As the government rushes to implement a price ceiling on petroleum products such as gasoline and diesel to stabilize inflation, concerns are emerging about side effects from an unprecedented policy move.
The refining industry says it will cooperate with the government's policy, but warns that if selling leads to losses, it could ultimately result in a supply crunch for petroleum products. There is also concern that, contrary to the policy's intent, nationwide prices could rise to match the ceiling in a so-called "leveling up" phenomenon.
According to the Ministry of Trade, Industry and Resources on the 10th, the government is proceeding this week with the process of enacting a notice to implement a price ceiling on petroleum products. Specific details are expected to be announced as early as the 13th.
The petroleum product price ceiling to be implemented by the government is expected to set an upper limit on refiners' supply prices by adding a certain margin to international gasoline and diesel benchmarks.
Under Article 23 of the Petroleum and Alternative Fuels Business Act, the government may set a maximum price to stabilize the national economy. However, it has never been implemented since fuel prices were liberalized in 1997. After consumer prices at gas stations rose following the U.S.-Iran war, the government plans to intervene directly to control prices.
The previous day, Minister Kim Jung-kwan of the Ministry of Trade, Industry and Resources noted, "As refiners reflect international oil price increases in domestic prices within a day or two, the public's belief that 'prices rise fast but fall slowly' has grown stronger."
According to Opinet, the oil price information system of the Korea National Oil Corporation (KNOC), as of 12:30 p.m. that day, the nationwide average gasoline price was 1,908.31 won per liter and the diesel price was 1,931.91 won. Compared with the 27th of last month, before the U.S. and Israel's strike on Iran, they jumped 13% and 21%, respectively.
The refining industry is on edge over what will come out of the task force (TF) on setting maximum prices for petroleum. In particular, there is deep concern about being forced into a situation where the government-set ceiling is below appropriate market prices, making each sale a loss.
If the price results in losses, refiners may reduce domestic supply volumes and increase exports. Currently, more than half of petroleum products produced domestically are exported. Some also predict that if a ceiling is set, more gas stations could raise prices toward the maximum.
There are cases where a price ceiling has caused side effects in the market. Although the mechanism differed, Hungary is a representative example that experienced shortages after the policy took effect.
When oil prices surged due to the Russia-Ukraine war, the Hungarian government implemented a price cap in 2021. As fuel in Hungary became cheaper than in neighboring countries, foreign vehicles engaged in "fuel runs," and nationwide shortages occurred. The government ultimately scrapped the policy a year later.
The domestic refining industry insists that concrete loss-compensation measures must be presented. Article 23 of the Petroleum and Alternative Fuels Business Act, which underpins the price ceiling, includes a provision allowing the state to compensate businesses for losses from price controls. The government is said to have already calculated, by scenario, the fiscal resources needed to cover such losses in light of these concerns.
There is also dissatisfaction that the government is adjusting market prices before implementing a fuel tax cut. Cutting the fuel tax, which accounts for a large share of petroleum prices, would be a more immediate method, they say. With fuel prices rising now, tax revenue collected by the government is actually increasing.
Fuel taxes are levies on gasoline and diesel that include the transportation, energy and environment tax (transportation tax), as well as the driving tax, education tax, and value-added taxes. Currently, fuel taxes account for more than 40% of domestic petroleum product prices.
Whenever fuel prices surged in the past, the government first cut fuel taxes. When oil topped $140 per Barrel during the 2008 global financial crisis, the government cut fuel taxes by 10% for 10 months. In 2022, as oil prices spiked due to the war in Ukraine, the government reduced fuel taxes by up to the legal maximum of 37%.
Shin Hyun-don, a professor at Inha University, said, "Even the signal that the government will implement a petroleum product price ceiling could have the effect of lowering domestic petroleum product prices," but added, "There needs to be supplementation on how the domestic ceiling will be noticed during periods of sharp swings in international petroleum product prices and how refiners' losses will be compensated."