The South Korean government, which had been reviewing a phased abolition of the petroleum product price cap, has shifted course toward strengthening or extending the measure as international oil prices spike amid deteriorating conditions in the Middle East. At a cabinet meeting on the 21st, President Lee Jae-myung said, “According to the original plan, we should have either lowered the price cap further or abolished the system by now, but it seems we should actually strengthen it instead.”
During the meeting, Deputy Prime Minister and Minister of Finance and Economy Koo Yun-cheol stated, “Taking into account the rising oil price situation, we will determine the eighth-round price cap.” The government had previously announced the seventh-round price cap on the 26th of last month, lowering the maximum supply prices for gasoline, diesel, and kerosene by 150 won (approximately $0.1016) per liter. At that time, the per-liter caps were set at 1,784 won (approximately $1.2087) for gasoline, 1,773 won (approximately $1.2012) for diesel, and 1,380 won (approximately $0.935) for kerosene.
The petroleum product price cap was first introduced on March 13 to stabilize petroleum prices that had skyrocketed due to the Middle East war. The initial first-round caps were set at 1,724 won (approximately $1.168) per liter for gasoline, 1,713 won (approximately $1.1606) for diesel, and 1,320 won (approximately $0.8943) for indoor kerosene. The second round on March 27 saw significant increases to 1,934 won (approximately $1.3103) for gasoline, 1,923 won (approximately $1.3029) for diesel, and 1,530 won (approximately $1.0366) for kerosene. Prices were then frozen from the third through sixth rounds, with the seventh round marking the first reduction.
The seventh-round reduction was a response to stabilizing international oil prices following the signing of a ceasefire memorandum of understanding between the United States and Iran. The government explained at the time that it had “proactively reflected the decline in international oil prices.” Indeed, Brent crude, which stood at $95 per barrel in the first week of June, fell to $75 by June 25, while Dubai crude also declined to around $64 per barrel over the same period.
However, international oil prices rebounded sharply after the U.S. resumed its maritime blockade against Iran on the 14th. As of the 20th, Brent crude futures for September delivery closed at $90.85 per barrel, up 3.12% from the previous trading day, breaching the $90 mark again for the first time in about a month. Dubai crude prices also surged to $79 per barrel. Deputy Prime Minister Koo noted that day, “Brent crude, which had fallen to $71 on July 1, rose to $90 yesterday,” describing the trajectory of international oil prices.
With the next adjustment date for the price cap approaching on the 24th, the government finds itself in a deep dilemma between inflation concerns and fiscal burdens. This month’s consumer price inflation rate is expected to enter the 2% range thanks to the seventh-round price cap reduction, but if the eighth round raises the cap, next month’s inflation rate could very likely climb back into the 3% range. According to the National Data Office, consumer price inflation exceeded 3% for two consecutive months, recording 3.1% in May and 3.2% in June. President Lee instructed, “The Middle East situation is deteriorating again, and the prospects for an early end to the war or a ceasefire are not clearly visible, so we need to carefully manage the impact on domestic prices.” Against this backdrop, market observers are raising the possibility that the fuel tax cut, scheduled to expire on the 31st of this month, may be extended.
Meanwhile, the government stated that there are no major disruptions to South Korea’s domestic crude oil imports despite concerns over blockades in the Strait of Hormuz and the Red Sea. According to the Ministry of Trade and Industry, import volumes for July and August have been secured at over 110% of the prior-year average, with September volumes already at around 90%. Deputy Prime Minister Koo said, “We will make efforts to secure additional crude oil and naphtha, looking ahead at the war situation beyond September.” A ministry official explained, “It has been confirmed that normal operations are currently underway in the Red Sea,” adding, “If problems arise, we will prepare alternative routes such as the Suez Canal.”
The government is also strengthening its livelihood response system to minimize price instability stemming from the worsening Middle East situation. Deputy Prime Minister Koo noted, “Prices of key food items such as eggs, mackerel, and chicken have fallen by about 3% compared to the end of June,” and pledged to “make every effort to stabilize prices through expanded imports and discount events.” Additionally, the government plans to introduce a traffic-light system for around 40 priority-monitored items, including syringes and medical gloves, to monitor inventory levels in real time. Items with less than two weeks of inventory will be flagged red, while those with between two weeks and one month will be flagged orange, visually indicating risk levels. Deputy Prime Minister Koo emphasized, “There are currently no items with a red or orange light, but we will not be complacent and will carefully monitor supply chains.”