The price of gasoline in Seoul is close to 1,800 won per liter.

After reaching the highest level in over 7 years at 1,807 won per liter in November of last year, the price of oil, which was hoped to be caught by the government's oil tax cut, has risen again.

According to Offinet, an oil price information site operated by Korea National Oil Corporation, the average gasoline price in Seoul at 4 pm on the 9th recorded 1,770.57 won.



The government also held the 12th meeting of the Energy and Resources Supply and Demand Management TF at the Seoul Trade Insurance Corporation on the 9th with the Korea Petroleum Association, 4 oil refineries, the Korea Energy Economics Institute, and the Korea National Oil Corporation to check the oil supply and demand response plan in case of emergency.

Along with the extension of the fuel tax cut, which ends in April, the plan to release additional oil reserves in case of supply and demand instability was also discussed.


Is oil price soaring because of the Ukraine crisis?


Looking at the recent world oil price trends, the price of Brent crude oil, which was around $68.87 per barrel as of December 1 last year, has soared to $92.69 per barrel after the crisis in Russia-Ukraine.

Some investment banks, such as JP Morgan, even raise the possibility of oil prices exceeding $100 per barrel.



From the point of view of Korea, which relies on imports of oil, it may seem natural to see that domestic oil prices are affected by world oil prices.

However, I also have doubts.

Most of the crude oil imported into Korea is imported from the Middle East, which is far from Ukraine, and it is done through long-term futures trading. Is it correct to explain that it rises due to short-term external factors?



As we all know, oil demand is closely related to the world's economic activity.

When the global economy is active, demand outstrips supply and the price of oil rises. Conversely, when economic activity stagnates, there is an oversupply and oil price falls.

It is a simple supply and demand principle.



News related to oil prices, which are mainly reported in the media, such as geopolitical risk factors such as the Ukraine crisis and the Iran nuclear deal, are somewhat different from the fundamental supply and demand issues that shape oil prices mentioned above.

(Of course, it may be a different story if such a situation significantly affects global economic activity.)



Going back to the main topic, then, what is the root cause of the current high oil price?

In 2019, as the global economic activity contracted significantly due to the COVID-19 outbreak, the demand for crude oil decreased significantly.

As supply exceeded demand, prices fell, and OPEC, the Organization of Petroleum Exporting Countries, cut production accordingly.



However, economic activity started to recover from last year, and in 2021, world oil demand exceeded 96.4 million barrels a day and supply was 95.3 million barrels a day, again exceeding supply.

If OPEC had increased production accordingly, there would have been no problem, but it was not and eventually returned to high oil prices.

An official from the Ministry of Trade, Industry and Energy explained that the Ukraine crisis was a geopolitical risk that occurred amid such high oil prices, and that it became a factor that further stimulated the rising oil price.



"Supply oversupply in the second half of the year… There will be no shortage of crude oil"


Then I'm curious.

When will oil prices end?

The Organization of Petroleum Exporting Countries and OPEC+, a consultative body for major oil producing countries, do not seem to have any intention of increasing the scale of production immediately.

Given that OPEC+ agreed to maintain last year's plan to increase production by 400,000 barrels per day per month in February at a regular meeting held earlier last month.



The reason OPEC+ is not increasing production right now is because they believe that they may face oversupply again after increasing the scale of production increase.

In fact, at its regular meeting earlier this month, OPEC+ estimated that the global oil market will experience oversupply of 1.3 million barrels per day this year.

An official from the Ministry of Industry said, "There are many views that supply will exceed demand in the second half of this year." He predicted that the overall supply shortage would not be resolved immediately.



However, he explained that Korea is introducing sufficient quantities through long-term contracts with oil-producing countries in the Middle East, and the government has stockpiles of oil, so there will be no shortage of supply in case of emergency.

He also said that a task force of related ministries has been formed to prepare for contingencies, such as in Ukraine, where rumors of a Russian invasion are being raised in February.



Fortunately, even if the Ukraine crisis subsides, given the nature of the international oil market, it is highly likely that other variables such as the US economy's reduced quantitative easing, inflation, and the Iran nuclear deal will continue to drive oil prices high, given the nature of the international oil market.

It is a time when not only the government but also the private sector such as businesses need to prepare.