3% inflation rises when the perceived oil price approaches 100 dollars… Discussion of fuel tax cut (comprehensive)

The exchange rate that poured oil on the burning oil price… Korea is also on red alert for global price crisis

In October, the 3% level of inflation became a fixed fact… Government “not considering lowering fuel tax at this time”

National gasoline prices rise

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(Sejong = Yonhap News) Reporter Park Yong-joo, Cha Ji-yeon, Kwak Min-seo, and Kim Da-hye = The price of oil that Koreans feel is already approaching the $100 per barrel level.

As oil prices soared, the won/dollar exchange rate also soared.

The global price crisis, which appeared as the collapse of the global supply chain and the rise in energy prices overlapped, is leading to a situation in which Korea is also attacked.

Cards such as fuel tax cuts are also being discussed in order to reduce the cost of inflation on the people.

◇ High oil price = Won’t strengthen the won’s formula

According to Yonhap Infomax on the 17th, the spot price of Dubai oil was $82.28 per delivery on the 14th.

Since the spot price of Dubai crude first entered the $80 range ($80.55 per barrel) on the 6th of this month, it stayed in the range of $81-82 per barrel based on the closing price throughout last week.

The price of Dubai oil is the highest in more than three years since it hit $84.44 on October 4, 2018.

However, this is only a dollar value, and it is different when converted to the Korean won.

Usually, a strong international oil price means a weakening of the dollar in the international financial market, and this is because the general formula of the past, which was linked to a strong won, did not work this time.

Even if the oil price rises, if the won strengthens, the oil price is relatively less felt. In other words, it is like pouring oil at the exchange rate amid a fire in oil prices.

[그래픽]  Average price of gasoline at gas stations nationwide
[그래픽] Average price of gasoline at gas stations nationwide

(Seoul = Yonhap News) Reporter Jang Ye-jin = According to the Korea National Oil Corporation’s oil price information service Opinet on the 16th, the price of gasoline sold at gas stations nationwide in the second week of October was 1,687.2 won per liter, up 28.3 won from the previous week.
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◇ Won-converted oil price was the same as in September 2014, when it was 95 dollars per barrel.

The latest day when the won/dollar exchange rate was the highest based on the closing price was on the 12th, and the won dropped to 1,198.8 won per dollar. Considering that the spot price of Dubai crude was $82.07 based on the closing price on that day, the price per barrel rose to 98,385 won in won.

On October 4, 2018, the latest high of Dubai oil, the closing price of the won/dollar exchange rate was 1,129.9 won. The price of KRW 95,409 per barrel was lower than last week.

The period when the price of Dubai oil in terms of won was so expensive should go back to October 1, 2014 (99,384 won), the end of the high oil price era. At that time, the price of Dubai oil stood at $93.52 per barrel, more than $10 per barrel higher than it is today.

Even on September 15, 2014, when the price of Dubai oil was $95.19 per barrel, the price of Dubai oil per barrel was 98,807 won in won, similar to the price on the 12th (98,385 won). At that time, the won/dollar exchange rate was in the range of 1,030 to 1,060 won.

In the end, considering the exchange rate, the oil price felt in Korea rises to close to $100 per barrel.

Dubai Oil Spot Price Trend
Dubai Oil Spot Price Trend

Won/dollar exchange rate trend
Won/dollar exchange rate trend

◇ Right after the record low after the CDS financial crisis, KRW 1,200/dollar KRW 1,200

This unusual situation, in which oil prices and the exchange rate soar together, shows no sign of being easily resolved.

There are many speculations that the international oil price could rise to $100 a barrel in the aftermath of the economic recovery and increase in oil demand.

The won/dollar exchange rate also tends to fluctuate depending on supply and demand, such as the outflow of foreign funds from the stock market and the expansion of overseas investment in won-denominated assets, rather than the fundamentals of the Korean economy.

It is difficult to understand fundamentally that Korea’s credit default swap (CDS) premium recorded its lowest level since the global financial crisis in September, and the KRW/USD exchange rate of 1,200 won, which appears in a liquidity crisis, is being created.

Experts are concerned about the adverse effect on domestic prices of the simultaneous surge in oil prices and the exchange rate. This is because oil price is a variable that cannot be controlled by the government, while oil price is a raw material that can cause a rise in the price of various products beyond simply the price of petroleum products.

Consumer price index increased year-on-year
Consumer price index increased year-on-year

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◇ This month’s inflation of 3% is a fixed fact… “A bad news for consumption and investment”

The consumer price inflation rate for this month is expected to be in the 3% range. As the telecommunication fee support effect that lowered the inflation rate to 0.1% in October last year disappears, inflation in October this year is bound to rise sharply, and the influence of exogenous variables such as oil prices and exchange rates is increasing. In recent years, even bad news about the global supply chain are showing signs of affecting Korea.

The government also predicted the possibility that the consumer price inflation rate in October would rise significantly from September. However, there is little talk about whether the inflation rate in October will exceed the 3% level.

If the inflation rate of 3% is recorded, it will be the first time in almost 10 years since February 2012 (3.0%).

In some developed countries, which also suffer from global supply chain disruption, the price situation is worse than ours. The US consumer price index, for example, rose 5.4% in September. This is the largest increase since August 2008. In the case of the United States, the phenomenon is a combination of energy prices, logistics disruption, and raw material shortages.

Kyu-cheol Gyu-cheol, head of economic forecasting at the Korea Development Institute (KDI), said, “If import prices rise, they will eventually have a negative impact on consumption and investment.

[그래픽]  Consumer Price Trend (Comprehensive)
[그래픽] Consumer Price Trend (Comprehensive)

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◇ Talking about the fuel tax cut card… Government “not reviewing at this time”

As the domestic gasoline price surpassed 1,700 won in the second half of last week, there is a possibility that the government will issue a fuel tax cut card. It is a way of lowering the perceived oil price by lowering the fuel tax.

The government paid oil price refunds and subsidies in 2008, when the price of oil greatly exceeded $100 per barrel. At that time, the fuel tax was also reduced.

The oil tax was also cut from 2018 to 2019, when the price of oil exceeded $80 a barrel. At that time, the extent of the fuel tax cut was 7-15%.

An official from the Ministry of Strategy and Finance said, “We are closely monitoring international and domestic oil price trends, but we are not considering a plan to lower the fuel tax under the current circumstances.”

However, it does not rule out the possibility of a fuel tax cut if the oil price situation becomes more serious in the future.

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