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Impact of Global Oil Shocks on Domestic Consumer Prices
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Q4 CPI inflation rate could rise as high as 4.98% if Middle East conflict escalates and oil prices surge
"Analyzing the impact of global oil price shocks on domestic consumer prices"
• Middle East risks could lead to oil prices rising by 18.4% (Brent) to 20.6% (WTI) compared to low of June 2023
• All-out war between Israel and Iran could cause an oil price shock of $109 to $157 per barrel (World Bank)
* A small disruption to oil supply (e.g. Libyan civil war levels) through localized warfare could see prices of $93 to $102/barrel
• Domestic Inflation Impact: Q4 CPI inflation rate of 4.00% to 4.98% forecast if oil price shock materializes
• Pre-emptive countermeasures such as diversifying oil import sources and increasing stockpiles are needed
As the outlook for oil supply becomes uncertain due to the recent instability1 in the Middle East, it has been shown that if oil prices were to surge, the Q4 CPI inflation rate could reach as high as 4.98%. The Federation of Korean Industries (FKI) revealed this in its report on “The Impact of Global Oil Price Shocks on Consumer Prices in Korea”.
1 As Israel and Iran attacked each other in April 2024, fears of a wider conflict increased
Oil prices on the rise due to Middle East risks, 18.4% to 20.06% higher than low of June 2023
Global crude oil prices have been rising recently due to concerns about further risks in the Middle East. After hitting a low point in June of 2023 as oversupply was reduced, prices have risen around 20 percent as of April 2024 (average from April 1-22). Since June 2023, Brent crude has risen 18.4% from $75.00 to $88.80 a barrel, Dubai crude has risen 19.7% from $74.70 to $89.40 a barrel and WTI crude has risen 20.6% from $70.30 to $84.80 a barrel.
Oil prices feared to rise to $109-157 a barrel if war breaks out between Israel and Iran
Due to the recent attacks between Israel and Iran, fears that heightened risk from the Middle East conflicts will cause oil prices to surge are rising 2. In particular, if attacks between Iran and Israel continue and lead to all-out war, effects such as the Strait of Hormuz being blocked, would lead3 to a very steep rise in prices.
2 U.S. Energy Information Administration Brent price forecasts, USD/barrel $83 (Dec. ’23) -> $88.55 (April ’24) $5.55↑
3 Medium disruption scenario: $109-121, large disruption scenario: $140-157, World Bank oil price forecasts, Oct. ’23, Brent crude, USD/barrel
As Korea is a resource-poor country that relies entirely on crude imports, a sharp rise in oil prices would put upward pressure not only on producer prices, but also distribution costs and energy bills, which in turn increase consumer prices. “When domestic inflation is already exceeding 4 the central bank’s inflation goal 5, a rise in oil prices would have a detrimental effect on keeping inflation in check which means thorough countermeasures are needed,” said the FKI.
4 Inflation rates (YoY, Bank of Korea) 2.4% (07/23), 3.4% (08/23) 3.7% (09/23), 3.8% (10/23), 3.3% (11/23), 3.2% (12/23), 2.8% (01/24), 3.1% (02/24), 3.1% (03/24)
5 Inflation Target: 2% (year-on-year, Bank of Korea)
The FKI analyzed 6 4 scenarios for oil price changes following full-scaled conflict between Israel and Iran and forecast 7 the CPI inflation rate for 2024Q4 according to each scenario. The scenarios were: 1) tensions remain at the current level 2) localized attacks leading to a level of supply disruption similar to the Libya civil war 3) full-out war leading to disruptions similar to the Iraq war 4) full-out war leading to disruptions similar to the 1973 OPEC oil embargo.
6 Adapted U.S. Energy Information Administration and World Bank forecasts
7 Refer to attachment for explanation of analysis model and detailed analysis results
8 Average estimated Brent crude price between 2024Q2-Q4
9 Scenario 1: U.S. Energy Information Administration 2024 international oil price forecast (2024Q4 levels), Scenario 2-4: median value of the World Bank’s small, medium and large-scale disruption scenarios
CPI inflation rate of 3.01% at end of year if tensions and oil prices remain at current levels ($88.55 a barrel), as high as 4.98% if war breaks out between Israel and Iran
The FKI forecast that if tensions remain at current levels with no escalation to war and global oil prices remain near $88.55 a barrel, the domestic CPI inflation rate will stand at 3.01% for 2024Q4. This is similar to the CPI inflation rate for 2024Q1 which was 3.00%.
However, if the Middle East conflict escalates to the level of localized attacks and retaliation without full-scale conflict and global oil prices rise to the level of $97.5 a barrel (Scenario 2), the 2024Q4 CPI inflation rate is predicted to be 3.37%. This represents a 0.36%p increase over Scenario 1 levels.
If the Middle East conflict escalates into a full-scale war between Israel and Iran, inflation is forecast to increase even further. If war breaks out and global oil prices reach levels of $115 a barrel (Scenario 3) or $148.5 a barrel (Scenario 4), the 2024Q4 inflation rate is predicted to reach 4.00% or 4.97% respectively. That would equal a 0.99-1.97%p increase compared to the inflation rate of Scenario 1.
“Fears that oil prices will increase due to increased geopolitical risks in the Middle East, such as attacks between Israel and Iran, are increasing,” said Sang-ho Lee, vice president of the FKI’s Economic and Industrial Research Department.
“There is a need to pre-emptively devise measures to ensure stable oil supply such as diversification of oil supply, increasing stockpiles, price hedges to prevent oil prices increases causing price instability.”
[Attached] Analyzing the Impact of Global Oil Price Shocks on Domestic Consumer Prices