International oil prices have surged above $100 per barrel due to renewed price pressures from the ongoing conflict in the Middle East. However, the South Korean government has decided to maintain the fuel price cap for the tenth time. This decision comes as the consumer price inflation rate has risen back to the 3% range, although the decline in the won-dollar exchange rate has somewhat offset the burden of crude oil import costs.
The Ministry of Trade, Industry and Energy announced on September 18 that the price cap for fuel products, effective from midnight on September 19 for the next four weeks, will remain unchanged at 1,784 won per liter for regular gasoline, 1,773 won for diesel, and 1,380 won for kerosene. This price cap applies to the fuel products supplied by refiners to gas stations.
Since lowering the seventh price cap by 150 won per type on June 27, the government has kept the prices stable for the eighth to tenth rounds.
The conflict between the U.S. and Iran, which had shown signs of temporary easing in August, has escalated again this month. Additionally, Houthi rebels have occupied cities near the Red Sea, contributing to a sharp rise in international oil prices. As of September 16, Brent crude was priced at $105.8 per barrel, Dubai crude at $128, and West Texas Intermediate (WTI) at $102.4.
International product prices have also increased, with gasoline reaching $145 per barrel and diesel at $201. Compared to the fourth week of August, gasoline prices have risen by $33, and diesel by $47.
Despite these increases, the government has decided to freeze prices, taking into account the recent inflationary pressures and the decline in the exchange rate. The consumer price inflation rate rose from 3.2% in June to 2.8% in July, before climbing back to 3.1% in August.
The exchange rate has also shown a downward trend. The won-dollar exchange rate fell from 1,505 won in the fourth week of March, when the second price cap was set, to 1,358 won in the third week of this month, a decrease of about 10%. The official selling price of Middle Eastern crude oil has also dropped from a premium of $19.5 per barrel in May to around minus $2 currently. The government believes that the actual burden of crude oil import costs is not as high as when the price cap was last increased.
The Ministry estimates that without the price cap, domestic prices would be over 100 won higher for gasoline, more than 350 won for diesel, and about 300 won higher for kerosene. The price control has also contributed to an average reduction of 0.6 percentage points in the consumer price inflation rate from March to August.
Contrary to concerns that price controls might increase oil consumption, retail sales at gas stations have decreased since the implementation of the price cap. From the second week of March to August, gasoline sales fell by 2.1% and diesel by 8.4% compared to the same period last year. Last month, gasoline and diesel consumption dropped by 1.2% and 8.8%, respectively.
The government currently sees no significant issues with crude oil supply. It has secured over 90% of the necessary quantities, with more than 70% of the November import volume already secured. Although some shipments have been delayed due to attacks on Saudi Arabia's east-west pipeline, refiners are obtaining alternative supplies.
The strategic oil reserve swap system has also been reactivated. Since the reactivation on August 24, swaps totaling 5.8 million barrels have been conducted. The government anticipates an additional swap demand of 9.6 million barrels by mid-November. It is also discussing with the Ministry of Economy and Finance the possibility of extending the freight differential support program, which was implemented from April to June, through December.
However, as the price cap extends beyond six months, the burden regarding financial compensation and exit strategies is expected to grow. The government plans to collect settlement data from the four major refiners by the end of this month to calculate the compensation amount for November and complete the objection process by December. It believes that financial support will be possible within the existing reserve fund of 4.2 trillion won and an additional 1.4 trillion won for the fourth quarter.
Yang Gi-wook, head of the Ministry's Resource Security Division, stated, "We will review the data submitted by the industry, including the four major refiners, by the end of September to determine the settlement amount by November. Although it may take a bit longer, we plan to expedite the process. I believe it can be resolved within the budget prepared by the government."
* This article has been translated by AI.
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