Ministry extends sixth price cap round, cautious on end date; experts see 1-2 more months before phaseout

A fuel price information board at a gas station in Seoul. [Yonhap]
A fuel price information board at a gas station in Seoul. [Yonhap]

International oil prices have plunged to the $70s per barrel after briefly surpassing $100 following the US-Iran ceasefire agreement, turning the spotlight on the future of South Korea's petroleum price cap system.

The government says it will monitor the progress of post-ceasefire negotiations before deciding the fate of the seventh round of the price cap.

According to the government on Saturday, the Ministry of Trade, Industry and Energy extended the sixth price cap on June 18 rather than announcing a seventh round.

Yang Ki-wook, director general of the ministry's industrial resource security office, said the seventh price cap would be determined after assessing whether the ceasefire is advancing — including the resumption of navigation through the Strait of Hormuz — and how international oil prices move.

Yang said the ministry extended the sixth cap because it expected to gauge progress around this weekend, adding that it plans to monitor developments through early this week.

The ministry is particularly watching whether the promised opening of the Strait of Hormuz is in fact being carried out and whether conditions are in place for South Korean vessels to transit the strait safely.

The ministry has set three conditions for considering an end to the price cap system: an end to the Middle East war, normalization of Strait of Hormuz navigation, and international oil prices settling in the $90s per barrel.

With the Middle East conflict now entering a ceasefire phase and crude prices — which had swung wildly around the $100 mark — stabilizing considerably, those conditions appear to have been largely met.

According to Korea National Oil Corp.'s Petronet, Dubai crude stood at $73.61 per barrel and Brent crude at $80.57 on June 19.

Both edged up from the previous day — when Dubai crude was at $73.09 and Brent at $79.85 — due to delays in post-ceasefire negotiations, but on a weekly basis prices fell more than 10 percent.

Still, the ministry is cautious about setting a specific end date for the system.

"It is too early to predict when the system will end," Yang said. "Once the conditions for lifting the cap — such as Strait of Hormuz navigation — are in place, we will make a comprehensive assessment that takes into account the burden on household finances and the fiscal impact, as well as domestic fuel price levels after the cap is removed."

An immediate end to the price cap also carries risks. Suppressed price increases accumulated under the cap could be released all at once, causing a sharp spike in domestic fuel prices.

As of May 21, the accumulated suppressed increases stood in the mid-to-high 200 won range per liter for gasoline, the mid-300 won range for diesel, and the mid-400 won range for kerosene.

Those figures have since narrowed as international oil prices fell, but have not been fully eliminated.

Some experts argue the government should maintain the price cap for now while mapping out a gradual exit strategy.

Yoo Seung-hoon, a professor at Seoul National University of Science and Technology, said the system could remain in place for one to two months even as international oil prices fall, because it takes time for imported crude to reach domestic consumers.

"Diesel prices are still high internationally, so scrapping the cap immediately could deal a serious blow to ordinary people's livelihoods," Yoo added. "The system needs to be wound down in stages — for example, by lifting the gasoline cap first and then removing the diesel cap."


oskymoon@heraldcorp.com