South Korea has frozen its cap on petroleum prices for a fourth consecutive month as high oil prices persist amid worsening tensions in the Middle East. With price controls stretching on and winter heating demand expected to rise, concerns are growing over additional public spending to cover refiners' losses.
The Ministry of Trade and Industry said on the 16th that it would keep the 11th round of maximum petroleum prices at existing levels. The ceiling on refiners' supply prices is 1,784 won per liter for gasoline, 1,773 won for diesel and 1,380 won for kerosene, and will apply for four weeks from midnight on the 17th. That means the seventh price ceiling, introduced on June 27, will remain in place through November. The government said it decided on the freeze because "even with the price cap in place, petroleum prices rose 14.8% in September from a year earlier, leaving the burden on low- and middle-income households unchanged." The price cap system, introduced in March this year in response to a surge in oil prices tied to the war in the Middle East, has now been in effect for more than seven months.
The government has set aside a combined 5.6497 trillion won in this year's supplementary budget and next year's budget proposal to compensate refiners for losses stemming from the price cap. It allocated 4.2 trillion won in contingency funds under the supplementary budget to cover refiners' losses through September, and included 1.4497 trillion won for fourth-quarter loss compensation in next year's budget proposal.
If the supply price freeze continues while oil prices remain high, the amount the government must reimburse will keep accumulating. According to data obtained from the ministry by Cho Ji-yeon, a lawmaker of the People Power Party, the government estimated when calculating the contingency funds that every 100-won-per-liter gap between the estimated price without the cap and the capped price would require about 1.5 trillion won in compensation. Under the arrangement, public funds cover losses that arise when refiners cannot pass higher costs on to sale prices.
With tensions in the Middle East continuing, high oil prices show signs of persisting. Iran has continued attacks on vessels passing through the Strait of Hormuz, while Yemen's Houthi rebels have struck Saudi Arabian airports and oil facilities, keeping supply concerns alive.
Some forecasts see high prices lasting through the end of the year. The U.S. Energy Information Administration raised its fourth-quarter forecast for average Brent crude prices this month to $105 a barrel, up $14 from a month earlier. Industry estimates put refiners' cumulative losses at 7 trillion to 8 trillion won, exceeding the funds the government has budgeted.
Winter heating demand is another variable that could add to the burden. The International Energy Agency noted that consumers who had delayed buying heating oil because of high prices will need to fill their storage tanks ahead of winter. The EIA projected that diesel and heating oil inventories in the eastern United States this winter will run 20% to 30% below the average for the same period over the past five years. A rush to buy heating oil at a time of low inventories could push up international prices for petroleum products.
At home, a prolonged cold snap that lifts sales of kerosene for heating could also increase the compensation burden. If purchase volumes rise while losses on sales continue, the amount the government must cover will grow. The actual compensation is determined after a review of refiners' costs and a reasonable profit margin.
Son Yang-hoon, a professor of economics at Incheon National University, said the fiscal burden is mounting because the price cap has been kept in place for too long. "It should be halted as soon as possible and prices should be set properly," he said.