With the cease-fire between the United States and Iran broken and global oil prices surging again, the government is grappling with when to end the oil price cap. The government has imposed a cap on retail prices of petroleum products since March, after war broke out in the Middle East.
As global oil prices turned downward with progress in peace talks, the government lowered the seventh capped price last month with an eye to ending the price cap. But with the war resuming and volatility in global oil prices increasing, the review of when to halt the measure has returned to square one. For now, the government has settled on a "period extension."
The policy to have the government cover refiners' losses from the price cap has also hit a snag with prosecutors' recent probe into alleged collusion among refiners. As the government and the refining industry prepare to calculate the size of the loss compensation, a potential indictment by prosecutors has emerged as a variable.
With the war resuming, the United States re-blockaded the Strait of Hormuz and declared the imposition of tolls, sending global oil prices soaring again. According to Korea National Oil Corporation (KNOC) Petronet on the 16th, as of the previous day in the Singapore spot market, the international diesel price was $146.78 per barrel, up about 27% from early this month ($115.90).
International diesel prices moved around $70 per barrel early this year, then more than quadrupled to a peak of $291.80 on Apr. 2. They fell to around $110 late last month on U.S.-Iran cease-fire talks, only to surge again with the war's resumption. Diesel is an essential industrial material used in large freight trucks, construction machinery and manufacturing, so its price reacts sensitively to supply conditions.
International gasoline prices, which had fallen below $100 late last month, have risen about 11% this month. Gasoline tends to show smaller price swings than diesel.
Taking into account the downward trend in global oil prices following a peace deal, the government lowered the seventh capped benchmarks, implemented from the 27th of last month, by 150 won per liter for both diesel and gasoline. As prices were cut for the first time since the second round of the cap, some read this as a step toward ending the measure.
However, with the Middle East war intensifying again, the oil price cap is expected to remain in place for the time being. The government has previously cited an end to the Middle East war, stabilization of global oil prices below $90, and the effective normalization of navigation in the Strait of Hormuz as conditions for ending the cap.
The eighth capped oil prices to be announced next week are widely expected to be frozen at the seventh-round levels in light of inflation concerns. An energy industry official said, "Even if international petroleum product prices have risen, it is difficult to raise the domestic cap again," and added, "Once the system is ended, it is even harder to reintroduce it, so the government seems to be in a tough spot to decide when to end it."
Yang Ki-uk, head of the Industrial Resource and Security Office at the Ministry of Trade, Industry and Resources, said, "Although international petroleum product prices have jumped suddenly, they are still lower than in March, when the war broke out," and added, "We will consider the timing of ending the oil price cap in light of the overall situation."
The government's promised compensation for refiners' losses, offered in return for implementing the cap, is also expected to face difficulties. In March, the government decided to set a wholesale price ceiling for refiners and cover losses arising from it with the budget. It also earmarked 4.2 trillion won in a contingency reserve for the compensation. The government had planned to launch a settlement committee this month to calculate the loss amount.
However, with prosecutors indicting the four refiners (HD Hyundai Oilbank, SK Energy, GS Caltex and S-Oil) early this month on charges of colluding to fix prices after the Middle East war broke out, the very need for loss compensation is being questioned. Prosecutors are said to believe refiners inflated costs and to have challenged the premise that refiners suffered losses under the price cap.
The refining industry is keeping quiet as legal risk surfaces just as it should begin full-fledged negotiations with the government over the size of the compensation. The industry has long clashed with the government over how to calculate the losses.
The surge in refining margins during the cap period, which improved profitability instead, is also weighing on refiners. According to FnGuide, the four refiners posted a combined operating loss in the 1.2 trillion won range in the second quarter of last year, but are expected to have recorded a combined 5 trillion won in operating profit in the second quarter of this year. With results improving, refiners judge that public opinion is not favorable toward compensating their losses.
Kim Tae-hwan, head of a research lab at the Korea Energy Economics Institute (KEEI), said, "The longer the oil price cap lasts, the greater the fiscal burden on the government," and added, "Compensating industry losses and weakening gas station competitiveness ultimately become invisible burdens on the public."