Sales of automotive gasoline and diesel that refiners supply to gas stations nationwide rose 1.8 percent year-on-year in May. Wholesale sales of vehicle fuel had been steadily declining since February, when the U.S.-Iran war broke out, but rebounded after four months. Analysts have raised the question of whether the petroleum price cap system, introduced to minimize increases in petroleum prices, has reached its policy limits.
According to the Ministry of Economy and Finance on Wednesday, vehicle fuel sales in May rose 1.8 percent year-on-year. Vehicle fuel sales had declined in February (-1.2 percent), when the U.S.-Iran war began, as well as in March (-7.3 percent) and April (-22 percent), but rose last month.
Data from the Ministry of Trade, Industry and Energy, which is based on retail volumes that each gas station sells to consumers, also showed petroleum product sales narrowing their decline in May (-4.7 percent) compared with April (-9.7 percent). "Consumption is recovering quickly," an industry official said. "Consumers appear to be adapting to the prices."
Among experts, there are voices of concern that unless an exit strategy for the price cap system is sought, refiners' accumulated losses (forgone opportunity profits) could snowball, leading to an even larger increase in the government fiscal spending needed to compensate for them. As of the end of May, losses in the refining industry are estimated to exceed 3 trillion won.
Nevertheless, the government's hesitation to halt the petroleum price cap system stems from concerns that the previously suppressed incentives to raise fuel prices could burst out all at once, stimulating consumer prices. With the May consumer price growth rate having soared to 3.1 percent, a halt to the price cap system on top of that could push the inflation rate above 4 percent.
As a result, the prevailing position within the government is to end the price cap with considerable lead time even if the U.S.-Iran war ends immediately. The logic is that the situation should be monitored until navigation through the Strait of Hormuz is fully stabilized after the war ends.
"Wouldn't a stable situation be one in which oil tankers can again freely enter the Strait of Hormuz?" a Ministry of Trade, Industry and Energy official said. "The conditions for lifting will be met when oil prices not only stabilize downward but also achieve a certain degree of predictability." Accordingly, the dominant view is that the price cap system, which is set to end at midnight on the 19th, is likely to be extended once more.
Experts point out that the longer the price cap system is maintained, the greater the market distortion will inevitably become. "Even if the price is high, if it stays at the same level for several weeks, consumers adapt to it," said Sohn Yang-hoon, professor emeritus at Incheon National University. "The consumption-curbing effect that the petroleum product price cap has is gradually disappearing."
Since the government set the per-liter price caps on petroleum products at 1,934 won for gasoline, 1,923 won for diesel and 1,530 won for kerosene on March 27, they have been maintained without change for more than 11 weeks, meaning the burden consumers feel at these price levels is gradually decreasing.
In fact, the movement of retail prices for petroleum products at frontline gas stations is also failing to provide proper price signals. According to the Korea National Oil Corporation's Opinet price information system, the average selling price of gasoline at gas stations nationwide in the second week of June (June 7-11) was 2,009.9 won per liter, down 0.5 won from the previous week. This marks the fourth consecutive week of decline after peaking at 2,011.8 won per liter in the second week of last month.
The average diesel selling price also fell steadily throughout the month, from 2,006.2 won in the second week of May to 2,004.8 won in the second week of June. Although the range of change is small, the continued decline has weakened the incentive for consumers to curb consumption. "The most basic policy a country highly dependent on overseas resources can take in a crisis is curbing consumption," Sohn said. "Even when setting a price cap, the government should have sent an appropriate signal to consumers by raising it little by little."
The snowballing fiscal burden the government must bear is also one of the side effects of the price cap system. The government previously stated, when implementing the petroleum product price cap system, that it would compensate for losses incurred by private companies due to the price controls. To this end, it secured 4.2 trillion won in reserve funds through a supplementary budget. The industry is calling for international product price fluctuations to be reflected in the loss settlement, but the government is reportedly adhering to a principle of settlement based on import costs. A notice containing the specific settlement principles is scheduled to be enacted this month.
The industry is concerned that proceeding with settlements in this way will result in a considerable financial burden during periods of falling oil prices. Refiners enjoy "inventory valuation gains" when the assessed value of crude oil stockpiled in inventory rises during periods of rising oil prices, but conversely must bear "inventory valuation losses" during periods of falling oil prices, as inventory value also declines. However, if retail prices are capped under the price cap system during periods of rising oil prices and losses are only partially settled, the capacity to endure periods of falling oil prices disappears.
As the price cap system drags on, the worries of small gas stations are also deepening. Even when the wholesale prices that refiners supply are capped at the maximum price, the actual selling prices vary widely from station to station. This is because labor costs, operating expenses and inventory costs all differ for each individual station. Stations that secured inventory at high prices during the period when oil prices spiked sharply right after the war broke out, before the price cap system was implemented, face an inevitable loss structure. As refiner-operated stations and government-supported "Alddeul" (budget) gas stations sell relatively cheaply, sales at small independent gas stations are reportedly worsening further.
In fact, small gas stations have been closing at a rate of about one a day since the petroleum product price cap system was implemented. According to Opinet, there were a total of 10,296 gas stations operating nationwide as of the 11th. That is 96 fewer than the 10,392 on March 13, when the petroleum product price cap system was implemented. Compared with the nearly 10,440 at the start of this year, nearly 150 have closed this year alone. The Korea Oil Station Association estimates that the operating profit margin of gas stations, which exceeded 11 percent in 2001, has recently plummeted to the 0 percent range.
