The "oil price cap" takes effect at midnight on the 12th. For the next two weeks, refiners must keep the wholesale price of gasoline supplied to gas stations at 1,724 won or less per liter (ℓ). The cap is about 6% lower than refiners' average supply price as of the 11th. As a result, the retail price consumers pay is expected to fall from current levels within a few days. This is the government's first direct intervention in market prices in 29 years since the liberalization of oil product prices in 1997.
This implementation of the "oil price cap" is based on Article 23 of the current Petroleum and Petroleum Substitute Fuel Business Act. The provision says the Minister of the Ministry of Trade, Industry and Resources may set a maximum price for oil refiners, importers and exporters, or sellers when the import and sales prices of oil fluctuate significantly or are likely to fluctuate. It can be called a "fuel price ceiling."
According to the "regulation on designating maximum oil sales prices and restricting excessive exports" released by the government on the day, for the two weeks through the 26th, refiners must charge gas stations no more than 1,724 won for gasoline, 1,713 won for diesel, and 1,320 won for kerosene. Compared with refiners' average supply prices as of the 11th, gasoline is 6% lower, diesel is 11.3% lower, and kerosene is 23.6% lower.
◇ Gasoline up 200 won in 10 days... "Put a cap on wholesale prices to induce retail price cuts"
The price consumers pay for fuel is set by gas stations adding various expenses such as labor and logistics costs and a fixed margin to the refiners' wholesale price. After fuel prices at gas stations surged immediately following the Middle East crisis, the government decided to put a cap on the wholesale price, which corresponds to the import cost, to induce a drop in retail prices. The nationwide average gasoline price at gas stations rose 12.4% (210 won), from 1,693 won per liter on Feb. 26, before the Middle East crisis, to 1,903 won as of this morning.
On not applying a cap to retail prices, the Ministry of Trade and Industry (MOTI) said, "Prices vary widely depending on where the gas station is located and whether it is self-service or not, so we judged it would be difficult to set a uniform price." A senior official at the Ministry of Economy and Finance said, "It is not possible to completely control the retail prices of more than 10,000 gas stations nationwide."
The wholesale price cap was set by multiplying the recent increase in Singapore oil product spot prices by the average wholesale price of oil products in the last week of February, before the Middle East crisis, and then adding various taxes. If a refiner is caught violating the price cap, it may face up to two years in prison or a fine of up to 50 million won under the Petroleum and Petroleum Substitute Fuel Business Act.
If the government determines that the average fuel price has stabilized over the two weeks, it plans to lift the price cap. The two-week application period reflects that it takes an average of two weeks for international oil prices to be reflected in domestic oil product supply prices. If, after two weeks, average fuel prices continue to rise, such as by exceeding the cap, the government will set a second cap. The second cap will be set by multiplying the first price by the recent international price change rate and then adding various taxes.
◇ Refiners cannot increase overseas exports more than last year... government to cover part of the losses
The government notice also states that refiners cannot increase this year's overseas export volumes of oil products beyond last year's levels. This is to prevent refiners from diverting volumes intended for domestic sales to overseas markets. A separate notice banning hoarding by refiners and gas stations will also take effect.
The government decided to cover part of the losses refiners incur from the implementation of the price cap with state funds. Refiners must calculate their losses directly at the end of the quarter and apply to the government. The government will form a "maximum price settlement committee" consisting of accountants, legal professionals, and oil industry experts to verify refiners' losses and then settle the amounts.