Fuel price cap held as oil tops $100, losses mount for refiners

The government is expected to hold fuel price caps unchanged when it announces the 11th round of petroleum product ceiling prices Friday, even as international crude oil prices have climbed back above $100 per barrel amid escalating geopolitical tensions in the Middle East. With the price ceiling regime now in its seventh month, concerns are growing over the mounting cost of compensating refiners for their losses — and over signs that the policy's effect in curbing consumption may be fading.

Deputy Prime Minister and Ministry of Economy and Finance Minister Lee Hyung-il said at emergency economic headquarters and economic ministers' meetings Wednesday that "the 11th ceiling prices, effective from midnight Saturday, will be announced at 6 p.m. Friday."

The 11th round is widely expected to maintain the caps set when the regime was first announced on June 26: 1,784 won per liter for gasoline, 1,773 won for diesel and 1,380 won for kerosene. Analysts see little reason to adjust prices, as international crude has not moved significantly since the 10th ceiling was announced on Sept. 18.

Brent crude for December delivery, the global benchmark, closed at $105.92 per barrel Thursday (local time) on the New York Mercantile Exchange, down 14 cents, or 0.13 percent.

Oil prices ended with modest gains despite increased crude exports from the Middle East, as markets weighed the possibility of a large-scale US military operation against Iran resuming and the risk of supply disruptions from expanding tanker attacks in the region. Dubai crude, the benchmark for South Korea's oil imports, stood at $108.0 per barrel, up $0.20 from the previous week.

International gasoline prices rose $3.10 to $147.40 per barrel, while international diesel prices fell $4.20 to $170.10 per barrel. Changes in international oil prices typically take two to three weeks to feed through to domestic pump prices.

The government has maintained the price ceiling regime to shield domestic fuel prices from international oil price swings and keep consumer prices in check. However, the fiscal burden of compensating refiners for losses incurred under the controls has been growing.

The government earlier allocated 4.2 trillion won ($3.11 billion) in reserve funds through a supplementary budget to cover industry losses under the petroleum price ceiling regime. It has also set aside 1.45 trillion won in next year's budget to cover refiner losses in the fourth quarter of this year.

According to data submitted to People Power Party lawmaker Jo Ji-yeon of the National Assembly's Trade, Industry, Energy, SMEs and Startups Committee, the Ministry of Trade, Industry and Energy calculated that compensating refiners for losses would require 1.5 trillion won for every 100-won gap between the uncapped market price and the government-set ceiling.

In other words, if the difference between the estimated uncontrolled price and the government ceiling stood at 100 won, the ministry judged that 1.5 trillion won would be needed to make refiners whole.

The ministry collected cost data and company-specific documentation from refiners by Sept. 30, covering losses incurred from March 13 through June 30. Based on that data, a settlement committee plans to establish common standards and finalize settlement prices by the end of next month, factoring in each refiner's costs and appropriate margins.

Meanwhile, domestic gasoline consumption in September rose nearly 3 percent from a year earlier, according to data submitted by the Korea Petroleum Management Institute to the office of People Power Party lawmaker Yun Han-hong of the same committee. Gasoline consumption last month reached 1,260,926 kiloliters, up 2.97 percent from 1,224,614 kiloliters in September last year — the first year-on-year increase since March. The uptick came even as the number of gasoline-powered vehicles on the road slipped 0.7 percent, from about 12.4 million in August last year to about 12.3 million in August this year.

Kerosene consumption also rose 10.45 percent from the same month last year — likewise the first year-on-year increase since March.

Domestic gasoline consumption had surged 3.95 percent year-on-year in March, immediately after the outbreak of military clashes between the United States and Iran, before declining each month from April through August.

The government had argued that the petroleum price ceiling regime, which took effect March 13, succeeded in restraining consumer price inflation while also curbing consumption to some degree.

As the period of price controls has lengthened and consumers have grown accustomed to the capped prices, consumption appears to have rebounded in September. The trend has fueled growing public debate over the need for an exit strategy, with many arguing that price controls lose effectiveness over time.

Bank of Korea Governor Shin Hyun-song, testifying at a national audit session Monday, said the petroleum price ceiling had "blocked the transmission channel through which the initial price shock could have fed into cost pass-throughs or core inflation," but cautioned that "price controls should not be implemented long-term — a temporary regime is most desirable."