The Israel-Hamas War, Oil Price Volatility, and Anticipated Impacts: Implications for Korean Industries

Sora Lee () and Minju Lee ()
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Sora Lee: Korea Institute for Industrial Economics and Trade, Postal: Sejong National Research Complex, Korea Institute for Industrial Economics and Trade, 370 Sicheong Dae-ro C-dong 8-12F 30147, Republic of Korea, http://www.kiet.re.kr
Minju Lee: Korea Institute for Industrial Economics and Trade, Postal: Sejong National Research Complex, Korea Institute for Industrial Economics and Trade, 370 Sicheong Dae-ro C-dong 8-12F 30147, Republic of Korea, http://www.kiet.re.kr

No 23/19, Research Papers from Korea Institute for Industrial Economics and Trade

Abstract: The Israel-Hamas War began when Hamas attacked Israel on October 7, 2023. The international community remains alertly attuned to the war’s developments, not least because conflicts in the Middle East have historically tended to fuel oil price hikes. Thus far, however, the war has not yet exerted a significant effect on global oil prices, as neither belligerent in the conflict is an oil producer. However, if a third-party country such as Iran enters the war, the international price of oil could well rise to USD 150 per barrel. Rising oil prices exert inflationary pressure first by directly increasing import prices. In South Korea, rising oil prices have been associated with higher prices of imported raw materials and intermediate goods since 2000. Higher input costs significantly raise the cost of business for Korean firms. Should business revenues fail to rise at the same pace as costs, firms stand to experience losses. Our analysis of different Korean industries reveals that rising prices have significantly elevated material costs for the chemical, primary metal, and petroleum refinery industries, with the impacts on the profitability of the chemical industry particularly severe. Our analysis also shows that the income terms of trade worsened especially for Korean chemical and steel exports under war-induced oil price hikes, while the income terms of trade for the semiconductor and automotive industries actually improved over the same period of time. Geopolitical factors can lead to abrupt fluctuations in oil prices, making it is critical to remain abreast of developments in the Israel-Hamas War. Moreover, the Korean government needs to monitor oil prices closely so as to take timely and proactive policy actions that ensure stability in domestic oil prices. Policy support should also be tailored to the needs of industries that are especially vulnerable than to oil price hikes, while measures should be introduced to enhance the competitiveness of their products. In the long run, more investment should be made in developing alternative and renewable energy sources.

Keywords: Israel; Hamas; Israel-Hamas war; Middle East; oil; oil prices; oil price volatility; inflation; global trade; renewable energy; KIET; Korea (search for similar items in EconPapers)
JEL-codes: F13 F51 F52 Q31 Q34 Q35 Q37 Q38 Q41 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2023-10-31
New Economics Papers: this item is included in nep-ene, nep-int and nep-inv
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