SEOUL — South Korea's government is deepening deliberations on an exit strategy for its oil price cap, which has been in effect for more than seven months, as the rise in global oil prices above $110 a barrel complicates the timeline for ending the programme, Aju Press reported on Sunday, October 25.
Source: Aju Press
According to the Korea National Oil Corporation figures cited by Aju Press, Brent crude rose to $116.72 a barrel on October 23, up 3.14 percent from the previous trading day and its highest level in about six months, since April 29. West Texas Intermediate rose 3.8 percent to $103.27. Aju Press attributed the spike to supply-disruption concerns from attacks on Saudi Arabian energy facilities by Houthi rebels and maritime uncertainty in the Strait of Hormuz, and said Brent rose 6 percent over the past week while WTI rose 2.3 percent.
Source: Aju Press
The Ministry of Trade, Industry and Energy has frozen the 11th oil price cap for four weeks starting October 17, with gasoline set at 1,784 won a litre, diesel at 1,773 won and kerosene at 1,380 won on refinery supply prices, Aju Press said. JKN, in its own report on the same policy, likewise said the 11th ceiling was kept unchanged for four weeks from October 17 at the same three prices, and that the system was introduced on March 13 after a sharp rise in international oil prices due to the war in the Middle East.
Source: JKN
Despite the global surge, domestic fuel prices in South Korea remain stable: in the third week of October the average price of regular gasoline was 1,856.1 won a litre and diesel 1,842.5 won, continuing a 23-week streak of declines since the third week of May, Aju Press reported. A Korea Institute for Industrial Economics and Trade analysis of 1,512 gas stations estimated regular gasoline was 239.48 won a litre lower, relative to premium gasoline, after the seventh cap than before the system, Aju Press said.
Source: Aju Press
The fiscal cost is the other side of the policy. The government has allocated a total of 5.6497 trillion won for compensating oil companies for losses, including 4.2 trillion won from this year's contingency fund and 1.4497 trillion won from next year's budget, Aju Press reported, adding that the final compensation amounts have yet to be settled as costs and margins are verified. JKN likewise reported that the cost of compensating refiners has exceeded 5.6 trillion won and that experts are pointing to the need for a phased exit strategy to reduce price distortions and fiscal strain.
Source: JKN
Bank of Korea Governor Shin Hyun-song told a National Assembly audit on October 23 that the cap had been measured to reduce inflation by 0.6 percentage points, Aju Press reported. It also reported Shin saying South Korea's fiscal situation is relatively sound enough to allow some continuation, while doubting the cap could be a long-term solution.
Source: Aju Press
The government's stated conditions for reviewing an end to the cap — an end to the Middle East conflict, normalisation of shipping in the Strait of Hormuz, and stabilisation of international oil prices around $90 a barrel — have not been met, both Aju Press and JKN reported. Ending the cap could push domestic fuel prices up as previously suppressed international increases are reflected, while keeping it raises the compensation bill if global prices keep rising, Aju Press noted.