Hormuz Energy Shock Hits Korea Hardest Among Major Economies

The war between the United States and Israel against Iran has dealt a severe blow to international energy markets. International oil prices surged amid a vicious cycle where transportation route "bottlenecks" from the Strait of Hormuz blockade led to supply reductions through Middle Eastern oil production cuts. This shock transmitted directly to financial markets. The crisis has raised several implications for energy markets, particularly highlighting the importance of energy independence and diversification.

Did Energy Self-Sufficiency Serve as a Breakwater?

Recent volatile swings in stock indices across nations clearly demonstrate how the war shook financial markets. While all markets declined, the magnitude of losses varied significantly.

Comparing current levels (as of March 9) to February 27—just before the U.S. and Israel launched "Operation Epic Fury" against Iran—Asian indices suffered the steepest drops. Korea's KOSPI led the decline, plunging nearly 16%. Japan's Nikkei 225 fell 10.40%, followed by Taiwan's TAIEX at 9.33%. India's Nifty 50 managed a relatively modest 4% decline. China's Shanghai Composite showed the smallest impact at just 1.59%. European indices in France, Germany, Italy, and the UK fell between 6% and 7%.

What explains these differences? Given the immediate crisis of crude oil and natural gas supply shortages, stockpile levels would seem relevant. However, major nations including Korea (with 208 days of reserves) exceed the international standard of minimum 90 days of net imports. For natural gas, which is difficult to stockpile, most countries faced concerns about immediate supply shortages. In essence, reserve situations were similar across nations.

Energy self-sufficiency rates tell a different story. Countries with lower self-sufficiency rates tended to experience steeper index declines. Korea (21.4%), Japan (15.2%), and Taiwan (8.9%) all showed relatively low energy self-sufficiency. These figures would be even lower when considering only crude oil and gas, excluding nuclear power.

Conversely, countries with high self-sufficiency—the United States as a net energy exporter, China above 80%, and India exceeding 60%—saw relatively limited index declines. China imports approximately 40% of crude oil passing through the Strait of Hormuz, far exceeding India (15%), Korea (12%), and Japan (11%). Yet China's stock market appeared less affected, likely due to its high energy self-sufficiency.

Fossil Fuels Remain 'Fundamental Strength' During Energy Transition

Stock indices are influenced by far more than energy markets alone. Macroeconomic conditions including exchange rates, interest rates, GDP growth, corporate developments, and political issues all play roles. China and India benefit not only from self-sufficiency but also from their ability to receive oil supplies from ally Russia, providing a buffer effect. Nevertheless, self-sufficiency as energy "fundamental strength" continues to significantly influence national markets and economic outlooks.

This phenomenon is particularly intriguing given the ongoing global energy transition aimed at carbon reduction. Fossil fuel supply-demand issues remain critical variables capable of rattling entire markets.

Examining the impact of renewable energy adoption rates reveals mixed results. Germany, the UK, and Italy have relatively high renewable shares ranging from 30% to over 50%. Yet whether renewable energy served as a financial market "breakwater" during this crisis remains questionable. Some assessments suggest Europe faced an energy crisis rivaling the Ukraine war impact. Following Russia's 2022 invasion of Ukraine, Europe declared independence from Russian pipeline gas. It subsequently diversified supply chains by increasing LNG imports from the United States and Qatar—a strategy that unexpectedly backfired.

Still, concluding that "energy independence through renewables is unstable" oversimplifies the lesson. A better interpretation might be: "Crisis arrives when the energy mix breaks down." When supply of any single energy source collapses, the entire system risks failure.

China's energy strategy stands out from this perspective. While renewable energy capacity approaches 60% of installed generation, China continues expanding coal production for energy security. Last year, China's annual coal production hit a record high, yet coal-fired power generation declined for the first time in a decade. Production increased while generation decreased.

Korea's Reality Reflected in 'Roller Coaster' KOSPI

*Note: "Petro-Electro" covers energy from petroleum to electricity. Energy serves as a key lens for understanding economics, industry, international affairs, and climate change response.*

Examining Korea through this lens reveals several implications. Korea appears disadvantaged both in energy self-sufficiency and energy mix balance. Policy efforts continue at the national level to reduce Middle East dependence for fossil fuels and improve energy balance. However, this war has reconfirmed multiple challenges facing the nation.

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