Dubai crude tumbled from $107 to $74 a barrel in a month, yet pump prices barely budged; high exchange rate and price cap regime slow the pass-through, while potential Strait of Hormuz transit fees could offset any gains

A gas station in Seoul. [Yonhap]
A gas station in Seoul. [Yonhap]

Global oil prices have tumbled nearly 30 percent over the past month following a ceasefire agreement between the United States and Iran, yet gasoline prices at South Korean pumps remain stubbornly above 2,000 won per liter, held in place by a high exchange rate and a government price cap.

Iran's reported consideration of transit fees through the Strait of Hormuz adds another obstacle, raising the prospect that domestic fuel prices could take considerably longer to return to pre-war levels.

According to Korea National Oil Corp.'s oil price information system Opinet, Dubai crude — the benchmark South Korea primarily imports through the Singapore spot market — tumbled 30.9 percent from $106.60 per barrel on May 20 to $73.61 on June 19.

At the height of the conflict involving the US, Israel and Iran, prices had briefly approached $170 per barrel on a closing-price basis. Before the war broke out, Dubai crude had been trading around $70 a barrel.

By contrast, the average retail gasoline price at domestic filling stations barely moved, edging down from 2,011 won per liter in the third week of May to 2,009 won in the third week of June.

If the Middle East conflict that triggered the recent price surge moves toward a full ceasefire and the Strait of Hormuz remains open, domestic pump prices are widely expected to eventually normalize.

However, analysts say consumers should not expect quick relief. According to industry sources, it takes about one week for international crude prices to feed through to refinery supply prices, and an additional one to two weeks for those changes to reach retail pump prices.

That means the sharp decline in global oil prices over the past month could, at the earliest, show up at the pump around early to mid-July — roughly three weeks away.

The government's maximum price regime has also played a significant role in muting the pass-through of the recent international price drop to domestic consumers.

Because the government capped prices on the way up — preventing the full impact of the global surge from reaching the pump — the same mechanism means a sharp fall in international prices does not translate directly into an equivalent drop at the domestic level.

The won-dollar exchange rate, hovering at elevated levels in the 1,500-won range, is another structural drag on domestic fuel prices. The rate dipped slightly to around 1,510 won between June 15 and June 17, after news broke of the US-Iran ceasefire agreement. But it reversed course following hawkish signals from the US Federal Open Market Committee, breaking back above 1,540 won in overnight trading on June 19 for the first time in eight sessions.

"The continued decline in international oil prices will ultimately have a positive effect on stabilizing domestic fuel prices," an industry official said. "However, variables such as the exchange rate and international petroleum product prices remain, making it difficult to predict future price levels."

Gasoline and diesel prices at domestic filling stations have hovered around 2,000 won since late February, when the Middle East war broke out, and have remained at elevated levels throughout April.

The national average gasoline price crossed the 2,000-won threshold on April 17 for the first time in more than three years since the Russia-Ukraine war.

"Even if a ceasefire agreement is reached and the price cap is lifted, prices are unlikely to immediately return to the January-February levels seen before the war," another industry official said. "International petroleum product prices remain high, and taxes and retail margins add to the cost, so the price reduction that consumers actually feel may be limited."

"Even after a ceasefire agreement, uncertainty in the Middle East — including clashes between Israel and Hezbollah — remains, so the possibility of renewed volatility in international oil prices cannot be ruled out," the official added.

Whether Iran imposes transit fees on the Strait of Hormuz is another variable that could delay the normalization of domestic fuel prices.

South Korea is particularly sensitive to developments in the Middle East and the Strait of Hormuz, with roughly 70 percent of its crude oil imports last year sourced from the region.

While the memorandum of understanding between the US and Iran stipulates that no fees will be charged to vessels transiting the Strait of Hormuz for the next 60 days, Iran is reportedly planning to collect what it calls an "insurance fee" — in effect a transit toll — from ships passing through the waterway.

The Strait of Hormuz is a critical shipping lane through which roughly 20 percent of the world's seaborne crude oil passes. Any transit fee would raise the cost of transporting crude, pushing up import prices.

If such fees are imposed, they could offset the benefits of lower international oil prices. Even with the strait fully reopened, higher shipping costs could narrow the price advantage of Middle Eastern crude over alternative sources by more than expected — raising concerns that the pace of decline in global oil prices could slow, limiting any further drop in domestic pump prices.


oskymoon@heraldcorp.com