Impacts of Oil Price Changes Korea Development Institute on Korean Economy March, 2006 Hangyong Lee Korea Development Institute

Contents - Growth rate - Market share 1. World oil demand - Growth rate - Market share 2. The impact of oil price changes - A simple calculation - Simulation results 3. Two issues - Industry structure in Korea - Demand shock vs supply shock

1. Growth Rate of World Oil Demand Growth rates slowed down in Japan and Korea 1971~2000 2000~2004 World 49.0 (1.3) 6.9 (1.7) US 22.2 (0.7) 4.9 (1.2) Canada 22.7 (0.7) 14.2 (3.3) Europe -4.7 (-0.2) 3.2 (0.8) Asia 169.1 (3.3) 12.8 (3.0) China 447.4 (5.7) 40.3 (8.5) Japan 18.0 (0.6) -3.9 (-1.0) Korea 837.5 (7.5) 0.2 (0.1) Oceania 59.7 (1.6) 4.6 (1.1) Other 59.7 (3.3) 4.6 (1.4) Note: Numbers in parentheses are average annual growth rates Source: Oil Information (2005), IEA

2. Market Share of World Oil Demand Asia’s market share has increased 1971 2004 US 30.6 24.6 Canada 3.1 2.7 Europe 40.8 25.2 Asia 14.5 27.7 China 1.6 7.9 Japan 9.2 6.5 Korea 0.4 2.6 Oceania 1.2 1.3 Source: Oil Information (2005), IEA

3. Oil Import/GDP in Korea Oil Import/GDP has increased due to higher oil prices

4. Impacts of 10% Increase in Oil Price A Simple Calculation  Oil import: 42.6 bil$ in 2005  15% of total import and 4-6% of GDP  10% increase in oil price would reduce 0.5% of GDP KDI Model Simulation Results  Cho and Kim(2005), Shin(2005) GDP: -0.21%, CPI: 0.12% Private Consumption: -0.12%, Investment: -0.87%  Bank of Korea(2005)

5. Two Issues Major industries in Korea are not oil-dependent  Composition of exporting goods  Sensitivities of profits/output across industries (without changing output prices) Oil Price increases driven by demand shocks partially offset the adverse effects  China’s rapid growth leads to an increase in exports to China

6. Composition of Korea’s Exporting Goods Main exporting goods are IT related products (25.2%) and motor vehicles and parts (13.4%) 1990 1995 2000 2005 Heavy industry & chemical products 56.4 72.7 81.0 89.6 Semiconductor 7.0 14.1 15.1 10.5 Motor vehicles and parts 3.9 7.5 8.9 13.4 Steel products 6.5 5.8 4.4 5.9 Chemicals 1.8 4.6 5.5 7.3 General machinery and equipment 2.7 4.5 4.2 7.8 Computer 3.1 3.5 8.4 5.0 Communications equipment 0.8 1.2 4.7 9.7 Ships 4.3 4.8 6.2 Light industry products 38.5 22.5 16.2

7. Impacts on Profits (Manufacturing) Changes (%p) Chemical products -0.58 Nonmetallic mineral products -0.43 Coal products -0.41 Fabricated metal products -0.10 Other manufacturing products -0.09 Textile and clothing -0.08 Paper, Printing, and Publishing Primary metal products -0.07 Food and Beverage -0.06 General machinery and equipment Electronic components and accessories -0.05 Motor vehicles and parts Other transportation equipment -0.04 Household electronic appliances -0.03 Precision instruments -0.02 Semiconductor -0.01 IT related equipments Source: Kim and Kim (2005)

8. Impacts on Profits (Service) Changes (%p) Transportation and warehousing -1.00 Steam and hot water supply -0.92 Electric services -0.42 Restaurants and hotels -0.17 Wholesale and retail trade -0.13 Manufactured gas supply -0.12 Public administration and services -0.10 Education and health services -0.08 Social and other services Construction -0.06 Water supply -0.03 Communications and broadcasting -0.02 Finance & insurance Real estate and business services -0.01 Source: Kim and Kim (2005)

9. Korea’s Export Structure (Destination) The share of exports to the US and Japan has declined, but the share of exports to China has increased  China’s rapid growth leads to an increase in exports to China 1990 1995 2000 2005 US 29.8 19.3 21.8 14.5 Japan 19.4 13.6 11.9 8.4 EU 15.4 13.0 ASEAN 8.0 14.4 11.7 9.6 China 0.9 7.3 10.7

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