk and Its Impact on Korea,” released on the 16th, a 10% rise in international oil prices could increase domestic manufacturing production costs by an average of approximately 0.71%.
By industry, the production cost increase rate was highest in the petroleum products industry at 6.30%, followed by chemical products (1.59%) and rubber and plastic products (0.46%), reflecting significant impact on industries with high energy input ratios. In contrast, industries such as steel (0.08%), semiconductors (0.05%), and automobiles (0.14%) were found to be relatively less affected.
This is because the energy input proportion of crude oil and petrochemical raw materials is high in domestic manufacturing. Rising international oil prices lead to increased prices of refining and petrochemical products, which in turn escalate production costs across various industries such as plastics, chemical materials, and transportation equipment. Especially, the petroleum and chemical industries are highly sensitive to oil price changes as fluctuations in crude oil prices directly translate into raw material cost increases.
With rising geopolitical tensions in the Middle East, uncertainty in the international energy supply chain has expanded. Risks surrounding the Strait of Hormuz, a critical route for oil and natural gas transportation, are growing, increasing the possibility of concurrent rises in international oil prices and sea logistics costs.
Particularly, South Korea’s structure, which heavily relies on crude oil imports from the Middle East, could be vulnerable to these shocks. The report highlights that South Korea depends on Middle East oil imports for over 70% of its needs, with most oil being transported by sea through the Strait of Hormuz, indicating potential risks of supply disruptions, increased transport costs, and raw material cost pressures if conflicts expand.
The impact of rising oil prices extends beyond increasing manufacturing production costs. The rise in energy prices could drive up the overall cost structure of industries, leading to consumer price inflation pressures, potentially causing companies to reduce investment and slow down economic activity. The report warns that if the rise in international oil prices persists over a long period, we’re at risk of simultaneously experiencing both production cost increases and inflation, potentially leading to ‘stagflation,’ where global inflation and economic slowdown occur together.
The report stresses the need for tailored responses considering the high energy dependence of different industries. For oil-based material industries like petrochemicals, refineries, and plastics, enhancing the ability to pass on price increases and strengthening inventory management strategies are crucial. In broader manufacturing, including steel, machinery, and automobiles, improving production efficiency and refining processes to cope with energy cost fluctuations is necessary.
The need for government policy responses was also discussed. The report suggests strengthening policies to stabilize the energy supply chain in anticipation of expanding Middle East risks and actively utilizing strategies like diversifying crude oil import sources and strategic oil stockpiling. Concurrently, managing supply chain risk strategies such as securing alternative routes and enhancing logistics response systems should be carried out in anticipation of potential maritime logistics disruptions like a blockade of the Strait of Hormuz.
Furthermore, as the impact of long-term oil price rises can vary across industries, tailored support systems considering the situation of each sector and company are required. The report emphasizes the necessity to continuously monitor energy supply situations following changes in the Middle East and devise support measures to address hardships faced by export companies.
Meanwhile, KIET assessed that these rises in energy prices and the widening geopolitical risks could be a burden on domestic economic growth. KIET had predicted South Korea’s economic growth rate this year at around 1.9%, but with recent exacerbations in Middle East conditions, leading to soaring international oil prices and increased supply chain uncertainties, the possibility of downgrading the growth forecast cannot be ruled out.
Hong Sung-wook, head of KIET’s Industrial Economic Data Analysis Division, implied a revision of growth projections mentioning, “If energy price hikes lead to increased manufacturing costs and inflation pressures, both corporate investment and consumer sentiment could contract, making the trend in Middle East affairs and international oil prices key variables in this year’s growth trajectory.”