The Peninsula

Depreciating Currency Adds to Burden of Rising Oil Prices

As of June, South Korea’s gasoline prices increased 31% from last year. The country’s complete dependence on imports means that it is not only extremely sensitive to global shocks in supply but also shifts in the South Korean won’s (KRW) exchange rate.

Foremost, Russia’s invasion of Ukraine negatively affected the global supply of energy. Russian oil production shrank by 10% and the European Union’s economic sanctions on Moscow led to nearly 80 million barrels being stuck at sea. With Seoul following the lead of the United States and European partners, South Korea has also cut its Russian oil imports by 84% from last year. These developments restrict the availability of oil, causing prices to rise in South Korea.

Simultaneously, the depreciating value of the KRW also raises the domestic cost of oil, which is priced on the international market in U.S. dollars (USD). The U.S. Federal Reserve’s recent interest rate hike depreciated the exchange rate of the KRW vis-à-vis (USD) because people take deposits and investments out of Korea in search of higher returns in the United States. The falling competitiveness of the KRW means that South Korean firms need to pay more to buy oil in dollars. This compounds the existing supply crisis created by the geopolitical crisis.

South Korea’s struggle with high oil prices underscores how sensitive energy-importing countries are to volatility. Not only does the global supply impact fuel prices in South Korea, but also the U.S. interest rate affects the country’s capacity to import this vital input.

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

Korea View was edited by Yong Kwon with the help of  Jae Chang, Kaitlyn King, Yu Na Choi, and Mai Anna Pressley. Picture from the flickr account of -EZEK