End-of-war talks between the United States and Iran were concluded on the 14th local time. But Korea's "oil price ceiling" does not appear likely to end immediately. The government has said it can end the oil price ceiling only when three conditions are met: ▲ the end of the war ▲ normalization of the Strait of Hormuz ▲ stabilization of international oil prices below $90.
◇ Government: normalization means reduced price volatility and all Korean ships trapped in Hormuz must exit
According to major foreign media on the 15th, Brent crude was trading at $84 per barrel, down 3.9%, and West Texas Intermediate (WTI) was at $81, down 4.8%. U.S. President Donald Trump said, "The end-of-war deal with Iran has been finalized. I fully approve the opening of the Strait of Hormuz."
The domestic oil price ceiling stemmed from the Hormuz blockade caused by the war. As international oil prices surged due to the U.S.-Iran war, the government set a cap on refinery supply prices on Mar. 13 under Article 23 of the Act on the Business of Petroleum and Alternative Fuels. After six adjustments, the current ceiling is 1,934 won per liter for gasoline and 1,923 won for diesel, and since the 22nd of last month, the adjustment cycle was extended from two weeks to four weeks.
Kim Jung-kwan, Minister of the Ministry of Trade and Industry (MOTI), said, "If the war ends or stabilizes, we have a basic policy to end it as soon as possible." However, it is highly likely it will not end on the 19th, when a decision will be made on whether to implement the seventh price ceiling.
The Ministry of Trade and Industry (MOTI) responded on the 10th to a report that "two of the three conditions, excluding the end of war, have been met," by saying, "The conditions have not yet been created." On international oil prices, it said, "Although prices have fallen somewhat recently, they are repeatedly rising and falling sharply, so it is difficult to judge that instability in international oil prices has been resolved." It noted that only when volatility is seen to be reduced can the condition be considered met.
MOTI also holds the position that the Strait of Hormuz can be considered stabilized only when all 24 Korean ships at anchor have exited. This is expected to take considerable time. In addition to the need to remove mines installed by Iran and secure safe routes, bottlenecks are also expected as about 2,000 ships worldwide make their way out.
◇ Price ceiling becomes a tool to curb inflation… "Even if conditions are met, lifting it can't be guaranteed"
Even if the three conditions presented by MOTI are all met, the price ceiling may be maintained longer. President Lee Jae-myung said at a press conference marking the first anniversary of his inauguration on the 8th, "It seems unlikely that crude prices will return to past levels," adding, "We intend to minimize inflationary pressure through implementation of the price ceiling and support for expense compensation stemming from diversification of import sources."
According to the government, the price ceiling is estimated to have lowered the consumer price inflation rate by 0.6 percentage point (p) in May, 1.2 p in April, and 0.6 p in March. MOTI believes the ceiling reduced domestic gasoline prices by the high-100 won range per liter and diesel by the mid-300 won range. Despite the ceiling, May's inflation rate hit 3.1%, a record high in two years and two months. In particular, petroleum product prices rose 24.2% year over year, driving the increase.