Concerns over a prolonged war in the Middle East are spreading into what economists describe as a "compound shock," shaking both financial markets and the real economy. The growing fear that the conflict could become a stalemate has intensified market volatility.
The impact was immediate. Korea's benchmark Kospi plunged more than 8 percent before recovering slightly to close down 5.96 percent. At one point during trading, the index briefly fell below the 5,200 level. The Korean won also weakened sharply, with the dollar-won exchange rate approaching 1,500 during the session.
Global oil prices surged as well. West Texas Intermediate crude, which had already climbed past $100 per barrel, jumped nearly 25 percent at one point during the day. The sharp increase has heightened fears that the world economy could face another oil shock if the conflict drags on.
One critical variable in determining the economic outlook is the Strait of Hormuz. About 20 percent of the world's seaborne oil shipments pass through the narrow waterway. Any disruption there could drive global oil prices even higher.
The effects are already being felt domestically. The average price of gasoline in Korea has surpassed 1,900 won per liter ($4.90 per gallon). Analysts warn that a Middle East conflict could trigger what some call a "fourth oil shock."
Korea's vulnerability is particularly high because it ranks seventh in the world in oil consumption and relies heavily on imports, most of which come from the Middle East. In such a structure, any regional disruption quickly spreads to both industry and households.
If high exchange rates, rising oil prices and accelerating inflation occur simultaneously, companies face mounting cost pressures while consumer spending weakens. Economic growth then slows further. This combination has revived fears of stagflation — often referred to in Korea as the return of "S fears."
The challenge is compounded by the relatively fragile state of the domestic economy. The government's economic growth forecast of around 2 percent for this year assumes international oil prices in the low $60 range per barrel. If oil prices remain elevated for more than a few months, the economy could face a dual shock of slower growth and rising inflation.
Under such circumstances, policy responses must remain realistic and carefully targeted.
During an emergency economic review meeting on Monday, officials discussed introducing a temporary gasoline price cap as early as this week. Yet artificial price controls are difficult to sustain and risk distorting the market.
Instead, support should focus on sectors most directly affected, including vulnerable households and industries such as transportation and logistics that face immediate fuel cost increases.
At the same time, longer-term structural responses are needed. Efforts to promote energy conservation and expand alternative energy sources should be accelerated.
The trajectory of the conflict remains uncertain. For policymakers, the priority must be to stabilize financial markets, secure energy supplies and contain inflation at the same time. Only through coordinated measures can the economy withstand the compound shock now unfolding.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.