U.S. ally South Korea feels collateral impact from Middle East

SEOUL, South Korea — With conflict in the Middle East igniting a powder keg that has set the global energy sector aflame, U.S. allies are feeling the heat.

Take South Korea. Its trade-dependent economy is highly vulnerable to global economic troubles, and as a net energy importer, South Korea is especially exposed to oil shocks like the closure of the Strait of Hormuz.

South Korea’s economic backbone is a heavy industry export machine churning out chips, ships, autos, displays, devices and petrochemicals — and the assembly line stops without a steady supply of oil.

According to the International Energy Agency, oil is the biggest component in Korea’s energy mix, at 38.6% — ahead of coal (23.2%), natural gas (19.7%) and nuclear (17.5%).

Kim Sung-hyun, a Sunkyunkwan University professor of economics, told foreign reporters in Seoul Thursday that Korea imports 70% of its crude from the Gulf — with much of that supply now threatened by the closure of the Strait of Hormuz.

The preference for oil and over-reliance on Middle Eastern supply are dangerous dependencies.

“There are several reasons why Korea has focused on Middle Eastern rather than U.S. and Latin American capabilities to supply large volumes,” Lee Jae-won, deputy governor of the Bank of Korea’s Economic Research Institute, told journalists. “There is the proximity of the Middle East to Asian countries, global pricing mechanisms are based on Middle Eastern [supply] and we have long purchased from the Middle East.”

Korea did diversify out of Middle Eastern energy, buying Russian, but those purchases ended with the Ukraine war, leaving Seoul again Gulf-dependent.

Mr. Lee – who said he was speaking for himself, not the Bank of Korea — said policies need a rethink.

“After this global oil shock, I think there will be growing need to diversify supply sources for imports and stockpiles,” he said. “And diversifying the domestic energy mix with nuclear.”

For now, crisis management is underway. Seoul has capped fuel prices, and this week secured a top-priority buyer agreement with the United Arab Emirates.

The UAE and South Korea enjoy tight ties. Seoul stations special forces in the region, and has supplied the emirates with nuclear reactors and varied weapons — including the Cheongung II air-defense system, currently defending against Iranian strikes.

However, it is unclear how the oil pledged by the UAE can reach Korea, absent a cessation of hostilities.

Two trans-Arabian pipelines, laid across desert — bypassing the strait — terminate on the coasts of the Red Sea and the Gulf of Aden. Their capacities, however, cannot replace tanker fleets.

According to domestic media, 26 Korean vessels are trapped in the Gulf, including seven oil tankers, the remainder being LNG and chemical carriers.

Another 14 are in holding patterns outside the strait.

Seoul has assured the public that domestic public and private oil reserves total 190 million barrels, enough for 208 days.

However, defiant Tehran is raising no white flags and U.S. President Trump has blown hot and cold on whether the U.S. and its allies should undertake the risky operation of forcing open the strait.

Meanwhile, in the last two days, Israeli and Iranian forces have directly struck oil facilities, further inflaming the situation.

Trade-dependent Korea weathered the COVID-19 and Ukraine war crises, but last year, national economic growth was just 1.%.

This year, with chipmakers benefiting from a bullish upward cycle, growth is anticipated to hit 2%. The Middle East crisis looks likely to slash that.

High oil prices impact overall energy pricing, adding cost to exports, imports and related logistics. These factors push inflation up.

With the dollar strong, the local currency, the won, is taking a battering, as are investor confidence and stock markets.

In this nervy atmosphere, extraordinary measures are under consideration — including one that could infuriate Washington.

The greenback reigns supreme as the currency of choice for energy settlements — the “petrodollar.” That irks competing economies, such as China, Iran and Russia.

Tehran is preventing cargoes of U.S. allies from transiting the strait, but given its close relations with Beijing, has offered to allow energy shipments paid for in Chinese yuan to pass through unmolested.

That puts U.S. allies in a tricky spot.

“When we saw geopolitical crises in the past, we saw the dollar strengthen, in the short term,” said Mr. Lee. “In the mid- to long-terms, [the crisis] can stimulate discussion on diversifying into multiple currencies for making payments, if the situation prolongs.”

Some pressure on the global market was released on March 12 when the Trump administration temporarily eased some sanctions on Russian oil.

The measure is expected to help India address its supply problems. According to Reuters, Seoul’s Industry Ministry announced Thursday that it was speaking with companies about whether and how to buy Russian fuels.

Experts were doubtful.

“There are still existing financial sanctions on Russia and these are correlated with payments, logistics and insurance, so it will not be easy to import Russian oil,” said Lee Yoon-soo, of Seoul National University’s Graduate School of International Studies. “And if [Trump] lifts financial sanctions as well, it will signal to the world that the situation in the Middle East is quite serious.”

Feasibly, the U.S. could assist: It is the world’s leading oil producer.

But it is unclear if capacities exist currently for all its allies’ tanker fleets to pivot from Gulf terminals to U.S. terminals.

“The worst-case scenario is when the Strait of Hormuz is blocked for a longer period,” said Seoul National University’s Mr. Lee. “If our oil reserve runs out, we will face an unprecedented situation that nobody has imagined before.”