Prolonged Oil Price Ceiling Puts Government in a Dilemma Over Fiscal Burden and Exit Strategy

▲ A gas station

As the oil price ceiling system surpasses seven months since its implementation, growing concerns are being raised over the side effects and fiscal burden of its prolonged application.

While calls for an exit strategy are emerging, ongoing geopolitical instability in the Middle East and high oil prices have left the government struggling between maintaining and terminating the system.

According to government authorities on October 25, the Ministry of Trade, Industry and Energy froze the maximum oil prices for four weeks starting at midnight on October 17.

Accordingly, the 11th price ceiling is maintained at 1,784 won per liter for gasoline, 1,773 won for diesel, and 1,380 won for kerosene, remaining the same as the 7th through 10th price ceilings.

The Ministry has maintained the same price for four months since announcing the 7th price ceiling, which was lowered by 150 won per liter when the United States and Iran reached a ceasefire agreement at the end of June.

The government introduced the price ceiling system as a "temporary measure" on March 13 to curb soaring oil prices triggered by the outbreak of the Middle East war, but it has been unable to terminate the system even after seven months.

This is because the conditions set by the government for reviewing the removal of the price ceiling—such as the end of the Middle East war, the normalization of navigation in the Strait of Hormuz, and the stabilization of international oil prices in the 90-dollar range—have not been met.

In particular, international oil prices, which had stabilized at $60 to $70 per barrel at the end of June, surged again, recording $115.40 for Dubai crude, $113.17 for Brent crude, and $99.47 for West Texas Intermediate (WTI) as of October 22.

The government explained that it maintained the maximum prices by closely monitoring international oil price trends while comprehensively considering the burden on public living costs and oil supply and demand conditions.

Although the consumer price inflation rate slowed to 2.9% in September, the burden of rising energy prices remains heavy, with petroleum product prices surging 14.8% compared to the previous year.

The problem is that the fiscal burden stemming from the prolonged system is also increasing.

The government previously allocated 4.2 trillion won in reserve funds to compensate refineries for losses, under the assumption that the price ceiling system would be operated for six months this year.

Subsequently, assuming that the implementation period would be extended through the fourth quarter, it newly allocated 1.4497 trillion won in next year's budget.

Combining the reserve funds and the budget allocated for loss compensation exceeds 5.6 trillion won.

On the other hand, concerns have been raised since the early stages of the system's introduction that abruptly terminating the price ceiling system could cause international oil price increases to be reflected in domestic prices, sharply raising the burden on consumers.

With no way of knowing how long the uncertainty in the Middle East will persist, points are being made that the long-term maintenance of the current price ceiling system should be reexamined.

Bank of Korea Governor Shin Hyun-song expressed concern on October 22, stating, "While the oil price ceiling system temporarily has the effect of suppressing consumer inflation, the longer it lasts, the more distortions occur in the price structure, leading to fiscal problems in the long run."

An official from the Ministry of Trade, Industry and Energy explained, "We know that making the price ceiling permanent is undesirable. If the current emergency situation becomes the new 'normal,' we are contemplating how to prepare an exit strategy."

However, the official maintained the stance that it is not easy to terminate the system immediately given the re-increase in international oil prices.

Regarding whether there are any changes to the criteria for terminating the price ceiling system, the official conveyed, "For now, yes, but I think discussions on this will be necessary."

Kim Soo-dong, a senior research fellow at the Korea Institute for Industrial Economics and Trade, said, "As seven months have passed since the implementation of the system, it is time to reexamine the side effects and fiscal burden," adding, "If it is difficult to terminate it all at once, there are ways to modify the existing system."

He suggested, "Rather than managing the supply of all gas stations, we could consider selective support methods for vulnerable classes or fields with high demand for petroleum products," and advised, "We need to revise the system and prepare a gradual, step-by-step exit strategy."

(Photo: Yonhap News)

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