The Middle East conflict has reached a critical juncture. Iran has directly attacked a U.S. military base in Jordan with missiles and drones, resulting in the deaths of two American service members and one missing. In response, the United States launched retaliatory airstrikes targeting the Iranian Revolutionary Guard. Iran has warned that it could threaten not only the Strait of Hormuz but also the Bab el-Mandeb Strait, a key gateway to the Red Sea, using Iran-aligned Houthi rebels. The potential for limited clashes to escalate into a broader conflict across the Middle East and major maritime transport routes is increasingly likely.
The Strait of Hormuz and the Red Sea are vital arteries for the global economy. The Strait of Hormuz is a crucial passage for Middle Eastern crude oil and liquefied natural gas, while the Red Sea and Suez Canal provide the shortest route between Asia and Europe. If both routes are blocked or face increased risks, international oil and natural gas prices, shipping rates, and insurance premiums are likely to surge. Rerouting vessels around the Cape of Good Hope would significantly increase transportation times and costs, potentially leading to a compounded energy crisis that could drive up logistics, raw materials, and food prices.
This situation is particularly dire for South Korea, which heavily relies on energy imports. Disruptions to the shipping of Middle Eastern oil and gas would have a cascading effect on industries such as refining, petrochemicals, power generation, steel, automotive, and shipping. Rising oil prices and freight costs would increase production expenses for companies and push consumer prices higher. For households and businesses already struggling with high exchange rates and interest rates, the added cost shock from the Middle East could further undermine domestic demand and investment recovery.
Moreover, the Bank of Korea raised its benchmark interest rate to 2.75% on July 16, citing inflation concerns. If the Middle East crisis prolongs and international oil prices and exchange rates rise again, pressure for further interest rate hikes will increase. While fiscal measures may be needed to defend the economy, the need for tight monetary policy due to inflation could lead to conflicting policy challenges. The war is no longer just a distant foreign policy and security issue; it has become a direct threat to South Korea's economic growth, inflation, interest rates, and livelihoods.
The government must not rely on optimistic scenarios. It should immediately assess energy and logistics contingency plans based on normal operations, partial blockades, and simultaneous blockades in the Strait of Hormuz and the Red Sea. This includes verifying oil and gas stockpiles, potential release timelines, alternative import routes, and vessel availability in collaboration with businesses. Support measures for shipping companies and small exporters regarding freight and insurance costs should also be prepared in advance.
Additionally, a financial market safety net must be established quickly. A surge in oil prices combined with risk-averse sentiment could lead to a decline in the value of the won, foreign capital outflows, and rising bond yields. Authorities must closely manage foreign currency liquidity and be ready to implement market stabilization measures immediately. Adjustments to fuel taxes and energy prices, as well as support for vulnerable groups, should not be reactive but rather based on pre-established response criteria.
Short-term measures alone will not suffice. South Korea must diversify its oil and gas import sources, expand renewable energy and nuclear power, and enhance national stockpiling capabilities to bolster energy security. The diversification of key raw material supply chains and export routes cannot be delayed any longer.
The situation in the Middle East is now beyond the realm of prediction. The government's task is not to speculate on the outcome of the war but to prepare for the worst-case scenario to ensure the economy does not come to a standstill. With the Strait of Hormuz and the Red Sea now in turmoil, it is time to activate the economic security emergency system.
* This article has been translated by AI.
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