The world’s oil corridor, which had come to a halt, is preparing to reopen. The United States and Iran are set to sign a memorandum of understanding (MOU) ending the war on the 19th at Bürgenstock, Switzerland, local time.
An MOU is a document that sets out a broad agreement in advance of a formal treaty. The draft includes Iran reopening the Strait of Hormuz and pledging not to pursue nuclear weapons in exchange for large-scale economic support.
This was not an ordinary conflict. In the clash between the United States and Israel and Iran that began in late February, Iran blocked the Strait of Hormuz in early March.
About 20% of the world’s crude oil, or 20 million barrels a day, passes through the strait. As the blockade became reality, international oil prices surged above $120 per barrel, and the International Energy Agency (IEA) called it “the largest oil supply shock in history.”
Qatar announced it would suspend LNG exports, and Europe was pushed into another energy crisis. In the United States, a shortage of aviation fuel reduced flights, and one low-cost carrier shut down.
It was not only a foreign issue for South Korea. The country depends on the Middle East for 70.7% of its crude oil imports. More than one-third of naphtha, a key feedstock for refining and petrochemicals, is also imported from the Middle East. As oil prices soared, gasoline exceeded 2,000 won per liter, and low-cost carriers cut international routes because of the aviation fuel shortage.
As expectations for peace spread, oil prices have already fallen about 20% from their peak to around $90. If an agreement is reached, that trend could continue. But the change will not come all at once. The timing and scale will differ by sector, and there are four economic effects of the deal.
◆ Oil prices will fall, but not return to prewar levels
As concerns over a blockade of the Strait of Hormuz ease, international oil prices are expected to face downward pressure, gradually easing the burden of domestic fuel costs. The first effect of the agreement will be seen in oil prices, as the “fear premium” added by the war comes out of prices. Even before actual supply increases, prices that had reflected the risk of a blockade fall on expectations that the route will reopen. Once the blockade is lifted and Iranian crude flows back into the market, supply fears will ease further.
However, a return to “prewar” levels is unlikely. Experts see full normalization of the Strait of Hormuz taking until at least 2027. It will take months for hundreds of trapped oil tankers to pass through the narrow strait, half a year to remove mines laid in the water, and several more months for oil-producing countries that cut output to restore production. As one analyst put it, “Improved sentiment does not mean supply will immediately follow.”
The Korea Institute for International Economic Policy (KIEP) projected that even under an early-end-of-war scenario, oil prices would not return to the prewar level of $63 but would remain around $90, more than 40% above prewar levels. It also estimated that if the blockade drags on, prices could rise to $117, and if the conflict expands, to as high as $174. Because damage recovery at facilities will be slow, even if an agreement is reached, oil prices are likely to decline only gradually rather than collapse.
If oil prices fall, South Korea’s crude import costs will decrease, and gasoline and diesel prices will stabilize with a time lag. According to an analysis by the Korea Institute for Industrial Economics & Trade, a 10% drop in international oil prices lowers average manufacturing production costs in South Korea by 0.71%.
Industries that consume large amounts of energy, such as petroleum products and chemicals, will feel relief. Refineries and petrochemical firms, which make profits from the gap between input costs and product prices, will have a path to restore margins. If jet fuel prices and shipping rates, which had surged on war risks, fall, the cost burden on airlines and shipping companies will also ease. As inflationary pressure subsides, the Bank of Korea will have more room to cut interest rates.
◆ A 454 trillion won “Iran reconstruction boom” opens up
If reconstruction projects in Iran begin in earnest, large-scale orders are expected in the energy, plant, and construction sectors. The draft agreement includes creating a reconstruction and development fund of at least $300 billion, or about 454 trillion won. The fund would be used to rebuild Iran’s energy, logistics, manufacturing, and transportation facilities destroyed by the war.
This is an opportunity for South Korea. According to foreign media reports, companies from South Korea, the United States, Asia, and the Middle East have already pledged more than $150 billion, or about 227 trillion won, more than half of the fund. A notable feature is that this is not a government budget but a private-sector-led investment.
Building roads and ports, power plants and refining facilities, and desalination plants that turn seawater into drinking water are longstanding specialties of South Korean construction and plant companies in the Middle East.
The trend also fits the broader direction. South Korea’s trade with the Middle East has shifted from resource-heavy oil imports to industrial and infrastructure cooperation, exporting automobiles, machinery, plants, and consumer goods. Last year, South Korea’s exports to the Middle East reached $20.4 billion, rising for the fifth consecutive year, and the value of South Korean projects underway in the region has reached 100 trillion won. Iran’s reconstruction would add another massive project pipeline on top of that trend.
Still, the outlook is not entirely rosy. Critics inside the United States are raising objections to the idea that the country that started the war would effectively compensate Iran by mobilizing allied companies. The key issue is whether the fund will actually be implemented as planned or whether it will be derailed by political resistance. As companies around the world target the same market, competition for orders will be fierce. The reconstruction market is clearly an opportunity, but one whose funding execution must be watched closely.
◆ Blocked trade and financial channels reopen
The third change is that the paths for money and goods reopen. The draft includes releasing Iran’s frozen assets for full use, lifting the U.S. maritime blockade, and allowing exports of Iranian crude oil and petrochemical products.
Frozen assets refer to Iranian overseas deposits that were locked up by sanctions and could not be used. Unfreezing them is tantamount to lifting the sanctions fence that has been tightening around Iran.
If sanctions are eased, the Iranian market of 85 million people will reopen. In the past, South Korea sold automobiles, electronics, and home appliances there actively. Trade that was cut off by sanctions could revive.
If shipping rates and cargo insurance premiums, which had surged on war risks, return to normal, the logistics burden for imports and exports will also ease considerably. Shipping routes that had detoured far around Hormuz would become shorter again.
Financial markets are also likely to breathe easier. If oil prices are brought under control, inflation will slow, leading to disinflation, meaning the rate of price increases will decelerate. That would give the U.S. Federal Reserve and the Bank of Korea a reason to lower interest rates.
Money that had poured into safe havens during the war would also be more likely to flow back into risk assets such as stocks. Investor sentiment, which had been heavily suppressed, would recover, and the won-dollar exchange rate, which had swung sharply, could also stabilize.
◆ Variables that could derail the agreement, and South Korea’s task
Of course, every scenario rests on the assumption that the agreement is upheld. There are still plenty of sparks that could weaken that premise. The war’s core issues — nuclear sanctions, frozen assets, and transit fees through Hormuz — have not yet been fully settled.
Another variable is that Israel, which was left out of the talks, could continue its attacks on Iran. There is also speculation that the detailed wording of the MOU could still change up until the moment of signing. If the agreement falls apart, the fear premium that had disappeared would quickly return to prices.
What South Korea needs, then, is not a “bet on peace” but preparation. Even if oil prices fall, they will not return to prewar levels, so diversifying crude supply away from the Middle East and strengthening emergency supply systems must continue regardless of the agreement. Experts are calling for the gradual use of government strategic reserves and private inventories, along with securing alternative shipping routes in advance.
Speed matters when opportunity arises. To secure its share of the 454 trillion won reconstruction market, South Korean companies and the government must work together quickly. Competition for construction and plant orders will begin the moment the agreement is signed.
The lesson of this war is clear: energy and supply chains are tied to the fate of a single strait and a single region. Whether the signing on the 19th becomes the starting point for peace or another spark remains to be seen. What is clear is that, depending on the outcome, many things in South Korea’s economy — from gasoline prices to construction orders and the direction of the stock market — will move together.