KIEP: "Oil Could Reach $174 Next Year if Middle East War Drags On... Major Impact on Korean Economy"

KIEP Releases Report on the Spillover Effects of Oil Price Shocks
Forecasts $90 per Barrel Even with an Early End to the War
"Delayed Recovery Will Drive Up Prices in Korea"

Even if the war between the United States and Iran ends early, analysts predict that international oil prices are unlikely to return to pre-war levels. Should the conflict drag on and energy facilities sustain greater damage, oil prices could soar to as much as $174 per barrel.

According to a report released on April 2 by the Korea Institute for International Economic Policy (KIEP), titled "The Spillover Effects of Oil Price Shocks from the U.S.-Iran War on Major Countries," three scenarios were analyzed using a GVAR (Global Vector Autoregression) model covering 33 countries worldwide.

KIEP established three scenarios depending on the intensity of the conflict: ① early cessation of hostilities or a ceasefire; ② prolonged conflict with the Strait of Hormuz blocked; and ③ escalation involving direct attacks on energy facilities. The report found that in all three scenarios, oil prices would not return to the pre-war level of $63 per barrel. By the fourth quarter of 2027, oil prices are projected to be $90 per barrel (early cessation), $117 per barrel (prolonged blockade), and $174 per barrel (energy facility attacks), respectively, for each scenario.

In the early cessation scenario, global crude oil production initially drops by about 4% following the outbreak of war. However, after hostilities end or a ceasefire is declared, free navigation is ensured despite Iran maintaining control over the strait, allowing oil exports to resume. Nevertheless, considerable time is needed to repair energy facilities damaged during the war, resulting in a lingering production disruption of approximately 2%. Oil prices are expected to stabilize in the range of $84 to $90 per barrel after the conflict, rising from $63 per barrel before the war to $85 per barrel in the second quarter of 2026. As of the fourth quarter of 2027, the price is projected to be around $90 per barrel, about 43% higher than pre-war levels. The report stated, "Ongoing supply constraints from damaged energy facilities are the main factor behind a persistent price premium. Oil product prices are likely to remain above pre-war levels."

In the scenario of a prolonged conflict with the Strait of Hormuz blocked, if restrictions on free navigation continue, international oil prices are expected to remain above $100 per barrel for an extended period. In this case, global crude oil production would decrease by about 10%, and prices would reach $102 per barrel in the third quarter of 2026, stabilizing in the $100–$117 per barrel range. By the fourth quarter of 2027, prices are forecast to be about $117 per barrel, approximately 86% higher than before the war.

In the scenario involving attacks on energy facilities and escalation, the worst case, where energy production facilities are directly targeted, oil prices are expected to surge to unprecedented levels. A total blockade of the Strait of Hormuz combined with large-scale destruction of facilities would lead to a roughly 20% drop in global crude oil production. Oil prices would peak at $129 per barrel in the second quarter of 2026 and surge to $168 per barrel in the third quarter, remaining in the $166–$181 per barrel range thereafter. By the fourth quarter of 2027, prices are projected to be around $174 per barrel, about 176% higher than pre-war levels and nearly 2.8 times the pre-war price.

Trucks are waiting at the Inland Container Depot (ICD) in Uiwang City, Gyeonggi Province, amid the high oil price situation caused by the Middle East war. March 30, 2026. Photo by Yonhap News.

Regarding the Korean economy, the report warned, "Even in the event of an early cessation, oil prices would not return to the pre-war level of $63 per barrel but would remain around $90, indicating a structural increase in the cost of imported energy. If the blockade persists and prices remain in the $100–$117 range, Korea's energy import costs will rise significantly, potentially worsening the terms of trade and placing a burden on the current account balance."

The report recommended that, as Korea is heavily dependent on Middle Eastern energy and thus highly vulnerable to the conflict, the country must urgently establish proactive measures for supply diversification and emergency energy procurement. In January and February of this year, the proportion of crude oil imports from the Middle East accounted for over 70% of the total. The report also noted, "Middle Eastern sources make up 34.4% of Korea's naphtha imports, and if facilities in Qatar are attacked, recovery could take three to five years, necessitating a strengthening of medium- to long-term energy security. Since the current situation is close to the prolonged blockade scenario, there is an urgent need for policy measures."

The report also stressed the need to closely monitor the transmission of oil prices to inflation. "In the past, inflation in Korea rose by 0.12 percentage points immediately after news of oil supply shocks," the report said, adding, "It is necessary to monitor how the rise in energy import prices is passed on from producer prices to consumer prices." The report further emphasized that the current crisis should be used as an opportunity to implement medium- to long-term energy diversification policies to reduce dependence on the Middle East.

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