With military tensions escalating between the United States and Iran, South Korea’s shipping companies and airlines are on edge. The safety of the Strait of Hormuz, a major route for Korean shipping companies, has been at stake, and airline losses have been growing due to soaring international oil prices and rising value of the dollar.
With regard to the instability in the Middle East, an official of the country’s largest national flag carrier said on Jan. 7, “There are no specific guidelines yet, but we do not rule out the possibility of the world’s largest oil transportation route, the Strait of Hormuz, being closed.” The strait, only 50 kilometers wide, separates the Arabian Sea from the Persian Gulf. It is a route through which crude oil coming from major oil-producing countries in the Middle East is transported.
About 18.5 million barrels of oil are delivered through the Strait of Hormuz, accounting for 20 percent of the world’s oil shipments. About 80 percent of crude oil passing through the strait is shipped to Asia, including South Korea, China and Japan. Oil tankers are not the only vessels that pass through the strait. A large number of container ships and bulk carriers also go through the strait.
The prevailing view is that Iran is unlikely to block the oil exports of other Middle Eastern countries. “Even the during the 1990 Persian Gulf War, the Strait of Hormuz was not blocked,” said an official of the Korea Shipowners’ Association. “However, the cost regarding safety will rise sharply.” In fact, insurance premiums increased sharply in June last year, when Norwegian and Japanese oil tankers were attacked in the Strait of Hormuz.
Shipping industry insiders believe that as freight rates rise as much as insurance premium hikes, there is no big loss. Indeed, Worldscale (WS) rates for very large crude carriers on the Middle East-Far East Route rose from 77.13 in November last year to 122.33 as of Jan.3 in 2020. In other words, what matters the most is “safety.”
Korean airlines are facing soaring oil prices and a strengthening dollar. The previous day, West Texas Intermediate (WTI) crude oil surged to an eight-month high since May 1. Airlines’ fuel costs account for 26 to 28 percent, the largest portion of the total cost.
If the dollar remains strong due to the preference for safe assets, the burden will be even greater. If oil prices rise one dollar a barrel, it will cost Korean Air an additional 38.5 billion won (US$33.01 million) annually. The carrier will lose 850 billion won (US$72.88 million) annually if the Korean won's value falls 10 won against the dollar.