Oil price uncertainties likely to prompt utility fee hikes after general elections

A driver fills up gas in his truck at a gas station in Seoul, Sunday. Yonhap

The government could consider raising the prices of essential utilities after the April 10 general elections as a preemptive measure against the potential economic repercussions of global oil market uncertainties, according to economic and political experts, Wednesday.

The speculation comes as global oil prices remain vulnerable to geopolitical risks in the Middle East, such as the Israel-Hamas war and the Red Sea crisis.

The crude oil benchmarks, including Dubai, Brent, and West Texas Intermediate (WTI), surpassed $80 per barrel at the end of January, although they recently retreated to the upper $70 range. Market watchers speculate that there is a possibility of further price increases.

Oil prices are closely linked to the production costs of public utilities that utilize other energy resources. They include liquefied natural gas (LNG), which is in high demand by two state-run energy firms – Korea Electric Power Corp. (KEPCO) and Korea Gas Corp. (KOGAS).

Each company faces an increasing financial burden amid the government's efforts to curb electricity and gas prices in order to stabilize the people's livelihoods.

KEPCO is struggling with a cumulative deficit of more than 45 trillion won ($34.5 billion), while its overall debt stands at 200 trillion won. KOGAS is making profits, but the amount of uncollected payments has kept increasing and is estimated to have surpassed 16 trillion won.

Throughout 2023, the electricity fee increased by 26 won per kilowatt-hour, significantly below the minimum 51.6 won hike required by KEPCO to address its cumulative deficit.

The price of gas went up by 1.04 won per megajoule last year, which sources say could exacerbate KOGAS' financial situation, particularly concerning uncollected payments.

“Under the circumstances, the government may need to back out of its commitment and increase utility fees after the general elections,” Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI), said.

He noted that the government said in its 2024 economic policy directions that it will keep utility prices steady until the first half of the year.

Lee also noted that the government suffered a record shortfall in tax revenues to the tune of 51.9 trillion won last year and “can’t afford to salvage the two troubled energy firms, while a freeze on utility fees can cause bigger economic problems.”

The shortfall in tax revenue is expected to continue this year as the Yoon Suk Yeol administration continues to adhere to an eased tax policy aligned with its private sector-driven economic vision.

Myongji University political science professor Shin Yul views the post-election period as "an opportune moment for the government to reevaluate its policies," regardless of the outcome of the elections for the ruling party.

“A possible victory will give the government confidence to push ahead in adjusting its economic policies,” he said. “But even if the ruling party loses, the government can attempt to reshape the course of policies as a part of reform.”