The Israel-Hamas War began when Hamas attacked Israel on October 7, 2023. The international communityremains alertly attuned to the war’s developments, not least because conflicts in the Middle East havehistorically tended to fuel oil price hikes. Thus far, however, the war has not yet exerted a significant effecton global oil prices, as neither belligerent in the conflict is an oil producer. However, if a third-party countrysuch as Iran enters the war, the international price of oil could well rise to USD 150 per barrel.

Rising oil prices exert inflationary pressure first by directly increasing import prices. In South Korea, risingoil prices have been associated with higher prices of imported raw materials and intermediate goods since2000. Higher input costs significantly raise the cost of business for Korean firms. Should business revenuesfail to rise at the same pace as costs, firms stand to experience losses. Our analysis of different Korean industriesreveals that rising prices have significantly elevated material costs for the chemical, primary metal,and petroleum refinery industries, with the impacts on the profitability of the chemical industry particularlysevere. Our analysis also shows that the income terms of trade worsened especially for Korean chemicaland steel exports under war-induced oil price hikes, while the income terms of trade for the semiconductorand automotive industries actually improved over the same period of time.

Geopolitical factors can lead to abrupt fluctuations in oil prices, making it is critical to remain abreast of developmentsin the Israel-Hamas War. Moreover, the Korean government needs to monitor oil prices closelyso as to take timely and proactive policy actions that ensure stability in domestic oil prices. Policy supportshould also be tailored to the needs of industries that are especially vulnerable than to oil price hikes, whilemeasures should be introduced to enhance the competitiveness of their products. In the long run, moreinvestment should be made in developing alternative and renewable energy sources.