As the government implemented the oil price cap at 12 a.m. on the 13th, the refining industry is more worried about potential disruptions in crude supply due to a prolonged war between the United States and Iran than about the possibility of margin declines. Regardless of whether fuel prices are high or low, refiners must procure crude they can refine, but with the Strait of Hormuz effectively closed, if the current situation continues, the flow of crude departing the Middle East and arriving in Korea could be cut off by late March to early April.
The refining industry said it would actively participate in the government's price cap, but noted it is currently difficult to calculate whether margins will rise or fall because it cannot tell the criteria for setting the ceiling on the prices refiners will supply to gas stations.
The Ministry of Trade, Industry and Resources set a ceiling on the fuel supply prices that refiners provide to gas stations as of 12 a.m. on the 13th. After the U.S. and Israel's airstrikes on Iran pushed domestic gasoline prices above 1,900 won, the government directly intervened in petroleum product prices for the first time in 29 years since oil price liberalization in 1997.
The first cap the government released is, after tax, 1,724 won per liter (L) for gasoline, 1,713 won for diesel, and 1,320 won for kerosene. According to the government, compared with the average supply price on Mar. 11, gasoline is 109 won cheaper per liter, diesel 218 won, and kerosene 408 won. The prices will apply for two weeks until the 26th. After that, the government will announce the cap every two weeks, reflecting changes in the Singapore spot market price, the benchmark for international petroleum product prices.
The cap the government released is higher than the average supply price in the fourth week of Feb., before the Iran airstrikes (gasoline 1,616.18 won, diesel 1,545.6 won), and lower than the average supply price in the first week of Mar., after the war began (gasoline 1,766.05 won, diesel 1,809.89 won). It shows that while lowering the retail prices that soared after the war, the government still reflected part of the increase in international petroleum product prices.
However, the government did not disclose the period that serves as the baseline for the rise in international petroleum product prices. It only explained that it set the cap by multiplying the fourth week of Feb. refiners' supply price (pre-tax) by the increase rate of international petroleum product prices over a certain period and then adding fuel taxes. Depending on the period used to calculate the increase rate, refiners could end up losing money compared with exporting, a point that could draw complaints.
◇ If Middle Eastern crude cannot be secured, there will be nothing to sell whether prices are low or high
Even as government price controls begin, the refining industry says in unison that securing crude is more important than the cap. Even if margins shrink, without crude, they cannot export or sell petroleum products domestically. If difficulties in securing crude prevent them from running refining facilities, there could be extra expense when restarting plants.
Multiple refining industry sources said, "There are some tankers passing through the Strait of Hormuz and heading to Korea," but added, "Since Feb. 28, right after the war broke out, ships carrying Middle Eastern crude have been unable to pass the Strait of Hormuz, so crude supply is our biggest concern."
It typically takes a little over a month for Middle Eastern crude to reach Korea. A ship that last passed through the Strait of Hormuz on Feb. 28, the day of the airstrikes on Iran, is scheduled to arrive in Korea on Apr. 3. More than 95% of Middle Eastern crude bound for Korea passes through the Strait of Hormuz.
A refining industry source said, "By late March to early April, the tankers departing the Middle East and entering Korea will disappear," adding, "If the war drags on, even if gasoline tops 2,000 won per liter, we may have to be grateful just to have fuel to pump."
Moreover, about 70% of the crude that the four refiners bring into Korea is from the Middle East. S-Oil, whose largest shareholder is Saudi Aramco, is known to source more than 90% of its crude from the Middle East. The share of Middle Eastern crude is about 70% for SK Energy and GS Caltex, and HD Hyundai Oilbank sources about 60% of its crude imports from the Middle East.
Reducing run rates to keep facilities operating after late March is not a realistic option either. With international petroleum product prices surging, they need to maintain export volumes now to earn profits. In the Singapore oil market, international gasoline and diesel prices in the first week of Mar. rose 28.1% and 50.32%, respectively, compared with the fourth week of Feb., before the war.
A refining industry source said, "Refiners around the world all use the same feedstock to make the same petroleum products," adding, "Fuel sold domestically accounts for only part of sales; exports make up a significant portion."
As of the cumulative third quarter last year, the export share of the refining business at HD Hyundai Oilbank and GS Caltex was 88% and 71%, respectively. SK Energy's refining business export share was 51%, and S-Oil's refining business export share was also more than half at 54%.
◇ Government preparing to release 22.46 million barrels of stockpiled oil…"Discussing order and ratio with the private sector"
Even if there are disruptions in Middle Eastern crude supply, the country can hold out for the time being. Korea holds a total of 190 million barrels of oil in storage, including about 100 million barrels of government reserves and about 90 million barrels of private inventories. By International Energy Agency (IEA) standards, that is 208 days' worth.
Earlier, the Ministry of Trade, Industry and Resources announced on the 11th that, in line with a decision at an emergency IEA Governing Board meeting for 32 member countries to jointly release a total of 400 million barrels of stockpiled oil, it will release 22.46 million barrels. The IEA's joint release of stockpiled oil is the first in about four years since the joint release during the Russia-Ukraine war in 2022. Korea released a total of 11.65 million barrels in two rounds at that time.
A Korea National Oil Corporation (KNOC) official said, "As a rule, private inventories are released first, but given the large size of this joint release, we are currently discussing the order and ratio of whether to release private inventories first or government reserves first."