The Role of the Oil Industry in the Korean National Economy: An Input-Output Analysis

Abstract

The oil industry has played an important role in the economic development of Korea, but recent skyrocketing oil prices are likely to stunt the Korean economy and prevent it from advancing in the long run. This article attempts to apply input-output (I-O) analysis to investigate the role of the oil industry in the Korean national economy. A static I-O framework is employed, focusing on three topics in its application: the impact of oil supply investment on the production of other sectors and the inter-industry linkage effect; the oil supply shortage effect; and the impact of the rise in oil rate on prices of other products. This article pays particular attention to the oil industry sector by taking the sector as exogenous and then investigating its economic impacts. Moreover, potential uses of the results are illustrated from the perspective of policy instruments and some policy implications are discussed.

Keywords:

• exogenous specification
• input-output analysis
• Korea
• oil industry

Notes

¹This article uses the noncompetitive imports I-O table that does distinguish domestic goods from imported goods because the oil is not concerned with imports by nature, and the objective of this study is related to the measurement of impacts of the oil industry on domestic production (Miller and Blair, 1985). Furthermore, it is appropriate to use the domestic table to analyze inter-industry effects which are ex-post concepts (Jones, 1976).

²If the backward and forward linkage effects of an industry are high and high, high and low, low and high, and low and low, the industry can be classified into intermediate manufacture, intermediate primary production, final manufacture, and final primary production, respectively.

³In October 2007, USD 1.0 was approximately equal to 950 Korean won.

⁴Sector 7 was petroleum and coal products, but the part of petroleum came to belong to sector 29 in the course of exogenous specification.

⁵These values are calculated as a weighted average of sectoral price impacts, considering the total output of each industrial sector.