The South Korean government has decided to freeze the 8th oil product price cap. Despite recent factors that could lead to price increases due to rising international oil prices, the decision was made considering the burden on the consumer economy from inflation and interest rate hikes. However, with escalating tensions in the Middle East, there remains the possibility of future price increases.
The Ministry of Trade, Industry and Energy announced on July 24 that the 8th oil product price cap, effective from midnight on July 25, will maintain the prices at 1,784 won per liter for regular gasoline, 1,773 won for diesel, and 1,380 won for kerosene. This price cap will apply to oil products supplied by refiners to gas stations over the next four weeks.
The government has been implementing the oil product price cap system since midnight on March 13. The initial price cap was set at 1,724 won per liter for regular gasoline, 1,713 won for diesel, and 1,320 won for kerosene. The second price cap, which took effect on March 27, was set at 1,934 won for gasoline, 1,923 won for diesel, and 1,530 won for kerosene, and the prices have remained frozen up to the 6th cap.
Subsequently, the government announced the 7th price cap on June 26, reducing the supply prices of gasoline, diesel, and kerosene by 150 won each. The 8th price cap announced today remains unchanged from the 7th.
Recently, tensions between the U.S. and Iran have intensified, and the number of oil tankers transiting the Strait of Hormuz has decreased, leading to an upward trend in international oil prices. Additionally, the Houthi rebels' declaration of a blockade in the Red Sea has contributed to this rise, with Brent crude prices reaching $101 per barrel on July 23. On the same day, West Texas Intermediate (WTI) crude was priced at $92, and Dubai crude at $97.
International oil product prices have also increased, with gasoline rising to $125 per barrel and diesel to $168. However, the average international oil prices for July are lower than those in June, with Brent at $82, WTI at $77, and Dubai at $75. This is why the government has not immediately reflected the recent short-term price increases in the price cap.
Furthermore, the domestic consumer price inflation rate has risen to around 3%, and the Bank of Korea has increased the base interest rate from 2.50% to 2.75%, influencing the decision to maintain the price cap. The government emphasized its focus on protecting the consumer economy from fluctuations in international oil prices and minimizing the burden on essential consumers such as truck drivers, delivery workers, and those in agriculture and fisheries.
As a result, domestic fuel prices at gas stations are expected to remain in the current 1,800 won range for the time being. Since the implementation of the 7th price cap on June 27, domestic fuel prices have shown a downward trend, with gasoline priced at 1,871 won per liter and diesel at 1,856 won as of July 23.
Yang Gi-wook, head of the Ministry's Resource Security Division, stated, "We believe that retail prices will either remain at the current level or may slightly decrease for the time being. However, if the situation in the Middle East changes rapidly this weekend or next week, we are keeping the possibility of adjusting the price cap open before the four weeks are up." He noted that while the likelihood of the price cap system ending is low, adjustments to raise prices in response to a surge in international oil prices are likely.
Currently, the price cap is set about 100 won lower than the estimated supply price for gasoline and about 300 won lower for diesel and kerosene. The government believes that the related financial burden can be managed within a reserve budget of 4.2 trillion won. If the price cap needs to be maintained for more than six months, additional measures will be considered, but the government is not currently contemplating a supplementary budget.
Regarding recent allegations of collusion among refiners, the government stated, "It is not appropriate to comment as it is still in the trial process. We will objectively review the materials received from the prosecution and those submitted by the refiners through the settlement committee."
Current measures for stabilizing supply and demand that have expired may be resumed if the situation in the Middle East escalates. Yang added, "We expect the supply and demand situation to remain stable until August, but if necessary in September or later, we will consider restarting measures such as strategic oil swaps and will prepare to implement other diversification measures sequentially."
Regarding the situation in the Red Sea, he noted, "Some refiners are considering alternative routes related to the blockade in the Red Sea, and there are cases of reviewing the Suez Canal. We are examining whether there is anything the government can support if it is deemed to affect supply and demand."
* This article has been translated by AI.
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