[Choi Ji-woong's Energy War] The Role of Gangnam Teheran-ro and Oil

Oil Shock, Global Financial Crisis, and Pandemic Only Three Times of Oil Demand Decline
Oil Demand Has Steadily Increased Over the Past Decades

Recent Global Car Sales Have Significantly Risen
Oil Prices Will Rise Further as Suppressed Travel Demand Recovers

Oil Is an Essential Resource for Energy Transition
Korean Economic Structure Led by Manufacturing That Uses a Lot of Oil
Efforts Needed for Stable Oil Supply

Asia Economy Newspaper will serialize 'Choi Ji-woong's Energy War' starting from the 13th, published once a month on Thursdays, diagnosing the energy industry undergoing a great transformation and examining the related changes in the international order. The author is an expert in the energy field who joined Korea National Oil Corporation in 2008, worked in the Europe and Africa Business Headquarters and the Stockpiling Business Headquarters, and completed an oil and gas MBA program at Coventry University in London in 2015. He published the bestseller 'How Oil Rules the World,' which covers the modern history of oil. From August to October last year, he gained readers' attention by serializing the column in this newspaper.

Teheran-ro Scenery

[Asia Economy Reporter Shim Na-young] Recently, armed conflicts in Palestine and the possibility of lifting U.S. sanctions on Iran have been major news topics. The conflicts between these parties have a history that led to two oil shocks in the 1970s, which caused tremendous shocks to the world economy and international politics. Those oil shocks are noteworthy at this time of preparing for energy transition because they reveal important characteristics of oil demand.

In October 1973, Arab oil-producing countries artificially reduced crude oil production, demanding Israel's withdrawal from Palestinian territories and the restoration of Palestinian rights. This triggered the first oil shock. The Korean government also issued a 'Pro-Arab Statement' in December 1973 amid the shock of the oil crisis, urging Israel to withdraw from the occupied territories. Although this did not align with the intentions of the allied United States, the impact of oil on the economy was significant. However, the amount of production cut by Arab oil-producing countries for oil weaponization was only about 5%. Moreover, non-Arab oil-producing countries partially offset the impact of the cuts by increasing production. Although the oil shock occurred at the end of 1973, the annual oil consumption that year actually increased compared to the previous year and only decreased by 1.4% in 1974 compared to the previous year (according to BP statistics).

During the second oil shock triggered by the 1979 Islamic Revolution in Iran, oil consumption did not decrease significantly either. At that time, Iran was a major oil producer accounting for about 10% of the world's oil production. Amid the revolutionary turmoil that toppled the Pahlavi monarchy and established an anti-American theocratic regime, oil production temporarily stopped. This marked the beginning of the second oil shock. Korea, which was experiencing rapid growth at the time, suffered negative economic growth in 1980 due to the impact of the second oil shock and other factors. The decrease in global oil consumption caused by the revolution was about 4% compared to the previous year's consumption.

Since then, except for the 2008 financial crisis, oil consumption has maintained an increasing trend. Then, in 2020, when COVID-19 occurred, crude oil consumption decreased for the first time in a long while. As the global economy halted and movement and trade sharply declined, consumption dropped by about 8.7% compared to the previous year in 2020. However, considering the near-global lockdowns and the unprecedented negative oil prices caused by the contraction of economic activity, this decrease is not very large. The reduced crude oil consumption began to increase again even before COVID-19 disappeared, and oil prices have been rising since the end of last year. Although demand for jet fuel remains sluggish, crude oil consumption is expected to recover to pre-COVID-19 levels in the second half of this year.

Jiwung Choi, Researcher at the Petroleum Information Center, Korea National Oil Corporation

Reducing oil demand may be very difficult unless there is a crisis situation such as rapid changes in the Middle East, a global financial crisis, or a pandemic. Carbon neutrality and energy transition efforts promoted by countries worldwide focus on reducing fossil fuel use, which is expected to be an enormous challenge. This year alone, global automobile sales are increasing sharply, and if suppressed travel demand returns, the reduction in oil consumption will become even more elusive.

Changes in oil demand can also cause complex issues in international relations. Oil money significantly contributes to alleviating public dissatisfaction and maintaining regimes in the unstable Middle East. If oil revenues decrease, chronic sectarian conflicts, the Palestinian dispute, the confrontation between the U.S. and Iran, and the Afghanistan issue will plunge into tremendous uncertainty. The impact could extend beyond borders to Europe and the Muslim region of Xinjiang Uighur. Europe's serious concern about refugee issues and China's regret over the U.S. withdrawal from Afghanistan are rooted in the Middle Eastern economy's dependence on oil. The difficulties oil-producing countries face in agreeing on production cuts also stem from an economic structure absolutely dependent on oil revenues. Regime stability depends on this.

Changes in oil demand are not a simple matter for the United States either. Recently, the Financial Times pointed out that there is no discussion of carbon tax in the Biden administration's energy policy. The surest economic means to reduce oil consumption is through carbon taxes and carbon pricing systems. The Biden administration has yet to consider implementing these. A reduction in U.S. oil consumption is a significant burden. The U.S. is the world's largest oil producer, and the oil industry accounts for a large portion of jobs and GDP domestically. More importantly, countries worldwide must first obtain dollars to purchase oil. Korea's top import item is undoubtedly crude oil, and to buy crude oil, it must first secure dollars. Korea uses foreign currency earned from exports to purchase crude oil, thereby supporting the dollar's status as the global reserve currency.

Oil is also an essential resource for energy transition. The Biden administration, which promised a Green New Deal, announced about $2 trillion in infrastructure investments to expand roads, ports, and energy transition. The U.S. oil industry argues that this is actually a positive development. The flagship project of improving transportation infrastructure requires a lot of asphalt, which is derived from oil, and renewable energy projects involve expanding related infrastructure, which requires significant energy consumption. Industry and transportation are absolutely dependent on oil in reality. Perhaps energy transition is the most important mission left for oil.

Korea is more sensitive to oil supply and demand than any other country. After the first oil shock, the Korean government invited the mayor of Tehran, Iran, and named a place in Gangnam, Seoul, 'Teheran-ro.' This reflects Korea's manufacturing-centered economy, which consumes a lot of energy, as the background of this historic event. The task of energy transition is also difficult without oil. Efforts to ensure stable oil supply have the meaning of protecting today's industry and preparing for future energy.