International oil prices remain unstable due to the ongoing war in Iran, with Brent crude nearing $120 per barrel.
Since the outbreak of the conflict, the government has maintained a price cap on oil for over seven months. Given the situation in the Middle East, it seems unlikely that the price cap will end soon. However, is it truly advisable to continue this price cap indefinitely?
The price cap was implemented out of concern for inflation and the cost of living. It has indeed alleviated some consumer burden by preventing the surge in international oil prices from translating into domestic inflation. Shin Hyun-sung, Governor of the Bank of Korea, acknowledged that the price cap has played a significant role in curbing inflation. But that is not the whole story.
Governor Shin warned that prolonging the price cap could distort price structures, prevent demand from decreasing even when consumption should be curtailed, and increase fiscal burdens. He emphasized that while there may be short-term benefits in stabilizing prices, it cannot serve as a long-term solution.
In fact, the price cap has led to unintended consequences. Gasoline consumption increased in May, July, and September compared to the previous year, a phenomenon attributed to the artificially suppressed domestic prices. This is occurring in a country that relies heavily on energy efficiency.
Moreover, the price cap is not without cost. The government must compensate oil companies for their losses due to the cap, with estimates suggesting that these losses could reach 7 to 8 trillion won. Analysts argue that the 4.2 trillion won set aside by the government as a contingency fund is woefully inadequate. This cost ultimately falls on taxpayers.
The price cap has also undermined the principle of 'beneficiary burden.' Raising gasoline prices would typically mean that drivers who use their cars more would bear a greater share of the costs. However, under the price cap, this burden is shifted to everyday citizens who rely on public transportation.
Continuing the price cap is not a viable option. We should not simply wait for international oil prices to stabilize at a certain level. The longer the crisis persists, the greater the fiscal burden and market distortions caused by price controls. It is essential to develop and implement an exit strategy as soon as possible. This strategy must include support measures for ordinary citizens, such as truck drivers, who are adversely affected by rising fuel costs.
Implementing an exit strategy for the price cap does not equate to admitting policy failure. Rather, it is a decision to return exceptional interventions to a normal market state. The government should focus not on how much further it can suppress prices but on fine-tuning the market to restore its proper function.
* This article has been translated by AI.
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