As diesel prices traded on the international market have jumped to more than double their levels before the U.S. and Israel's Iran airstrike, breaking 2,000 won per liter (L), the government's quandary is deepening. This is because the domestic retail price excluding taxes is about 1,000 won cheaper than the international transaction price, making it difficult to correct the gap by reflecting it as is.
The government is set to release the third maximum petroleum price on the 9th, to take effect on the 10th. The government sets the new maximum price by applying the rate of change in international petroleum product prices to the transfer maximum price. As a matter of principle, it should set a higher increase for diesel than for gasoline. But because diesel is mainly used for livelihoods—by commercial vehicles, ships, and agricultural generators—setting a higher price could draw public backlash.
According to Opinet, the oil price information system of the Korea National Oil Corporation (KNOC), on the 9th diesel on the international market transacted at 2,585.46 won per L as of the 6th. That is 636.25 won more expensive than the domestic average retail diesel price (1,949.21) on the same day. Excluding fuel taxes, the gap between international diesel prices and domestic diesel prices widens to 1,072.25 won. International diesel prices even surged to 2,776.9 won on the 2nd.
For gasoline, the gap between international and domestic prices is smaller than for diesel. Considering that taxes are not included in international product prices, if you subtract fuel taxes from domestic retail prices, as of the 6th the domestic gasoline price (1,260.37 won) is 85.03 won cheaper than the international gasoline price (1,345.4 won) on the same day.
The reason the diesel price gap is larger than gasoline when comparing international petroleum product prices with domestic prices is that the government has set gasoline higher than diesel through the petroleum maximum price system. The first maximum gasoline price applied from Mar. 13 was 1,724 won, and diesel was 1,713 won, making gasoline higher. The second maximum petroleum price released on Mar. 27 also set gasoline (1,934 won) higher than diesel (1,923 won).
When releasing the second maximum petroleum price, the government raised both gasoline and diesel equally by 210 won. Although the increase in diesel prices on the international market was larger, it was not reflected. As a result, there is speculation that the government may again not reflect the full amount of the international diesel price increase in the third maximum petroleum price.
From the implementation of the second maximum petroleum price through the 6th, diesel on the international market rose 14.75%, and gasoline rose 8.81%. It is said that there is considerable internal debate within the government over setting the diesel maximum price. The energy industry expects the government is likely to keep diesel cheaper than gasoline again this time.
An official at the Ministry of Trade, Industry and Resources said, "While the principles of the maximum price system include considering the public burden and price signals, there is also the aspect of considering livelihood consumers, truck drivers, delivery workers, farmers, and fishers," adding, "We are giving more consideration to diesel than to gasoline."
Experts worry that the government's price setting could cause side effects if it continues for a long time.
Lee Hong, associate research fellow, and Hong Sung-uk, senior research fellow, at the Korea Institute for Industrial Economics & Trade (KIET) said in a report released on the 23rd of last month, "The petroleum maximum price system can help curb rapid price spikes and ease consumer burdens in the short term," but noted, "If the policy is prolonged, it could lead to issues such as expanded fiscal compensation or supply reduction."
Shin Hyun-don, a professor in the Department of Energy Resources at Inha University, said, "It is also necessary to reduce energy consumption, but if domestic market price increases continue to be restricted, it becomes difficult to control demand through prices."