In response to instability in the Middle East, the South Korean government has implemented an oil price cap that could cost nearly 5.7 trillion won ($4.3 billion) this year and next. Experts are urging a thorough evaluation of how much the policy has actually reduced consumer prices.
According to relevant authorities, the government introduced the oil price cap at the end of March to address soaring international oil prices due to the ongoing conflict in the Middle East. The 10th price cap, effective from September 19 for the next four weeks, sets gasoline at 1,784 won per liter, diesel at 1,773 won, and kerosene at 1,380 won, maintaining the same levels as the previous cap.
The total financial support for the price cap is projected to reach 5.6497 trillion won over this year and next. The government has secured 4.2 trillion won through a supplementary budget to sustain the program for approximately six months.
However, the price cap has been extended beyond the initially anticipated six months, now reaching its 10th iteration. The Ministry of Trade, Industry and Energy has included an additional 1.4497 trillion won in the next year's budget to cover losses incurred by oil companies if the price cap continues through the fourth quarter of this year.
Despite the significant financial investment, accurately measuring consumer benefits remains challenging. The price cap directly limits the wholesale prices that oil companies charge gas stations, not the retail prices consumers pay at the pump.
Even if wholesale prices decrease, factors such as existing inventory, actual purchase prices, distribution costs, and time lags in price adjustments complicate the transfer of these savings to consumers. Since the implementation of the price cap, fluctuations in average oil prices have made it difficult to determine the net effect of the policy based solely on price changes before and after its introduction.
There is also a need for transparency in the calculation of compensation amounts. The government has established a principle of adding a reasonable margin to the cost of crude oil purchases to assess oil companies' losses. Each company's compensation request is verified by an accounting firm, and a settlement committee composed of accounting, legal, and oil market experts reviews and finalizes the compensation amounts.
However, the lack of clarity regarding the amounts requested by each oil company, the accounting firm's assessments, and the final compensation amounts limits the ability to evaluate the scale and appropriateness of the funds allocated to the price cap. It is essential to assess not only the compensation amounts for oil companies but also how much consumers' fuel costs have actually decreased during this period.
The government maintains that the price cap has been effective in stabilizing prices. The Ministry of Trade estimates that the implementation of the price cap has reduced the consumer price inflation rate by an average of 0.6 percentage points from March to August. In July, the Ministry of Economy and Finance analyzed that the price cap alone lowered the inflation rate by approximately 0.3 percentage points.
As the program continues to impose a growing financial burden, there are calls for the government to validate the effectiveness of the policy by comparing the estimated inflation stabilization effects with actual consumer fuel savings and compensation amounts for oil companies during upcoming national audits. The National Assembly's Legislative Research Service has suggested that, given the limited consumer benefits, criteria should be established for when and how to adjust or terminate the price cap if international oil prices stabilize.
* This article has been translated by AI.
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