With Middle East conflict spreading beyond the Strait of Hormuz to the Red Sea and pushing global oil prices sharply higher again, the South Korean government has summoned the country's four refiners to draw up emergency measures. Officials are reviewing plans to expand freight cost subsidies to encourage crude imports from outside the Middle East, while checking for shipment delays and damage. The government will also develop an "oil supply stability diagnostic index" that combines factors affecting petroleum supply and demand.
The Ministry of Trade and Industry said it held an emergency review meeting on crude supply conditions on the 14th at the Korea Chamber of Commerce and Industry in central Seoul, chaired by Vice Minister Moon Shin-hak. Executives from the Korea National Oil Corporation and the four refiners — SK Energy, GS Caltex, S-Oil and HD Hyundai Oilbank — attended.
"We have already secured crude import volumes for September and October at more than 90% of year-earlier levels, so the immediate impact on domestic supply is limited," a government official said. "We will keep monitoring the restart of Saudi Arabia's pipeline and mobilize every available policy tool, including support for detour routes through the Suez Canal."
The unscheduled meeting was called because the war in the Middle East has spread past the Persian Gulf into the Red Sea. The Houthis, Yemen's pro-Iran rebels, have seized Perim Island and the port of Mokha, both strategic points on the Bab el-Mandeb Strait linking the Red Sea and the Indian Ocean. Saudi Arabia's East-West Pipeline, which had been supplying crude to global markets as an alternative to the Strait of Hormuz, also halted operations after being hit by drones launched from Iraq.
As conditions in the Middle East deteriorate rapidly, crude and refined product prices that had steadied for a time are climbing again. Spot Dubai crude, at $80.80 a barrel as recently as Aug. 7, jumped to $123.70 on the 11th. The international price of gasoline traded in Singapore reached $147.90 on the 11th, up 26.8% from a month earlier. Naphtha prices rose 15.2% over the same period.
The government said it will watch developments closely to ensure that contracted crude cargoes arrive on schedule. A tanker leaving the Red Sea port of Yanbu and routing through the Suez Canal instead of the Bab el-Mandeb Strait needs roughly 30 additional days of sailing time. Repairing the East-West Pipeline will take considerable time, meaning Saudi crude may remain hard to obtain for a while even with a Suez detour. South Korea imported $16.046 billion worth of crude from Saudi Arabia in the first seven months of this year, or 31.3% of the total. Although the share slipped slightly from last year, Saudi Arabia remains the largest single supplier.
To cope with the supply crisis, the government is examining whether to raise the subsidy rate for crude freight cost differentials, which had been lifted to 100% before being cut back to 25%. The aim is to make it easier for companies to source crude from the Americas, Africa and Southeast Asia. "We are consulting with related ministries so that refiners can receive larger freight differential payments when they bring in alternative crude," a government official said.
The government faces a harder choice over the oil price cap that has been in place since March 13. It originally introduced the ceiling on the assumption that it would run for about six months, but the U.S.-Iran war has dragged on far longer than expected and oil prices are rising again. Industry officials expect the government will have little choice but to extend the ninth round of the cap, which expires on the 18th, for another term. Swings in liquefied natural gas prices, which track crude, are another concern. The Middle East accounts for only a small share of LNG imports, so supply is not an immediate problem, but higher prices eventually feed into electricity and heating bills.
Separately, the government is developing an indicator that would show the state of petroleum supply stability at a glance in response to geopolitical risk from the Middle East. The Korea Petroleum Quality & Distribution Authority plans to commission a research project on the 11th to develop the diagnostic index. The goal is a gauge that monitors not only global oil prices but also a range of cost factors such as official selling prices set by Middle Eastern producers and tanker charter rates, while quantifying risks by supplier country and shipping route as well as government and private stockpiles and jointly held international reserves, to assess the safety of the oil supply chain.
