As international oil product prices rise, South Korea's fuel price cap policy is entering a prolonged phase, prompting calls to evaluate both its effectiveness and financial implications. While capping prices can lower consumer inflation and logistics costs, the expenses incurred to compensate oil companies for losses may accumulate as a burden on government finances.
According to relevant authorities on October 18, the Ministry of Trade, Industry and Energy has frozen the 11th fuel price cap, which will be in effect for four weeks starting October 17. Based on the supply prices set by refiners, gasoline is priced at 1,784 won per liter, diesel at 1,773 won, and kerosene at 1,380 won. This measure aims to mitigate the impact of rising international oil prices and product costs due to instability in the Middle East.
The government reports that the price cap has effectively restrained inflation. The Ministry of Economy and Finance estimates that without the fuel price cap, the consumer price inflation rate for September, recorded at 2.9%, would have been 3.5%, 0.6 percentage points higher. The Ministry of Trade also estimates that the implementation of the price cap from March to August this year lowered the average monthly inflation rate by 0.6 percentage points.
However, the cost of maintaining price stability raises concerns. The government secured funding for compensating refiners through a supplementary budget in April 2026. Yet, if international oil prices and exchange rates remain higher than anticipated, the demand for compensation may increase, necessitating additional funding.
Additionally, the reduction in fuel tax revenue due to the price cap must be considered. While the price cap expands fiscal spending, the fuel tax cut reduces government revenue. Both policies aim to curb rising fuel prices, but their financial impacts differ significantly.
Determining when and how to adjust the price cap remains a challenge. Maintaining the current system could lead to ongoing compensation burdens due to the gap between international and domestic supply prices. Conversely, easing or ending the price cap could result in domestic prices reflecting international increases, potentially driving up inflation and transportation costs.
The government plans to operate the system by comprehensively considering international oil prices, exchange rates, domestic supply and demand conditions, and consumer trends. However, specific criteria for ending the program and a timeline for gradual normalization have yet to be established.
There are also discussions about changing the support method. While lowering costs for all consumers can help suppress inflation, focusing support on sectors heavily reliant on diesel, such as freight transportation and agriculture, could reduce fiscal spending while alleviating the burden on vulnerable sectors.
Some argue that if the price cap continues long-term, it may be necessary to concentrate support on industries most affected by high oil prices rather than applying a uniform price suppression approach. However, this could lead to equity debates over how to select beneficiaries and determine the scale of support, potentially increasing the burden on sectors excluded from assistance.
* This article has been translated by AI.
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