Korea faces dilemma over prolonged fuel price cap

Fuel prices are listed at a gas station in Seoul, Friday. Yonhap

The Korean government is facing a dilemma over its oil price cap system, as extending the measure raises concerns about market distortions and mounting fiscal burdens, while removing it too abruptly could fuel inflation.

The Ministry of Trade, Industry and Energy on Thursday froze fuel price ceilings for a fourth consecutive round to curb a surge in domestic fuel prices triggered by the conflict in the Middle East.

Under the system introduced in March, the government adjusts maximum wholesale prices supplied by refiners to gas stations and distributors every two weeks in line with global oil price movements, in an effort to ease the financial burden on drivers and industries.

Following the latest decision, wholesale prices will remain capped at 1,934 won ($1.30) per liter for gasoline, 1,923 won for diesel and 1,530 won for kerosene for the next two weeks.

Yet the prolonged price controls are becoming an increasing fiscal burden, as the government said it would compensate refiners for the loss caused by the gap between international crude prices and regulated domestic wholesale prices.

The government has earmarked 4.2 trillion won for the program. But concerns are growing that compensation costs could soon exceed the budget if the war drags on.

Industry officials suggest losses tied to the price cap system may already have reached as much as 3 trillion won for refiners.

Questions are also mounting over the effectiveness of the policy itself.

Normally, tighter energy supplies would encourage consumers to cut back on spending and save up on energy. But with prices restrained, consumers appear to feel little urgency to reduce consumption.

Traffic volumes have shown little sign of decreasing.

According to the Korea Expressway Corp., highway traffic during the May 1 to 5 holiday period reached 27.4 million vehicles, similar to levels typically seen during major holidays such as the Lunar New Year.

Still, officials remain cautious about removing the measure, fearing suppressed price pressures could immediately spill into the market and accelerate inflation.

"Gasoline has a large impact on consumer prices, while diesel and kerosene are closely tied to production and logistics prices for truckers, delivery workers and the farming and fishing sectors, making it essential to keep prices stable," Vice Industry Minister Moon Shin-hak said during a briefing.

Authorities estimate that April consumer prices could have risen as high as 3.8 percent without the fuel price cap system. Last month, consumer prices rose 2.6 percent from a year earlier, the fastest pace in 21 months.