Gasoline consumption in South Korea rose nearly 3% in September from a year earlier, the first increase in volumes sold at domestic service stations since March. Kerosene consumption also turned higher for the first time since March. Analysts attribute the shift to the weakening effect of the petroleum product price-cap system, in place since March, as it drags on. Yet suspending the program is not easy while the U.S.-Iran war continues, leaving the government with a more complicated calculation.
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, on the 15th. The number of gasoline-powered vehicles fell 0.7% to 12,314,449 in August this year from 12,401,663 in August last year, meaning fuel consumption rose even as the vehicle fleet shrank.
Domestic gasoline consumption rose 3.95% year-on-year in March, just after the U.S.-Iran war broke out, then declined steadily from April through August. The government had said the petroleum product price-cap system, which took effect on March 13, curbed consumer price increases while also restraining consumption to some degree. But as the period of price controls lengthened, consumption rebounded in September. Kerosene consumption had also fallen steadily after March, when it rose 9.3%, but increased 10.45% in September. As consumers grew accustomed to the controlled prices, volumes turned higher. The Ministry of Trade, Industry and Energy has set aside about 5.7 trillion won ($4 billion) for the price-cap program, combining this year's contingency funds and next year's budget.
Several variables, including the holiday calendar, likely contributed to the change. The Chuseok holiday fell in October last year but in late September this year, which may have lifted freight and passenger demand during the break. But analysts say the government also undercut the price cap's own policy effect by cutting fuel prices at 226 highway rest stops by 100 won per liter and waiving tolls during the holiday. Even in the months when petroleum consumption fell, declines ranged from 1.12% to 2.4% except in April, prompting questions about whether the restraining effect was meaningful at all.
With the price cap's control function weakening, calls are growing for the government to seriously consider an exit strategy. "Price control policies bring side effects such as price distortions 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 holding 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 over a long period is not desirable." The professor added that one option would be to "end the gasoline price cap but phase out the diesel cap in stages, since many diesel users are small self-employed business owners, drivers of small trucks or delivery workers who depend on it for a living."
The government faces a deepening dilemma over when to end the program. Its duration has already exceeded the six months the government initially expected. But preparing for a sunset is difficult with no sign the U.S.-Iran war will end. International oil prices fell to the $60-per-barrel range in June, when a ceasefire between the two sides appeared to be taking shape, but have recently topped $100 as clashes have escalated again. A conflict between Saudi Arabia and Yemen's Houthi rebels is also widening, making it hard to gauge when geopolitical uncertainty will ease. Lee Jung-hee, a professor of economics at Chung-Ang University, said reintroducing the program would be difficult if it were abruptly halted and conditions in the Middle East then worsened. "The government does not have much room for choice," the professor said.
As a result, the prevailing view is that the 11th round of petroleum product price caps, due to be announced on the 16th, will keep existing ceilings unchanged. International oil prices have changed little since the 10th round was announced on the 18th of last month, leaving few grounds for either an increase or a cut. Current domestic ceilings have held for four months at the levels announced on June 26: 1,784 won per liter for gasoline, 1,773 won for diesel and 1,380 won for kerosene.
Meanwhile, work to compensate refiners for losses accumulated under the program is stretching toward the end of the year. The government and the industry had sharply differing views on settlement principles, and refiners are also 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 compensate industry losses. It later earmarked 1.4497 trillion won ($1 billion) in next year's budget to cover losses for the fourth quarter of this year.
The industry is also voicing complaints about petroleum product export restrictions, which began alongside the price cap and are now in their seventh month. Inquiries from buyers seeking Korean products are pouring in as the global diesel supply crunch deepens, but government policy bars refiners from selling more than they exported a year earlier. "With refining facilities in the Middle East and Russia damaged, only a few countries are left that can produce diesel smoothly," an industry official said. "Domestically, there is surplus volume even when diesel is supplied at maximum levels, but we cannot sell it overseas."
