SEPTEMBER 29 , 2000

Blackout Alert Expensive oil threatens the region's best-recovering economy By LAXMI NAKARMI Seoul

Seoul's neon-bright Kangnam entertainment district could become a lot duller soon if the government decides to strictly enforce just-introduced rules banning neon in an effort to save energy. Meeting in the wake of rising oil prices and the decision by Ford to pull out of its prospective deal to purchase Daewoo Motors, President Kim Dae Jung and his cabinet grimly discussed the nation's problems in a two-hour meeting that seemed much longer on questions than answers. "Do more reform and work together," Kim reportedly told the cabinet. It was the sort of bland instruction that bespeaks a leader at least temporarily out of specific solutions.

Obviously, neither rising oil prices nor Ford's falling fortunes, which probably influenced the company's decision to pull out of the Daewoo deal, are Kim's fault. But that didn't deter nervous investors in the Seoul stock market from selling off a wide range of stocks  the benchmark Seoul Composite index plunged 50 points on Sept. 18, the first day of trading after the Ford-Daewoo deal collapsed and oil prices grabbed the region's attention. The index recovered some of those losses in ensuing sessions, but the damage to sentiment had been done.

Initially, it was the pullout by Ford that grabbed the biggest headlines. But while Daewoo's creditors scrambled to find an alternate buyer  and seemed to re-engage an earlier joint effort by General Motors and Fiat to the possibility  a solution to the oil problem would be much tougher. "Investors are leaving the market because they now fear that South Korea's economic fundamentals may no longer be as good as they were before," said Kim Joo Hyung, senior economist at LG Investment and Securities in Seoul. "The oil price rise and Korea's interdependence on oil is a factor I cannot ignore."

Many analysts feel the same way. Lee Hyo Kun of Daewoo Securities ticked off a list of potential problems brought by expensive oil: "Higher interest rates, a reduction in household disposable income and [depressed] markets. If the oil import price settles at $29 a barrel in the fourth quarter this year [it has topped $35 in recent days], South Koreans could lose about $8 billion in national income, 1.8% of GDP."

Blame for the problem has so far been leveled at Korean manufacturers for being too heavily dependent upon oil. Critics point to statistics like energy consumption in proportion to GDP as a way of proving that South Korean manufacturers are relatively inefficient users of energy compared with developed economies like Japan and the U.S. Some analysts say South Korea's policy of subsidizing energy in the 1970s in a bid to boost manufacturing exports is the culprit.

The criticism may not be entirely fair, however. Singapore-based energy consultant Lee Eng Lock says South Korea uses comparatively more energy than Japan and the U.S. to produce a given amount of GDP because the structure of its economy is different. It has fewer service companies and, in general, lower-value manufactured output than its more developed counterparts. Despite this mitigating factor, it can hardly be a bad thing if the government acts to reduce its own role in setting domestic energy prices. Now if it can just take a lot of talk and turn it into action.

http://www.cnn.com/ASIANOW/asiaweek/magazine/2000/0929/biz.oil_sb1.html

-- Martin Thompson (mthom1927@aol.com), September 22, 2000