Korea Braces for Oil, Currency Shock as Middle East Conflict Escalates

Tensions surrounding the Korean economy are mounting as hostilities between the U.S.-Israel alliance and Iran intensify. While the semiconductor industry has sustained Korea's economy on the back of explosive artificial intelligence demand, escalating geopolitical instability in the Middle East could trigger warning signs across multiple industrial sectors. Domestic companies sensitive to oil prices and electricity costs are closely monitoring the situation and reviewing contingency plans.

The government has initiated emergency response measures for worst-case scenarios. A government official said on the 2nd, "We are adjusting oil tanker schedules and reviewing alternative supply sources, assuming the worst-case scenario of a complete blockade of the Strait of Hormuz." The government and private sector have stockpiled approximately seven months' worth of crude oil and LNG reserves exceeding mandatory levels. The Ministry of Trade, Industry and Energy has indicated it will release supplies to the market at its own discretion if necessary. An emergency response system has also been established. Lee Hyung-il, Second Vice Minister of the Ministry of Economy and Finance, said, "We have decided to activate a joint emergency response team among relevant agencies regarding the Iran situation." The response team consists of an international energy division, an economic situation and supply chain division, and a financial markets division.

The concern is that the situation shows signs of becoming protracted, with Iran conducting retaliatory strikes on U.S. military facilities in the Persian Gulf region. In such a case, oil prices could exceed $100 per barrel, likely impacting both export costs and consumer prices.

There are also concerns that China, the largest buyer of Iranian crude oil, could fuel energy price instability. If China enters the market to secure alternative supplies to replace Iranian oil, the supply-demand balance could be disrupted.

Korea is particularly vulnerable to geopolitical crises in the Strait of Hormuz, as it depends on five Persian Gulf nations—Saudi Arabia, Iraq, the United Arab Emirates, Kuwait, and Qatar—for nearly 70% of its crude oil supply as of last year. While Saudi Arabia and the UAE export some of their production via the Red Sea and Indian Ocean routes, most shipments to Korea must pass through the Strait of Hormuz.

If oil prices rise significantly, consumer prices are likely to follow. Petroleum products and heating costs account for nearly 6% of the Consumer Price Index weighting, and rising oil prices generally increase overall production costs. According to the Korea International Trade Association, every 10% increase in international oil prices raises export and import unit prices by 2.09% and 3.15%, respectively. LNG prices, in particular, are expected to push up average power generation costs, adding pressure for electricity rate increases.

Domestic industries are closely watching developments in the Middle East. The semiconductor industry assesses that immediate impact is limited due to the absence of direct production facilities or material supply chains in the region. However, companies are strengthening monitoring efforts in preparation for potential contraction in global IT demand.

Samsung Electronics has evacuated employees stationed in Iran and Israel to nearby countries including Dubai in the UAE, Egypt, and Jordan. Employees in the UAE, Qatar, and Iraq have shifted to remote work, while operations in Saudi Arabia and Jordan continue normally.

The shipping industry is focused on the Strait of Hormuz. Tensions heightened after Iran's Revolutionary Guard declared a blockade and civilian vessels were subsequently attacked nearby, resulting in casualties. Major shipping companies from Greece, Germany, and Japan have suspended operations in the area. On the 2nd, the Korea Shipowners' Association sent a notice to member companies urging crew protection, verification of war insurance terms, and information sharing with the Cheonghae Unit and the Ministry of Oceans and Fisheries.

Even without a blockade of the Strait of Hormuz, companies face various cost burdens. According to major international media reports, specialized marine insurers have begun renegotiating contracts reflecting increased war risk premiums. Some observers estimate that insurance premiums for Persian Gulf voyages could increase by up to 50%. An official from a Korean shipping company said, "Separate rates will apply for high-risk zones. In cases where alternative routes are not viable, vessels will have to transit while absorbing higher rates." Depending on contract structures, insurance cost burdens may also be passed on to cargo owners such as refiners.

Conversely, some analysts suggest that a swift resolution to the conflict could benefit the global economy by removing uncertainty. Ed Yardeni, president of Yardeni Research, said on the 1st (local time), "This attack has effectively neutralized the Iranian navy. This is positive in that it could significantly reduce Middle East risk after the war ends." If the U.S. ends the war or moves toward a ceasefire without damaging Iran's oil production and export facilities, oil prices could decline, potentially easing U.S. inflation and improving demand, according to analysts.