President Lee Jae-myung on the 5th ordered at a Cabinet meeting, "Quickly designate realistic maximum prices by region and by fuel type in connection with the excessive increases in domestic oil prices after the Middle East war." In response, Deputy Prime Minister for Economic Affairs Koo Yun-cheol asked the Ministry of Trade, Industry and Resources to "swiftly review designating maximum oil sales prices under the Petroleum and Petroleum Alternative Fuel Business Act."
Article 23 of the current Petroleum Business Act stipulates the "system for determining and announcing maximum oil sales prices." It says that when oil import or sales prices fluctuate significantly or are likely to fluctuate, the Minister of Trade, Industry and Resources may set a maximum price for oil refiners, importers and exporters, or sellers. It can be called a "fuel price cap."
◇ Oil price cap system has existed since 1970… no cases invoked since the 2000s
The system for determining and announcing maximum oil sales prices has been in place since the Petroleum Business Act was enacted in 1970. For example, from Feb. 15 to March 14, 1994, a determination and announcement of maximum prices was issued for one month. The wholesale (ex-factory) price per liter was set at 171 won 79 jeon for unleaded gasoline and 128 won 73 jeon for diesel. The consumer price ceilings were 608 won per liter for gasoline and 216 won for diesel. Such measures continued until the end of 1996.
Afterward, starting in 1997, oil product prices were liberalized. Refiners were allowed to set prices freely by linking them to international market levels. The Petroleum Business Act was also renamed in 2005 as the Petroleum and Petroleum Alternative Fuel Business Act. A government official said, "Since the law's name was changed in 2005, there have been no instances of invoking the determination and announcement of maximum oil sales prices."
◇ "Many legal provisions are vague, and government price intervention is exceptional"
Spurred by the recent Middle East war, the government began reviewing the application of the system to determine and announce maximum oil sales prices. In effect, it has pulled out a legal provision that had long been moribund.
Experts note, "There are several hurdles to actually invoking it." First, the legal provisions themselves are vague, making it difficult to judge whether the conditions for invocation have been met.
A maximum can be set "when oil import or sales prices fluctuate significantly," but it is unclear how much higher prices must rise than before to be deemed significant. Also, a maximum can be announced "when deemed necessary for stabilizing people's livelihoods and the smooth operation of the national economy," but because the provision is abstract, it may not be easy to conclude that the current situation falls under it.
Fundamentally, there is strong criticism that in a market economy it is undesirable for the government to set prices. Kim Jae-kyung, a research fellow at the Korea Energy Economics Institute, said, "Measures like this, where the government seeks to directly control prices, can be considered exceptional," adding, "When international oil prices surged in the past, the government tried various steps such as cutting the flexible fuel tax rate, but it intervened minimally and indirectly while respecting the market's autonomous functions and authority as much as possible."
Kim went on to say, "If the government actually invokes the determination and announcement of maximum prices, it could set a bad precedent," adding, "There are concerns this could lead to more frequent direct market intervention."