The Koreas | Economy | East Asia

The Economic Consequences of the Iran War Reverberate in South Korea

It’s not just energy: South Korea’s stock market, industrial supply chains, and export markets have all been impacted.

Iran may be geographically distant from South Korea, but in an interconnected world the consequences of wars are no longer local. Their economic effects ripple across regions, especially for highly integrated global economies such as South Korea. While the disruption to energy supplies from the war has been a concern, shocks to interconnected supply chains for industrial inputs and exports are also placing pressure on the economy.

The most immediate consequences of the Israeli-U.S. decision to attack Iran have been felt in South Korea’s domestic stock market, foreign exchange rate, and prices. The KOSPI, South Korea’s main stock index, suffered its largest ever decline when markets opened after the war began, falling a total of 18 percent over first two days of the war. KOSPI has since partially recovered but remains 13 percent below its pre-war value with the war in its fourth week.

Concerns about the broader impact on the Korean economy have driven the won to levels not seen since the Global Financial Crisis. In recent trading, it has hovered around 1,500 won to the U.S. dollar. The decline in the won adds to inflationary pressures as energy and other input prices rise due to tightening supply. Some of this may be offset by increased price competitiveness for South Korean exports. 

With concerns growing about price gouging, Seoul has taken the extraordinary step of imposing price caps on refined petroleum products for the first time since 1997, while also establishing price monitoring for 23 essential items to prevent excessive price hikes. 

If the war is relatively short, each of these pressures is manageable. However, should the conflict persist for up to three months it would likely decrease South Korea’s growth rate by 0.3 percent. 

The longer the war drags on, the greater the odds that the South Korean economy enters a period of stagflation – stagnating economic growth and higher inflation. An extended war also increases the potential for negative shocks from supply chain disruptions and declining exports. Should the conflict persist for a year, it would likely push South Korea’s growth rate to zero. 

While the Middle East only account for roughly 3 percent of exports, the region is a significant market for certain firms, and slowing global economic growth would reduce demand for South Korean exports more broadly. 

South Korea’s Exposure to Middle East Energy Market Disruptions

Pressures on South Korea’s stock market, the won, and prices are being driven by the disruption to petroleum and LNG exports from the Middle East. South Korea imports 62 percent of its petroleum from inside the Strait of Hormuz, while 20 percent of its LNG comes from the region. Early estimates form the International Energy Agency (IEA) expect overall global oil production to decline by 8 million barrels per day in March, or 7 percent of production, while Goldman Sachs estimates that the disruption to Qatar’s LNG production has pulled 19 percent of the world’s total production offline. 

Because of South Korea’s lack of domestic petroleum and gas reserves, it maintains a strategic stockpile equivalent to over 200 days of petroleum. In coordination with the IEA, Seoul plans on releasing 22.46 million barrels of oil from its strategic reserve as part of a larger international effort to bring additional supply to markets and stabilize prices.

It is less clear, however, how sufficient South Korea’s LNG reserves are. Regulations require South Korea to maintain nine days’ worth of supply, but the government indicated that it has significantly more. This could become a more serious issue, as recent Iranian strikes on Qatar are reported to have caused damage that will keep 17 percent of Qatari production offline for three to five years.

Rising prices and shortages of fuel oil, which powers container ships, and jet fuel are also impacting South Korea. Fuel oil prices have increased by 87.5 percent since the beginning of the war. Jet fuel prices have also surged. Higher fuel costs, combined with the weakening won, are hitting the airline industry particularly hard: jet fuel prices have doubled and Korea Air has tripled its fuel surcharge on some routes. 

South Korea is taking steps to manage energy shortages and rising prices. As one of the region’s major refiners of crude petroleum products, Seoul has capped exports of gasoline, kerosene, and diesel at 2025 monthly levels in an effort to manage domestic supplies. South Korea has also raised production caps on nuclear and coal power plants to ease any disruption to electricity production from LNG shortages. Lastly, the government is taking steps to ease the burden of energy cost increases on the public.  

Supply Chain Disruptions Extend Beyond Energy 

The Middle East’s role in global energy production is the focus of much of the world’s attention, especially now that Iran has confirmed its intention to essentially keep the Strait of Hormuz blocked. However, other key inputs for the South Korean economy are produced in the Middle East. In a list of 41 key items for South Korea’s industrial supply chains, 70 percent were supplied by imports from the Middle East, particularly Turkiye, Saudi Arabia, and Israel.

One of the most immediate concerns is the supply of naphtha, the core feedstock for South Korea’s petrochemical sector, which generates roughly 7 percent of the country’s exports. Shortages of naphtha and propylene have already forced LG Chem to declare force majeure on exports of dioctyl terephthalate, a key plasticizer used in a range of thermoplastic products. Even basic goods such as plastic trash bags are now facing production delays. Yeochun NCC has also declared force majeure, and Lotte Chemical and other major producers warn they may have to follow if supply constraints persist. And the South Korean government has now placed restrictions on the export of this critical input.

The disruption in naphtha extends to high-value industries like automotives, healthcare, shipbuilding, and consumer industrial goods. Naphtha is used to produce ethylene, which is used in a wide variety of parts in the the automotive industry. The healthcare industry uses ethylene to produce medical grade plastics, while the........

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