Oil companies adopt different schemes in price cut

By Kang Seung-woo

Oil refiners are slashing their prices.

But when it comes down to bringing the benefits of lower gas prices to consumers, they are going in different directions.

In less than a week, four major refiners, SK Innovation, S-Oil, GS Caltex and Hyundai Oilbank, have cut the prices of gasoline and diesel by a uniform 100 won ($0.09) per liter. This reduction went into effect on Thursday and will last three months.

SK, the nation’s largest crude refiner, and GS, are offering a discount of 100 won per liter in the form of refunds that consumers can receive through credit card settlement or membership cards, while S-Oil and Hyundai are directly offering lower prices at the gas stations.

“Our method will ensure gas stations will deliver a full discount to customers,” said an official of SK Innovation. “Smaller S-Oil and Hyundai can’t do what we can because they don’t have as good a ‘cash-back’ system as ours.”

S-Oil says that their own system of marking down the supply price will better ease the public’s burden of fuel costs.

“As SK will take a few weeks to build a computerized system, our consumers will be able to directly benefit from the discount,” an S-Oil official said. “Besides, credit card discounts at its “pole” service stations can hurt independent pole gas stations.”

According to a local brokerage house, refiners will suffer a mountain of operating loss during the discount period.

The 100 won per liter cut is projected to cost SK around 255 billion won, followed by 208 billion won for GS, 127 billion won for Hyundai and 93 billion won for S-Oil.

The refiners are swallowing the losses in the face of increasing pressure by the government, which is trying to tame inflation. For the first three months of the year, consumer prices rose over 4 percent monthly, well over the government’s target of 3 percent.

“Although oil firms said that they are cutting prices to ease the burden on consumers, they are doing so, not being able to withstand the pressure from the government,” an official at an oil refiner industry said.

President Lee Myung-bak said in January that gas prices were playing a role in rising inflation, insinuating that the oil refiners were profiteering in the process.

Knowledge Economy Minister Choi Joong-kyung, who served as Lee’s chief economic assistant, has kept pushing them to slash oil prices, raising issue with what he sees as big profit margins for the refinery industry, while the Fair Trade Commission (FTC) is preparing to levy huge fines on refiners on suspicions of collusion.

Industry watchers claim that the government needs to lower various taxes on gasoline and other oil products to keep consumer prices under control. In Korea 745 won in taxes is imposed on a liter of gasoline, which has been risen close to 2,000 won.

Kim Chang-seob, a professor at Kyungwon University, said, “The government has been reluctant to lower taxes imposed on oil products for fear that its impact would be short-lived and a decline in tax revenue could worsen its fiscal soundness.