The government's oil price cap system could cause side effects such as price uniformity and supply reductions if maintained over the medium to long term, a new analysis has found. Experts advised that differentiated policy responses considering industry-specific characteristics are needed rather than uniform price regulations.
The Korea Institute for Industrial Economics and Trade (KIET) published a report titled "Policy Implications and Future Direction of the Oil Price Cap System" on Wednesday. The government had introduced the price cap system on June 13, setting upper limits on petroleum supply prices from refiners. The government set the ceiling by adding a fixed margin to Singapore spot market prices and decided to adjust it every two weeks.
Lee Hong, an associate research fellow at KIET, said the price cap system "is expected to have a greater policy effect in curbing the pace of price surges and easing consumer burden in the short term compared to other policy tools." He added that "it particularly has a signaling effect that conveys the government's strong commitment to market stabilization."
However, the research team noted that such effects may be limited to the short term. "If supply shocks become prolonged over the medium to long term, non-price allocation distortions such as shortages, queuing and volume disparities among gas stations could emerge under price controls," Lee said. "This would function as a mechanism that shifts the nominal price reduction effect into other forms of real burden on consumers." He warned that small-scale and non-metropolitan marginal gas stations could be forced out of the market, and that suppressed prices may rebound rapidly once the system ends.
"It is advisable to use the oil price cap system in a limited capacity as a short-term market stabilization tool," Lee said. "Especially from an industrial perspective, supply continuity and maintaining production activity are more important policy objectives than the price level itself. Differentiated policy design that considers differences in fuel dependency and cost structures by industry is therefore necessary."
