The sharp rise in the price of oil over the past year is one of the primary causes of rising inflation around the world. The high cost of oil affects every sector of the economy, making it more expensive to produce and move goods at all points in the supply chain. As prices rise, workers require higher wages, which adds to inflationary pressure. Inflation affects lower income workers and retirees most because the increase in the cost of basic goods, such as food and transportation, often outpaces the increase in discretionary goods and services.
Higher fuel costs have begun to have a noticeable effect on consumer behavior. People are driving less and canceling summer vacation plans that involve long drives. The jump in airfares is causing people to postpone longer, more expensive trips in favor of shorter trips. Demand for electric cars, meanwhile, is increasing, as people look for ways to save money.
The surge in inflation caught governments around the world off guard. During the pandemic, central banks adopted an easy money policy to keep the economy alive amid lockdowns and other restrictions on commerce. The sudden surge in inflation forced them to do an about-face and raise interest rates to slow the economy and reduce inflation.
Political leaders facing pressure from angry citizens have found themselves searching for ways to reduce the cost of energy. Early in the inflationary surge, US President Joe Biden released oil from the strategic reserve in the hope of calming the market, but it did nothing. Recently, he proposed a three-month gas tax holiday, but experts have argued that the benefits would be limited.
Frustration with inflation has affected efforts to move away from fossil fuels negatively. The scientific community has concluded that human behavior, mostly in the form of fossil fuel consumption, is responsible for climate change. The scientific community has also documented the effects of climate change on human and other forms life. Most people agree with the scientific community, but they feel it less than the sharp rise in the price of gas. Politicians respond to these frustrations and have shifted their focus away from climate change to increasing the supply of oil in the hope of reducing the cost.
For South Korea, the situation offers a chance to project itself as a model of competence for others to follow as it did in the early days of the COVID-19 pandemic. This in turn helps push the country into a leadership role on reducing fossil fuel consumption. Reducing consumption also helps improve the trade balance and makes the economy less susceptible to external shocks.
Like other advanced countries, South Korea’s fossil fuel consumption is divided between producers and consumers, and any successful effort must include both groups. Producers, particularly large companies, can lower production costs by switching to renewable sources. Some producers are leaders in renewable energy technology, which gives them an extra incentive to continue the move to renewables.
Consumers, already battered by inflation, have a harder time switching to renewable energy. Electric vehicles are a key component, but they are more expensive than gas cars, and consumers worry about the availability of charge points. South Korea has made rapid progress in developing an EV charging network. A recent report by International Energy Agency ranked the country No. 1 in the number of charging points per electric vehicle, which bodes well for future growth. Production of EVs has increased rapidly, which should help prices move closer to gas cars.
As of 2018, 59 percent of South Koreans lived in apartments. Continued construction means that figure has now crossed 60 percent, and will continue to increase. Compared to detached houses, apartments are more energy efficient, and the concentration of people makes it easier to switch large numbers of people to renewable energy quickly. Not all South Koreans live in apartments, particularly in smaller cities and rural areas. Few older homes have solar panels and many need energy efficient upgrades. Housing policy makers need to develop a housing energy policy to help these homeowners as well those in older apartments.
Infrastructure has been one of the keywords in the story of South Korea’s development. In times of economic transition, the country has moved quickly to build the infrastructure and implement policies needed to take the lead in the transition. None of this will be easy, but when South Korea harnesses the will to act, it makes things happen. The world is waiting for it to do so.