The Democratic Party of Korea and the government announced on the 6th that they agreed to abolish the "post-settlement system" for fuel prices. The post-settlement system is a scheme in which refiners and gas stations settle the transaction price of fuel traded over a set period all at once. For example, a refiner supplies gasoline and diesel to a gas station about twice a week for a month and then notifies the transaction price in a lump sum at the end of that month.
The post-settlement system became controversial because gas station fuel prices suddenly jumped right after the U.S. and Israel's airstrikes on Iran. In the past, when international oil prices surged due to war and other factors, there was about a two-week lag before it was reflected in domestic fuel prices, but this time it moved with no lag.
Afterward, criticism followed that refiners and gas stations were trying to profiteer by exploiting unstable international conditions. Some gas stations argued that because the fuel price they received from refiners was opaque, they had no choice but to raise petroleum product prices first, prompting debate over the appropriateness of the system.
What is the post-settlement system, why did the refining industry introduce it, and are independently run gas stations really operating in the dark? We checked them one by one.
Q. What is the post-settlement system?
A. When a refiner supplies petroleum products to a gas station, it does not present a confirmed price. It first delivers at a "temporary price (deposit)" and then, about a month later, confirms the final supply price reflecting market conditions and settles the difference.
If the final supply price is higher than the temporary price at the time of delivery, the gas station must pay the difference to the refiner. Conversely, if the final supply price is lower, the gas station pays that much less when purchasing petroleum products the following month.
Q. Why did this system arise?
A. After the 1997 "liberalization of petroleum product prices," competition for market share among refiners intensified. Before then, all gas stations had the same price, so there was little price competition between refiners and gas stations.
After liberalization, refiners began price competition to increase market share. However, it was difficult to respond to fuel prices that moved differently every day, and they eventually began proposing to gas stations that they would match prices afterward after checking competitors' prices. It then became established as one of the transaction methods between refiners and gas stations.
Q. Must gas stations transact only in the post-settlement form?
A. No. Gas stations can decide how they receive supplies. The price at which a gas station receives petroleum products from a refiner varies by transport distance, contract terms, and volume. Gas stations can choose the method that is advantageous to them.
Even with post-settlement, there are many options, such as monthly average price, month-end price, mid-month price, and price based on five business days. They can also freely choose a daily fixed-price method that settles immediately at the time of sale.
Q. Are there gas stations that prefer the post-settlement system?
A. Gas stations with small storage tanks, fast turnover, and poor cash flow are said to prefer the post-settlement system. When oil prices swing sharply, settling on a monthly average basis can be convenient for gas stations as well.
For example, if a gas station pays cash for each incoming shipment, it suffers a loss when selling fuel bought during a spike after prices fall. Calculating with a monthly average post-settlement can reduce such risks.
Q. What are the risks for gas station operators?
A. Because the final supply price is usually set on a monthly basis, they can incur losses if they set the retail price poorly when fuel prices fluctuate widely.
Even while selling fuel, gas stations do not know exactly how much they paid for that fuel and must operate in a "black box." Fuel sold at 1,700 won may later settle at 1,650 won or 1,750 won. Without knowing the purchase cost, it is hard to set an appropriate retail price.
Most gas stations set their retail prices after checking nearby competitors' prices. If there are budget or company-operated gas stations nearby, price competition is fierce. Conscious of this, if they sell cheap and later receive notice of a high settlement price, they run a deficit. Sales representatives from refiners provide price indications in the meantime, but they are not exact.
Q. What is the impact on consumers?
A. Even when international oil prices fall, gas stations tend not to cut retail prices immediately and keep them conservative because they do not know what the later settlement will be. Conversely, when international oil prices rise, concern about additional settlement prompts them to raise retail prices first. The period after the recent Middle East airstrikes is a representative example.
Q. Is this type of transaction illegal by any chance?
A. The Korea Fair Trade Commission has viewed the post-settlement system as an "unfair practice that undermines price transparency" and has conducted multiple investigations. Each time, refiners argued that it is a "marketing tool for flexible price responses under competitive conditions." In 2013, the Supreme Court ruled that the post-settlement system does not constitute an unfair transaction, so the legal issue is currently considered resolved.
Q. Is there discussion about abolishing the post-settlement system altogether?
A. The Democratic Party of Korea and the government announced that they decided in principle to abolish the gas station post-settlement system. At the third meeting on the 8th, a final plan is expected to be released to abolish the post-settlement practice that had continued as a convention.
Supplying petroleum products is a private contract between refiners and gas stations. It appears the contract terms can be changed sequentially, starting with gas stations that want changes. They plan to add a proviso so that gas stations can use post-settlement if they wish.
The refining industry's position is that the post-settlement system was created simply to offer better terms to its customer, the gas station, and that it can be scrapped immediately without issue.
Q. What is the position of gas stations?
A. Most independently run gas stations currently settle on a monthly average price post-settlement basis. Some reportedly entered into such contracts out of convention for fear of disadvantages, considering their relationship with refiner sales representatives. If the principle from the start is to avoid post-settlement, the longstanding transaction practice is highly likely to change.
However, not all gas stations support abolishing the post-settlement system. Some gas stations choose post-settlement to receive fuel at lower prices than nearby stations. In the past, discussions about abolishing the post-settlement system also emerged, but they fell through as some gas stations opposed it.
The Korea Gas Station Association, which represents the interests of gas stations, is currently collecting opinions from branch heads in each city and province nationwide. The challenge is that gas stations differ in their positions on the post-settlement issue and contract terms are complex. The association believes that, considering the views of the majority of gas stations, it is right to abolish the post-settlement system.