Two months have passed since Korea introduced an oil price ceiling system to counter the surge in fuel prices triggered by the Iran war. The government implemented the price cap on March 13, raised prices by about 12% in a second notice on March 27, and then kept prices frozen through the third, fourth, and fifth notices up to May 8. Although pressure for price hikes has accumulated, the government explains that it maintained the freeze considering that international oil prices are fluctuating around $100 per barrel and taking into account the burden of inflation.
The government's activation of a price stabilization mechanism was a necessary measure at a time when war-driven oil prices are stimulating overall inflation. Without the price cap, gasoline prices would likely have exceeded 2,200 won per liter, and diesel prices 2,500 won per liter. The government also assesses that the measure helped reduce last month's inflation rate by 1.2 percentage points, keeping it at 2.6%. Without the price cap, inflation would have reached 3.8%.
The problem is that the cost of controlling oil prices is snowballing. The cumulative suppressed price increases alone amount to about 200 won per liter for gasoline, about 400 won for diesel, and about 600 won for kerosene. This means the losses of refiners, which must be compensated through tax revenues, are growing by the same amount. The government has earmarked 4.2 trillion won in purpose-specific reserve funds on the assumption of maintaining the price cap for six months, but the refining industry estimates that cumulative losses have already reached around 3 trillion won in less than two months of implementation. At this pace, an expansion of the fiscal burden is inevitable.
The government must begin considering an exit strategy for the price cap. Even after the war ends, there are significant concerns that high oil prices will persist for a prolonged period due to factors such as infrastructure destruction. Artificial price controls reduce consumers' perception of high oil prices, weakening incentives to save energy, and could amplify market shocks from a price surge once the system ends. The government should terminate the price cap in a timely manner and actively review more sustainable alternatives, such as cutting fuel taxes. Strengthening incentives for reducing energy consumption is also necessary. The time has come to shift policy away from universal support such as high oil price subsidies and toward expanding targeted assistance for low-income consumers and vulnerable groups.
