A state-run research institute found that the first oil price cap, implemented in response to the Middle East war and a surge in oil prices, lowered March consumer prices by as much as 0.4 to 0.8 percentage points. Last month's consumer price inflation was 2.2%, but the analysis said it could have been as high as 3% without the cap.

The Korea Development Institute (KDI) Middle East War Response Task Force (TF) on the 22nd released analysis results on key policy issues in response to the Middle East war.

As the national average gasoline price exceeds 2,000 won, a gas station in the Steel Industrial Complex in Nam-gu, Pohang, North Gyeongsang Province, sells diesel and gasoline at the same price on the morning of the 20th. According to Opinet, the oil price information system of Korea National Oil Corporation (KNOC), as of 9 a.m. on the 19th, the 10th day of the third petroleum price cap, the national average gasoline price per liter (L) is tallied at 2,000.93 won, up 0.42 won from the previous day. /Courtesy of News1

◇ "Without the price cap, gasoline would have been 460 won more per liter"

First, KDI analyzed the gap between a "virtual price" and the "actual price" assuming there had been no price cap in the fourth week of March. Ma Chang-seok, a KDI research fellow who conducted the study, said, "The point at which we can say the effect of the first price cap (implemented Mar. 13–26) was fully reflected is the fourth week of March."

For the virtual price, KDI first estimated refinery prices based on international petroleum product prices traded in the Singapore market and the won-dollar exchange rate, then used those to derive a second estimate for gas station prices. Recognizing that there is a lag before international oil prices are reflected in consumer prices, it calculated multiple virtual prices by segmenting the international oil prices used by period. For example, scenarios ranged from the assumption that "international oil prices in the fourth week of February apply to consumer prices in the fourth week of March" to the assumption that "international oil prices in the fourth week of March apply in the fourth week of March." KDI then compared these virtual prices with consumer prices posted on Opinet, the Korea National Oil Corporation (KNOC) oil price information system.

Estimated effect of the price cap in the 4th week of March. /Courtesy of Korea Development Institute (KDI)

As a result, the median of the various virtual prices that would have appeared without the price cap in the fourth week of March was estimated at 2,279 won per liter (ℓ) for gasoline. The actual price at the time was 1,819 won, indicating a reduction effect of 460 won. In addition, the virtual prices for automotive diesel and indoor kerosene were 2,732 won and 2,061 won, respectively, while the actual prices were lower by 916 won and 552 won, at 1,816 won and 1,509 won.

Taking into account the item weights of gasoline, diesel, and kerosene in the consumer price index, KDI estimated that this ultimately reduced the overall price index by 0.4 to 0.8 percentage points. Commissioner Ma said, "The farther back the international oil price applied, the smaller the price-reduction effect." Earlier, the Ministry of Data and Statistics (MODS) released that March consumer prices rose 2.2%.

Meanwhile, based on the effect of the gasoline fuel tax cut implemented in the second week of November 2021, Research Fellow Ma also estimated that the fuel tax cut to be fully reflected from April would lower inflation by about 0.2 percentage points.

Minister Kim Jung-kwan of the Ministry of Trade, Industry and Resources observes a tank lorry unloading process during a visit to a privately run Budget Gas Station in Cheongju on the morning of the 16th last month, the fourth day of the petroleum price cap. /Courtesy of Ministry of Trade, Industry and Resources

◇ Hard to see it as the pure effect of the price cap alone… Long-term impact analysis should follow

However, since other policy packages—such as government inspections, crackdowns on hoarding, and the announced implementation of a second price cap—were also in play in March, the study may have over-attributed the outcome to the oil price cap policy alone. Another limitation is that the virtual price calculation method is somewhat simplified, and the estimated effect widens by up to twofold—from 0.4 percentage point to 0.8 percentage point—depending on when international oil prices are reflected in gas station prices.

Given the very short observation period in this study, it appears necessary to also assess the long-term effects of the second and third price caps to gauge the actual impact of the policy.

Separately, through another study, KDI concluded that "there has not yet been a contraction in consumption in March after the outbreak of the Middle East war" and that "because energy burdens on nonrecipients of the basic livelihood guarantee are in fact greater than those on recipients, differential support based solely on benefit status has limits."

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