The domestic oil industry is facing profitability pressures due to the prolonged implementation of price controls on petroleum products, with concerns growing that supply and procurement costs may intensify starting at the end of the year. While there are no significant supply issues until November, uncertainties surrounding the Strait of Hormuz and disruptions to key transport routes in Saudi Arabia suggest that challenges may arise after November.
According to the government and the refining industry on September 21, domestic refiners have secured over 90% of the crude oil volumes expected for September and October, and more than 70% for November. Actual import volumes for July and August also exceeded 100% compared to the previous year. The government believes that, considering the volumes secured so far, the short-term impact on domestic oil supply will be limited.
The issue lies in the time lag. It typically takes 1 to 2 months to transport crude oil from the Middle East to domestic refining facilities. When factoring in the contract timing, there is a 2 to 3-month delay from securing crude oil to its domestic arrival. If supply uncertainties in the Middle East persist, the effects may become apparent starting with the November import volumes.
An industry insider stated, "There is usually a 1 to 2-month lag from the time Middle Eastern crude is loaded until it arrives in Korea and is processed. While we expect no unusual issues from late October to November, if the situation continues, subsequent volumes may be affected, necessitating the securing of alternative transport routes and ongoing monitoring."
Particularly concerning is the disruption to the Saudi East-West Pipeline, which has served as an alternative transport route for oil exports bypassing the Strait of Hormuz. This pipeline connects the eastern oil fields of Saudi Arabia to the Red Sea port of Yanbu, spanning approximately 1,200 kilometers. Recent drone attacks have caused operational disruptions, raising concerns about the capacity for alternative transport of Middle Eastern crude.
If the situation continues, competition for alternative crude oil will also pose challenges. Domestic refiners will need to secure alternative sources from the U.S. and South America if Middle Eastern supplies become unreliable. If countries in Northeast Asia, including South Korea, China, and Japan, simultaneously seek alternative supplies, there is a potential for increased oil prices as well as higher transportation and insurance costs associated with long-distance shipping.
Meanwhile, the prolonged price control system is adding to the burden on refiners. Implemented in March, the price control system restricts refiners from immediately reflecting increases in international oil prices and procurement costs in domestic selling prices. If the situation in the Middle East continues, rising oil prices, along with transportation and insurance costs, could widen the gap between procurement costs and selling prices for refiners.
Compensation for losses is also a key variable. While the government has pledged to support refiners' losses resulting from the price control system, the industry believes it will be challenging to receive full compensation for actual losses. The government calculates support amounts based on objective cost criteria rather than simply accepting the loss estimates provided by refiners.
A refining industry insider remarked, "So far, we have been able to manage with the volumes we secured, but if the situation in the Middle East continues, the impact on incoming crude will be unavoidable. The rising procurement costs, coupled with the limitations imposed by the price control system, present the biggest challenge."
* This article has been translated by AI.
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