Rising Burden of Loss Compensation Amid Uncertain Oil Reserve Release Timing

The South Korean government's policy of releasing strategic oil reserves to stabilize prices is set to conclude in a month, but the future direction remains unclear. As international oil prices remain high, concerns are growing over the increasing burden of loss compensation for the refining industry, raising questions about the sustainability of the policy.

The government has relied on short-term measures like the oil price cap and reserve releases, leading to heightened market uncertainty due to a lack of an exit strategy.

Industry analysts estimate that the combined operating profit of the four major refiners (SK Innovation, S-Oil, GS Caltex, and HD Hyundai Oilbank) for the first quarter of this year could approach 5 trillion won, a significant improvement from the previous year.

The surge in oil prices due to the Middle East conflict has driven up the prices of petroleum products like gasoline and diesel. Refineries benefit from selling crude oil acquired at lower prices before the conflict, resulting in improved refining margins.

However, the domestic market situation is different. The industry reports losses ranging from 1 trillion to 3 trillion won since the implementation of the price cap. While much of the revenue comes from exports and industrial sales not subject to the cap, the burden of domestic losses is nearing its limits.

The government's burden of loss compensation is also increasing. If the current trend continues, the losses in the refining sector could exceed the 4.2 trillion won set aside by the government for compensation over six months.

Concerns about additional financial burdens are growing within and outside the government. Nonetheless, officials maintain that they will uphold the principle of compensating legitimate losses.

Moon Shin-hak, Deputy Minister of Trade, Industry and Energy, stated in a briefing, "The government has announced that it will fully compensate for legitimate losses, and it is the government's responsibility to secure the funds."

However, if international oil prices continue to rise, discussions about securing additional funds will likely become unavoidable. Recently, international oil prices fell below $100 per barrel amid hopes for a reopening of the Strait of Hormuz, but concerns about declining global oil inventories due to the Middle East conflict persist. As the summer peak season approaches, fears of supply disruptions could lead to another spike in prices.

There are clear differences between the government and the industry regarding loss compensation criteria. The government aims to maintain a cost verification-based settlement approach for transparency in tax expenditures. Deputy Minister Moon stated, "Loss amounts will be calculated based on cost criteria."

In contrast, the industry argues that the complexities of crude oil acquisition and refining make it difficult to determine costs for individual products. They advocate for incorporating the Singapore oil product price (MOPS) as a benchmark, indicating potential challenges in the settlement process ahead.

Despite the impending end of the strategic oil reserve releases, the government has not disclosed specific plans or follow-up measures. According to the International Energy Agency (IEA) resolution, the government must complete the reserve releases by June 9, but no detailed schedule has been provided.

Deputy Minister Moon explained, "The government is taking a cautious approach to the release of strategic oil reserves, as there is still volatility with the ceasefire negotiations showing progress and then uncertainty returning."

The government prioritizes price stability over absolute price levels. Moon noted, "Even if a ceasefire occurs, prices may not decrease significantly for some time, as many experts point out. Stability in price fluctuations is more important than falling a few dollars."

He added, "If prices move within a certain band and show stability, the market and consumers can adapt. However, we cannot rule out the possibility of increased price volatility even after a ceasefire."