"War Likely to Persist at 'Low Intensity'... Oil Prices Expected to Settle at $80 if Hormuz Blockade Eases"

Korea Financial Investment Association's "Hormuz Crisis Emergency Seminar"

Oil Prices Could Reach $110 per Barrel If War Lasts One Month

Korea May See Lower Inflation Due to Oil Price Cap

Interest Rate Hikes Possible in Q3 if War Persists

Bloomberg experts have analyzed that the most likely scenario is that the Iran war will persist but with relatively reduced intensity. Based on the formula that a 1% decrease in oil supply from the Strait of Hormuz leads to a 4% increase in oil prices, they forecast that if the blockade is eased, oil prices will remain in the $80 per barrel range, while a blockade lasting more than one month could push prices up to $110 per barrel.

Dr. Hyo-Sung Kwon, a Bloomberg economist, stated at the "Hormuz Crisis Emergency Seminar" held at the Korea Financial Investment Association on the 19th, "According to academic research and recent oil price shock cases, a 1% reduction in oil supply results in a 4% price increase. Since 20% of global oil is supplied through the Strait of Hormuz, if all of this were disrupted, prices would rise by about 80%," he explained.

Dr. Hyosung Kwon, economist at Bloomberg, is presenting at the "Hormuz Crisis Emergency Seminar" held on the 19th at the Korea Financial Investment Association. Photo by Youngwon Kim

Accordingly, Dr. Kwon estimated that the price per barrel, which stood at $60 to $70 before the war, would rise to $110 if the war lasts for one month, $140 for two months, and $170 for three months.

He identified the most probable scenario as a situation where the war continues but with diminished intensity, allowing some easing of the Strait of Hormuz blockade. In this case, he predicted oil prices would settle in the $80 per barrel range. The second most likely scenario is that the war continues at the current or an even higher intensity. In this case, he projected that oil prices would either continue to rise or, even if there is a temporary drop, would remain in the $110 per barrel range.

If oil prices remain in the $80 range as per the most likely scenario, Dr. Kwon forecasted that there would be inflationary impacts in Europe and the UK. The United States, as an energy self-sufficient country, would be relatively less affected. He stated, "Inflation would rise slightly and GDP would be hit, but not to a severe degree. Central banks may monitor inflation even if it increases to some extent, and may not necessarily adjust interest rates."

However, if oil prices surge to $110 as in the second scenario, Dr. Kwon warned that this would shock the global economy. He explained, "For the eurozone and the UK, which must import energy, GDP could fall by 0.5 percentage points and inflation could rise by up to 1 percentage point. Central banks would have no choice but to operate tighter monetary policies to stabilize inflation expectations, which would make interest rate hikes inevitable."

In the case of Korea, he assessed that the burden of rising oil prices has been partially mitigated by policies such as the oil price cap. This is reflected in the fact that the inflation forecast for this year was only slightly revised from 2.1% to 2.3% before the war. Bloomberg Economics projected that the implementation of the oil price cap would lower Korea's March inflation rate by about 0.4 percentage points.

He anticipated that interest rates would remain unchanged this year and be raised next year. Dr. Kwon commented, "Although the Korean economy is recovering, economic activity remains below its potential level, so it may be advisable not to raise policy rates too quickly."

However, if the Iran war continues at high intensity and oil prices fluctuate above the $110 level, he also suggested the possibility of an early rate hike. Dr. Kwon stated, "If the war eases and oil prices stabilize in the $80 range, inflation may rise somewhat but it is unlikely to lead to an interest rate hike. However, if oil prices remain at $110, the impact could be compounded by exchange rate shocks, leading to significantly higher inflation. In that case, rate hikes could begin as early as the third quarter."

Dr. Kwon described this war as "an important turning point that will raise global inflation and lead to higher global long-term interest rates." He added that the United States, which already has a significant fiscal deficit, will further increase its spending on the war, while Korea is likely to expand fiscal spending to offset oil prices through measures like the oil price cap. Furthermore, Dr. Kwon noted that countries around the world will be compelled to boost defense spending in anticipation of prolonged wartime conditions.

This content was produced with the assistance of AI translation services.