International oil prices have dropped sharply, falling over 8% as expectations rise for an early resolution to the Middle East conflict following the U.S. midterm elections. This decline has sparked interest in the exit strategy for the oil price cap that has been in place for nearly eight months. If the downward trend continues, the end of the price cap could be expedited, potentially easing financial burdens.
According to the Korea National Oil Corporation, on November 4 (local time), Brent crude futures fell to $94.62 per barrel, a decrease of 8.67% from the previous trading day. West Texas Intermediate (WTI) also dropped to $88.12, down 8.29%. Both benchmarks reached their lowest levels in over two months.
The Democratic Party's control of both houses of Congress in the U.S. midterm elections has led to increased expectations for pressure on the Trump administration to end the conflict with Iran. A resolution to the war could normalize oil transport through the Strait of Hormuz, contributing to the decline in oil prices.
As a result, attention is turning to potential changes in the oil price cap implemented by the government since March. The Ministry of Trade, Industry and Energy has been applying the 11th price cap since October 17, maintaining gasoline prices at 1,784 won per liter, diesel at 1,773 won, and kerosene at 1,380 won, unchanged since late June. The current price cap is set to remain in effect until November 13.
The government has previously indicated that the end of the price cap would be contingent on the conclusion of the Middle East conflict, normalization of shipping through the Strait of Hormuz, and stabilization of international oil prices. Although Brent crude has fallen to the $90 range, uncertainty remains regarding the actual end of hostilities and the normalization of oil transport, making an immediate end to the price cap unlikely.
Alongside the potential end of the price cap, there is significant interest in the settlement of loss compensation for oil companies. The government has allocated 4.2 trillion won for this year's contingency fund and included 1.4497 trillion won in the budget for the fourth quarter of this year. This totals 5.6497 trillion won in resources, but the actual scale of losses has yet to be determined.
Notably, the compensation for losses incurred from March 13 to June 30, the first settlement period, has not yet been finalized. The government has established principles for calculating losses based on the cost and appropriate margins for each oil company. However, the oil industry argues that international oil product prices should also be considered, leading to ongoing disagreements over the loss calculation method.
There is a significant gap in perspectives regarding the scale of loss compensation. The government believes that the existing contingency fund and next year's budget can cover the losses, while the oil industry anticipates that actual losses will exceed these amounts.
If the decline in international oil prices continues and the end of the price cap is expedited, additional financial burdens may be reduced. However, even if the program ends, the responsibility for settling already incurred losses will remain. The government faces the challenge of managing the exit strategy for the price cap while finalizing the scale of loss compensation and controlling financial burdens.
The National Assembly Budget Office has also pointed out in its analysis report on next year's budget that "considering the uncertainties surrounding the timing of the price cap's end, the timing of loss compensation payments, and the actual scale of losses, specific scenarios for loss compensation needs to be developed." It emphasized the need for clear execution management standards, as the losses incurred by oil companies due to government price regulations will be compensated retroactively.
* This article has been translated by AI.
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