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Pressure mounts on government to break up cartel of nation's big four refineries
By Cho Jin-seo
It’s a mini oil crisis. The “yellow” alert went on as oil prices crawled over $110 per barrel. Seoul bars need to turn off their outdoor signs after 2 a.m. to save electricity. Night rounds are prohibited at golf courses. Day after day, ministers and Cheong Wa Dae officials take turn to raise their voices that the country’s four oil refineries should take on the burden of the oil crisis with consumers by reducing their margins on the prices of gasoline and diesel fuel.
There may be more than just talk. By mid-March, the Ministry of Knowledge Economy is supposed to announce new, more direct measures to control fuel prices. This should trigger a red alert for oil firms.
The big four ― SK Innovation (formerly SK Energy), S-Oil, GS Caltex and Hyundai Oilbank ― are keeping a low profile because they know it would not be wise to irk politicians and voters, and have public opinion against them. While refraining from making comments on the government’s action, they instead lowered the wholesale price of kerosene by around 6 percent last month as a gesture of goodwill.
For shareholders of the four firms, this could be an ominous sign that further price cuts could be forced upon them. But surprisingly, the market has been reacting the other way.
KOSPI-listed shares of SK Innovation, S-Oil and GS Holdings are priced fairly well compared to last year (Oilbank is not listed). They took a hit during the recent plunge of the KOSPI index, but not by a larger degree than other industries.
At 175,000 won, the share price of SK Innovation is about the double that of last May. S-Oil is even more impressive, as the firm is now valued at 2.5 times higher than the same month. One may only guess how pleased its CEO Ahmed Subaey and his bosses at Saudi Aramco, the major shareholder are.
Why is the stock market not deterred by the regulatory pressure from the Korean government, which is notorious in Western media for meddling in the business of private firms? Daewoo Securities analyst Park Youn-ju says the reason is strong global demand for industrial diesel is beyond any government action.
“Exports are the major businesses for Korean refineries, and demand has been particularly strong from China where local refining facilities are already running close to maximum capacity,” she says. Actually, most of the major refineries over the world have seen their stock price surge since last August.
After all, everyone knows that increasing demand from China, India and elsewhere is the core reason behind today’s high oil prices. This benefits every industry in the oil supply chain from production to shipping to refining. Even if the government forces refineries to cut their margins in terms of proportion, their profit in terms of value can still go up. For example, a 5-percent cut on 2,000 won-per-liter gasoline is more desirable for oil firms than a 6-percent cut on 1,500 won-per liter gas.
In this sense, government price control is the least of the worries that investors in these oil firms have. The worst scenario for the four refineries cartel _ and certainly the best scenario for oil consumers ― is its break-up.
Already, several academics and government officials have been contemplating opening up the oil industry to new entrants. Jeong Kap-yeong, an influential economist at Yonsei University who runs a weekly cartoon column in the vernacular Chosun Ilbo, says that the free-market remedy is the right cure for the oil industry. More firms and more competition will make the distorted market a more balanced one, says the liberal professor who is roughly Korea’s equivalent to Paul Krugman.
But the big-four oligopoly has been here for too long and is perceived as almost natural. “It’s a problem with the license system,” Jeong said last week, after having a long, uncomfortable pause when this reporter asked him. “And it’s not only a problem with the oil industry,” he said.
The government has protected oil and a few other industries such as telecoms by not granting new licenses for various reasons such as national security and the “market order.” So every time the government tries micro-management of these markets, regulators say that the cartels deserve state supervision as much as they benefit from it.
Such a state-backed cartel rarely breaks up but sometimes they do. The example of the airline industry should send a chill down investors’ spines. Korean Air and Asiana Airlines no longer enjoy the old duopoly on domestic and short-distance international routes, after a few budget airlines somehow managed to persuade the government and lawmakers to grant them licenses.
Policymakers will be more tempted to use the same approach to the oil and mobile phone industries, if oil price go up further. Daewoo analyst Park thinks the possibility is still low, given that the firms will cry “the domestic market is already saturated.” But politicians may think otherwise. They may point to the 1.7 trillion won ($1.5 billion) of net profit SK Innovation made last year. Or they will remember the 50 percent bonus given to every employee of Hyundai Oilbank for last year’s performance.
In this sense, the rising oil price throws a dilemma to Korean oil firms. If profits surge further, they will be more likely to face undesirable consequences in the form of a broken cartel and the entry of new, tight-buckled competitors.
The timing is especially bad for them ― inflation is rising and politicians are looking for a victim for voters ahead of next year’s presidential and general elections. Price controls by the government are the least of the worries the oil firms have. More competition in the market should be their number one concern, and their current stock prices do not seem to reflect this.
