Gasoline consumption in South Korea rose nearly 3% in September from a year earlier, the first increase in service-station gasoline sales since March, when the Middle East war escalated. Kerosene consumption also turned higher for the first time since March. With global oil prices surging, critics say the government's cap on petroleum prices is deepening distortions in supply and demand.
Domestic gasoline consumption last month totaled 1,260,926 kiloliters, up 2.97% from 1,224,614 kiloliters in September last year, according to data the Korea Petroleum Quality & Distribution Authority submitted to the office of Rep. Yoon Han-hong of the People Power Party, a member of the National Assembly's Trade, Industry, Energy, SMEs and Startups Committee. One kiloliter equals 1,000 liters. The number of gasoline-powered vehicles fell 0.7% to 12,314,449 in August from 12,401,663 a year earlier, meaning fuel use rose even as the vehicle fleet shrank.
Gasoline consumption had risen 3.95% year-on-year in March, when the U.S.-Iran war began, then declined steadily from April through August. The government had said the price cap was holding down consumer inflation while also curbing consumption to some degree. Funding set aside for the program totals about 5.7 trillion won ($4 billion), combining this year's contingency funds and next year's budget.
But as the controls have stretched on and consumers have grown accustomed to the capped prices, consumption rebounded in September. Kerosene use, which had fallen steadily since March, when it dropped 9.3%, rose 10.45% in September.
Several factors likely contributed to the shift, including the holiday calendar. The Chuseok holiday fell in October last year but at the end of September this year, which may have lifted freight and passenger demand. Analysts also say the government undercut its own policy during the holiday by cutting fuel prices by 100 won per liter at 226 highway rest stops and waiving tolls. Even during the months when consumption fell, declines ranged from just 1.12% to 2.4% except in April, prompting questions about how much the cap was actually restraining demand.
As the cap's grip on prices weakens, calls are growing for the government to map out an exit. "Price control policies bring side effects such as price distortion and fiscal inefficiency, so they should be used only as a temporary emergency measure," Yoon said. "It is time to move quickly on an exit strategy."
Yoo Seung-hoon, a professor of future energy convergence at Seoul National University of Science and Technology, criticized the policy. "Energy prices have risen sharply worldwide, sending a message to cut consumption, but Korea alone is keeping prices low and giving consumers the wrong signal," the professor said. "For a country that imports all of its oil, maintaining this kind of policy for a long period is not desirable." Yoo added: "One option is to end the gasoline price cap but phase out the diesel cap gradually, since many diesel users are small business owners, small truck operators and delivery drivers who depend on it for their livelihoods."
The government faces a difficult call on when to end the program, which has already run past the six months it originally envisioned. Yet preparing a sunset is complicated by the absence of any sign that the U.S.-Iran war is ending. International oil prices fell to the $60-a-barrel range in June, when a ceasefire appeared within reach, but have climbed above $100 recently as clashes have intensified again. A conflict between Saudi Arabia and Yemen's Houthi rebels is also spreading, making it hard to gauge when geopolitical uncertainty will ease. Lee Jung-hee, a professor of economics at Chung-Ang University, said: "If the government suddenly halts the program and conditions in the Middle East worsen again, reintroducing it would be difficult. The government does not have many options."
Most observers expect the 11th round of petroleum price ceilings, due on the 16th, to leave the current caps unchanged. International oil prices have moved little since the 10th round was announced on the 18th of last month, leaving little reason to raise or lower the ceilings. The current caps — 1,784 won per liter for gasoline, 1,773 won for diesel and 1,380 won for kerosene — have been in place since June 26, a span of four months.
Meanwhile, work to compensate refiners for accumulated losses is dragging into year-end. The government and the industry have differed sharply over settlement principles, and refiners are taking time to submit accounting documents in line with government guidelines. When it introduced the price cap, the government allocated 4.2 trillion won ($2.9 billion) in contingency funds through a supplementary budget to cover industry losses. It has since earmarked 1.4497 trillion won ($1 billion) in next year's budget to compensate for fourth-quarter losses this year.