Fuel price row

Heavy-handed control does more harm than good

A new round of debates over a fair and transparent fuel pricing system has erupted as gasoline prices approach 2,000 won ($1.8) per liter. This time, President Lee Myung-bak touched off the row by saying he believes that fuel prices are unduly high. Following his words, the Fair Trade Commission (FTC) has launched a probe into local refineries to confirm allegations that they might have collaborated in price fixing to maximize their profits.

Needless to say, the investigation is part of the Lee administration’s efforts to keep the mounting inflationary pressure in check. Since late last year, the consumer price index (CPI) has jumped due mainly to an upsurge in the prices of crude oil and other natural resources as well as farm products. Last Thursday, the government announced an anti-inflation package, including a freeze in utilities and public services charges.

Maintaining price stability is one of the top priorities in South Korea as in other emerging market economies as their stimulus measures and a vast global liquidity have not only speeded up the economic recovery but also stoked inflation. Against this backdrop, the Bank of Korea has joined the government’s anti-inflation drive by raising its key interest rate by 0.25 percentage points. The rate hike was somewhat belated but necessary to tame inflation. The Lee administration has also tightened its direct control on prices of major consumer goods.

Gasoline and other fuels have also become the target of government control, especially at the urging of President Lee. He has questioned why gasoline prices now hover around 1,800 won to 1,900 won per liter when crude oil prices are in the range of $80-$90 per barrel on international markets. He implied that the fuel prices are high compared with 2,000 won per liter when the crude prices surged to $140 per barrel in 2008.

It seems that Lee and his policymakers are turning to populism by capitalizing on public sentiment that refineries have continued to inflate their product prices to make more money in illegitimate ways. No one would oppose government measures to lower fuel prices by cracking down on refineries for their alleged price rigging. The FTC’s latest investigation came in 2008 when the antitrust regulator imposed 12.7 billion won ($11.4 million) in fines on eight refineries, including SK Energy, GS Caltex, and Samsung Total Petrochemicals, for forming a price cartel.

It remains to be seen if the FTC can find any evidence of price fixing to slap further penalties on those firms and force them to supply fuel at reduced prices. The commission might succeed in its probe but it is not likely to lower the prices by a sizable margin. This is not to defend fuel suppliers. The authorities should take all factors affecting higher fuel prices into account in order to allow consumers to get the real benefit.

Let’s look at what fuel prices consist of. Transportation, energy and environment taxes as well as value-added tax and other surcharges account for 53 percent of gasoline prices. And refinery firms charge 43.3 percent for crude oil purchase, production costs and profit margins. The remaining 3.7 percent is for gas stations for their operation costs and profit margins. Under this price structure, it is hard to slash fuel prices by only twisting the arm of the producers. As it did in 2008, the authorities should cut fuel taxes to ease consumer burden and prevent price hikes.

The heavy-handed price control is feared to cause a backlash from refineries that have no other choice but to give in to government pressure to curtail their product prices. This method is reminiscent of direct government intervention in the market to check inflationary pressure in the 1970s and 80s. Now it may do more harm than good. The role of the government should focus more on promoting fair competition. Policymakers need to take more fundamental approaches to fighting inflation by unwinding stimulus packages and raising interest rates to prevent economic bubbles and ensure sustainable growth.