SEOUL, KOREA - As the U.S. fighters began attacking a stronghold of Iraq's Islamic State group on August 8 by dropping bombs on mobile artillery near Irbil, worries that the fresh conflict may escalate into another Iraq war or a region-wide crisis are mounting. A private think tank released a research report predicting it may cut Korea's economic growth rate by 0.08 percent this year.
According to a report "Iraqi Air Strike's Impact on the Korean Economy" published by Hyundai Economic Research Institute on August 10, a hit on the economy would be inevitable in the form of international oil price rises due to geopolitical instability. The report said there would be little impact on oil output and oil prices if the air strikes can significantly weaken the Sunni fundamentalist Muslim group in northern Iraq. If the group puts up resistance for an extended time, the international oil prices would rise by 10 percent for the next three months. For example, for three months since January 2012 when the U.S. government announced sanctions against Iran, the average price of Dubai crude rose 8.4 percent.
On the assumption that the oil prices would increase by 10 percent, the report forecast, the growth rate of the Korean economy for the whole year would shrink by 0.03 percentage point from the original forecast, with consumer prices rising by 0.14 percentage point. Under a worst-case scenario, according to the report, in which Sunni tribes in Iraq and surrounding Sunni-affiliated nations start supporting Islamic State group fighters, the oil prices may rise by more than 30 percent for the next six months.
In this case, Korea's economic growth rate would fall by 0.08 percent, with consumer prices increasing by 0.42 percentage point for the year. This is almost equivalent to what happened in January 2008 when a series of U.S.-Iranian naval disputes in the Strait of Hormuz almost led to a military confrontation. At the time, oil prices (based on Dubai crude) rose 27.8 percent on average for the following six months.
Choi Sung-geun, senior research fellow with Hyundai Economic Research Institute, said, "One can't rule out a possibility of Arab nations banding together along the dividing line of Sunni and Shiite following the air strike. To prepare for the contingencies, Korean companies need to stock up oil inventories by actively using the futures markets and diversifying their oil sources away from the Middle East."
