The government must keep 'even the worst-case scenario in mind,' said South Korean President Lee Jae Myung, shown on March 3.ROLEX DELA PENA/POOL/Reuters
South Korea will cap fuel prices for the first time in nearly three decades, the government announced Monday, as economies across Asia grapple with the spiking cost of oil as a result of the widening conflict in the Middle East.
Oil prices soared to more than US$119 per barrel on Monday, an increase of more than 30 per cent since the U.S. and Israel began bombing Iran on Feb. 28. That assault provoked all-out retaliatory attacks from Tehran against U.S. bases and interests in countries across the Gulf, and threats to close the vital Strait of Hormuz, through which a huge portion of oil and liquid natural gas (LNG) bound for Asian markets travels on a daily basis.
“As the crisis in the Middle East deepens, uncertainty in the domestic and global economic environment is expanding significantly, posing a considerable burden on the Korean economy relying heavily on global trade and energy imports from the Middle East,” said South Korean President Lee Jae Myung. “As it is difficult to predict how the situation will unfold, the government must prepare pre-emptive response measures with a sense of urgency, keeping even the worst-case scenario in mind.”
A fuel price cap is expected to be implemented as soon as this week, while the Bank of Korea is also preparing market-stabilization measures to respond to rising volatility.
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South Korean shares slumped 8 per cent on Monday to activate circuit breakers for a second time this month, while the won dropped below 1,500 per U.S. dollar for the first time in 17 years. In Japan, the Nikkei plunged 7.5 per cent, in its second-biggest intra-day drop on record, while stocks in Hong Kong were on track for their worst performance since September last year.
In the Philippines, where officials from across Southeast Asia are meeting this week to discuss ways to deal with spiking energy costs, the government has said it could mandate a four-day working week if the crisis worsens.
China too, has expressed concern about rising fuel prices, with Foreign Ministry spokeswoman Mao Ning last week urging all parties to “maintain the safety of shipping lanes in the Strait of Hormuz, and prevent a greater impact on the global economy.”
Despite reports that some ships have switched their flags to that of China’s in an attempt to avoid potential Iranian attacks, an analysis by the Center for Strategic and International Studies (CSIS) found few vessels of any flag are getting through the strait, the closure of which they warned will have “global implications.”
“As a critical chokepoint for the world’s oil and LNG, a sustained halt on maritime traffic through the strait would strain global supply chains and put pressure on energy prices,” the CSIS analysts wrote. “Major Asian economies such as China, India, Japan, and South Korea could be especially affected, as over 80 per cent of oil and LNG transiting the strait is bound for Asia.”
While China is the biggest destination for energy flows from the Gulf, it is also better positioned than other economies in Asia, they added. “China has stockpiled significant amounts of crude oil over the past year, and it has room to substitute Middle Eastern oil with alternative energy sources such as LNG and coal to insulate its economy.”
Mr. Lee said Seoul was actively co-ordinating “with strategic partner countries to promptly explore alternative routes that do not have to pass through the Strait of Hormuz.”
That could include Canada, which delivered the country’s first cargo of LNG to South Korea last year and is looking to expand supply to economies across Asia.
With a report from Reuters