Korea still nervous about inflation as Iran embargo looms

The euro crisis is on the radar in Seoul, but South Korea’s central bankers are at least as worried about soaring oil import prices as Iranian crude supplies taper off.

Image courtesy Taylor & Yumi: http://www.flickr.com/people/taylorandayumi/

Vertical growth in Wangsimini, Seoul

The Bank of Korea voted Friday to leave the country’s interest rates unchanged for the tenth month in a row, warning that global risks are balanced between “debt problems in European countries” on the growth side and the Middle East on the inflationary side.

Korea has historically bought about 10% of the 2.4 million barrels a day of imported oil it uses from Iran.

While the country has promised to curtail its trade with Iran to comply with U.S. sanctions, it still currently buys about 215,000 barrels of oil a day — at a reported discount of $2 to $3 per barrel.

While paying an $650,000 a day to meet Korea’s energy needs will not exactly bankrupt one of the world’s biggest economies, it assumes that reliable replacement supply can be found.

A full-fledged interruption of Iranian oil will knock 2.6 million barrels a day off the market for most consumers, leaving only countries willing to defy the United States — China and India — able to access that fuel.

Korea has requested an exemption. In the meantime, while inflation is currently moderate at around 2.6%, the odds of an oil shock are high enough to keep the Bank of Korea on edge.

Other countries that are especially exposed to Iran include South Africa (EZA, quote), which derives nearly 30% of its petroleum from Iranian sources.

As a member of the European Union, Turkey (TUR, quote) has also been forced to find new oil partners to cover its import needs.

The upshot here is that any uptick in crude (BNO, quote) will act as an additional drag on these economies from here. If BNO rises, Korean stocks (EWY, quote) are likely to slow or go into reverse — at least until the Iranian situation is resolved.