Saudi pipeline strike raises alarm over Korea’s crude oil supply

Last week's drone attack has knocked out the Saudi Arabian pipeline that lets the kingdom route oil around the Strait of Hormuz, putting Korea's crude oil supply on alert as the war in the Middle East escalates.

Korea has secured most of the crude it needs for September and October, so a supply disruption is unlikely in the immediate term. Still, the government held an emergency meeting with refiners Monday, bracing for a possible chain reaction — from tighter supply and higher energy prices to broader inflation — if this month's shipments are affected and the fallout reaches imports arriving from November onward.

Since the Strait of Hormuz blockade, Saudi Arabia has used the roughly 1,200-kilometer (746-mile) East-West Pipeline — which cuts across the Arabian Peninsula — to send up to 7 million barrels of crude a day to the port of Yanbu on the Red Sea for export. Drone strikes hit at least two points along the pipeline on Friday, halting operations. The Associated Press, citing local officials, reported that restarting the pipeline could take several weeks.

Oil prices reacted immediately to the mounting concern over supply disruptions. Brent crude futures rose above $105 a barrel. West Texas Intermediate futures topped $101 and Dubai crude surged to $123.66 a barrel — up 21.3 percent in a week.

At Monday's emergency meeting, the Ministry of Trade, Industry and Resources and refiners reviewed Korea's crude supply position and planned their response.

Refiners told the ministry they had secured more than 90 percent of the crude oil they planned to import in September and October compared to normal levels, meaning the short-term impact should be limited. Crude contracts and shipments are typically arranged two to three months in advance, so the volumes already secured face no immediate problem, according to the ministry.

But if supply disruptions begin affecting cargoes scheduled to ship this month, the impact would likely show up in earnest starting with Korea's November imports. Saudi Arabia accounted for 34.1 percent of Korea's total crude imports as of July, and if the East-West Pipeline's recovery drags on, Korea will need to secure replacement volumes from other regions — likely adding to costs through higher shipping and insurance fees.

To respond, the government plans to mobilize policy tools including its strategic reserve swap program where the government lends reserve crude to refiners once they can prove they have secured oil overseas, then takes the reserves back once the replacement volumes arrive in Korea. The government reactivated the program on Aug. 24 amid renewed Middle East tensions. 

The government is also considering expanding the subsidy it offers refiners to cover the higher freight costs of importing crude from outside the Middle East, an effort to reduce Korea's reliance on Middle Eastern oil.

The spike in global oil prices is expected to weigh on domestic inflation as well. Korea's petroleum price cap system, introduced March 13 and originally intended to run for six months, appears increasingly likely to be extended given the renewed surge in international prices. The government is expected to announce its 10th price-cap adjustment in the near future. Reflecting the rise in international prices would require raising the cap, but higher gasoline and diesel prices risk stoking consumer inflation. 

There is also concern that rising crude prices could spread to liquefied natural gas prices, which are pegged to oil prices with a lag, eventually pushing up electricity and heating bills and other public utility costs.

BY JEONG JAE-HONG [lee.jian@joongang.co.kr]