Oil consumption versus GDP set to fall to lowest in 45 years

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SEOUL, Jan. 20 – Domestic oil consumption versus gross domestic product (GDP) in South Korea was expected to fall to the lowest level since 1970 this year, boosting corporate earnings and domestic consumption, according to analysts and data Tuesday.

The ratio of oil import in South Korea’s GDP was forecast to fall to 3.33 percent this year, down from 6.11 percent in 2014, according to the state-run Korea Energy Economics Institute (KEEI).

When excluding oil imports assigned for exports of refined petroleum products, the proportion will slip from 3.15 percent on-year to 1.71 percent this year, the lowest since it marked 1.47 percent in 1970, the KEEI said.

The estimate was based on the 2015 crude prices forecast by the International Monetary Fund at US$56.7 per barrel, a 41.1 percent slump from last year.

The ratio hit 7.85 percent in 1980 in the wake of the 1979 oil shock and remained close to 5 percent in 2011 and 2012. The last time the ratio fell to the 1 percent level was in 1998.

South Korea was expected to save about $18.9 billion from falling oil prices, which would add up to $38.4 billion when combined with the drop in gas and coal prices, the KEEI said, noting the biggest winner will be households, followed by companies and the government.

“Although negative impacts of plunging oil prices have been highlighted, the cost-saving effect will be felt by economic participants starting from the second quarter,” Kim Sung-no, a strategist at KB Investment & Securities, said.

Kim said savings in transportation costs and raw materials will enhance corporate earnings, especially utility firms and airlines.

In South Korea, which heavily relies on crude imports, market watchers expected cheaper oil would improve corporate earnings and boost domestic consumption as individuals would have more money to spend on other things.

If the gasoline prices fall about 20-25 percent this year compared to 2013, the energy cost versus total household consumption was projected to shed 3.53-3.77 percent, according to the state-funded Korea Institute for Industrial Economics and Trade (KIET).

The ratio of energy bills in household consumption was estimated to have declined to 4.3 percent last year, compared with 4.17 percent in 2013, which resulted in hikes in household income.

Although the decrease in transportation expenses was limited from unchanged rates, cheaper oil prices immediately lowered fuel costs.

The average retail gasoline price fell to 1,499.20 won per liter last week, going below the 1,500 won level for the first time in February 2009.

A 10 percent drop in crude prices would increase South Korea’s outbound shipments by 0.55 percent, while slashing local manufacturers’ production costs by 1.03 percent, the KIET said.

Market watchers raised hopes that the improved earnings outlook may push up shares of major exporters, which weighed down on the local stock market last year.

“As companies and households are expected to enjoy benefiting from cheaper oil prices, investors will be hoping for better corporate earnings this year,” Cho Jung-hyun, a researcher at KB Investment & Securities, said. “If the positive earnings prospect becomes reality, there is much room for the benchmark KOSPI to rise.” (Yonhap)