South Korea braces for ‘worst-case scenarios’ as Iran oil shock deepens

South Korea stepped up its emergency economic planning on Wednesday as Prime Minister Kim Min-seok warned the government must prepare for “worst-case scenarios” from a Middle East conflict that has shown no sign of abating.

The government planned to set up an emergency economic task force, led by Kim, to coordinate cross-ministerial efforts, the prime minister said at a press briefing, according to Yonhap News Agency.

“It is time to step up the government’s preemptive response system to prepare against a prolonged situation, including worst-case scenarios,” Kim said.

The group will convene twice a week across five working groups, overseeing the war-induced impact on energy, the macroeconomy, financial markets and household livelihoods, as well as overseas situation monitoring.

Separately, an emergency economic situation room will also be set up at the presidential office, Kim added.

The moves follow South Korean President Lee Jae Myung’s instruction on Tuesday to activate a preemptive emergency response system, as Seoul stepped up efforts to manage the economic fallout from the conflict.

The Asian country imports around 70% of its crude oil and 20% of liquefied natural gas from the Middle East, leaving the economy particularly vulnerable to prolonged disruptions in energy flows.

The Strait of Hormuz, a narrow waterway connecting the Persian Gulf and the Gulf of Oman and carrying one-fifth of global energy flows, has been effectively closed by Iran since the war began on Feb. 28. The disruption has rattled global energy markets, reigniting inflationary pressures stemming from surging energy prices.

South Korea has rolled out several emergency measures as the Iran turmoil deepened, including imposing a fuel price cap for the first time in nearly three decades to contain a spike in energy prices.

The price caps could lower retail fuel prices by roughly 8% on an annual average basis, Goldman Sachs estimated in a note on Tuesday.

The government has also imposed a five-day, license plate-based rotation system to restrict public-sector vehicle traffic and reduce oil consumption, and urged households to take shorter showers and charge phones during the day.

“Utilities inflation, mainly electricity and gas, is likely to gradually rise from 4Q26E [the fourth quarter of 2026] as the major gas and power companies would act as a price buffer for a while,” Jin-Wook Kim, Chief Korea Economist at Citi, said in a note Tuesday. For now, he said he anticipates limited disruption risks in natural gas imports and domestic gas usage thanks to the government’s efforts in diversifying energy sources.

The government has sought to pivot to coal as an alternative source, removing an 80% maximum operation limit, and nuclear energy by raising the nuclear power plant utilization rate from around 70% to over 80%.

The ongoing energy crisis has exposed the vulnerability in Korea’s energy mix, said Park Seok Gil, chief Korea economist at JPMorgan, noting that “we need to price in the possibility of supply shocks and further disruptions.”

He also urged the government to expand nuclear power as well as bringing more renewable energy into the equation. “We need to be better prepared for any kind of a shock in the pipeline,” he told CNBC’s “Squawk Box Asia” on Tuesday.

On March 5, ​President Lee unveiled a 100 trillion won ($66.9 billion) financial market stabilization fund and urged officials to step up efforts in curbing volatility in the financial and foreign exchange markets.

“Fiscal policy is the first line of defense as of now,” Gil said, while for monetary policy, he said the Bank of Korea will likely keep rates elevated to contain inflation pressure.