Government Cautious on Ending Oil Price Cap Despite Stabilizing Prices

Government officials are taking a cautious stance on ending the oil price cap, even after the conclusion of peace negotiations between the United States and Iran. Although international oil prices have fallen below the government's specified threshold for ending the cap, the normalization of the Hormuz Strait and the time required for Middle Eastern oil to reach South Korea necessitate a comprehensive review of the situation before making a decision.

On June 16, Prime Minister Kim Min-seok stated during a government meeting at the Seoul Government Complex that, "While the peace negotiations have concluded, there are still significant discrepancies between the U.S. and Iran regarding key issues such as passage through the Hormuz Strait. We must remain vigilant until the end." He also instructed relevant departments to assess domestic measures in light of the changes following the agreement between the two countries.

Minister of Trade, Industry and Energy Kim Jeong-kwan added, "It will take more time for the complete normalization of the Hormuz Strait and for Middle Eastern oil to arrive in South Korea, so we will ensure stability in supply and demand. We plan to comprehensively review the timing of ending the price cap once the Hormuz Strait is fully operational and international oil prices stabilize."

The government's cautious approach is influenced by the ongoing high domestic fuel prices and supply chain uncertainties, despite a downward trend in international oil prices.

International oil prices have shown signs of stabilization following the peace negotiations. On June 15, Brent crude and West Texas Intermediate (WTI) were recorded at $83.20 and $80.75 per barrel, respectively, marking their lowest levels in three months.

However, domestic fuel prices remain high, with average gasoline prices still above 2,000 won per liter, despite a four-week decline. According to the Korea National Oil Corporation's Opinet, as of June 16, the national average gasoline price was 2,009.28 won per liter, and diesel was 2,004.36 won.

The Ministry of Industry has previously set conditions for ending the price cap, including the normalization of passage through the Hormuz Strait and stabilization of international oil prices below $90 per barrel. While international prices have already dropped to around $80, the government believes it is still too early to discuss ending the system.

This is due to the time lag in reflecting international oil price declines in the domestic market and ongoing supply chain uncertainties. Typically, it takes several weeks for a drop in international oil prices to be reflected in domestic retail prices, as refiners and gas stations need to sell off their previously purchased high-cost inventory.

The normalization of the Hormuz Strait is also expected to take time. The U.S. Department of Defense estimates that it will take at least two to six months to remove mines from the Strait, and currently, 24 domestic vessels are stranded near the area.

As a result, the market is leaning towards the possibility of another freeze on the seventh oil price cap, which will take effect at midnight on June 19.

However, discussions on exit strategies for price stabilization policies are beginning to emerge in the global market. According to the Korea Electric Power Corporation's Management Research Institute, as of late April, 57 countries worldwide were implementing price caps or fuel subsidies, with Poland recently announcing plans to end its fuel price cap due to stabilizing international oil prices.

An industry insider noted, "While it is difficult to end the price cap immediately, if international oil prices remain stable for an extended period, a gradual reduction of the cap through a 'stepwise exit' approach is likely."