An employee fills a vehicle with fuel at a gas station in Seoul. [YONHAP]
Korea’s oil price cap system, introduced in response to surging energy prices following the outbreak of war in the Middle East, has now entered its 57th day. Under the policy, the government determines refinery supply prices every two weeks. The fifth round of prices taking effect Friday remains unchanged from the third and fourth rounds, with gasoline capped at 1,934 won per liter ($5.04 per gallon) and diesel at 1,923 won per liter.
The government has explained that it froze prices despite accumulated upward pressure in order to ease the burden on households. That decision, however, has moved increasingly far from the original principle of linking domestic prices to international oil markets.
Market distortions caused by the system are becoming more serious. While fuel prices are currently held near 2,000 won per liter, without the cap, analysts estimate gasoline prices would have risen to around 2,200 won per liter and diesel to as high as 2,800 won. As the gap between market prices and regulated prices widens, consumers have become less sensitive to the shock of high oil prices. The result is weakened incentives to reduce energy consumption during a period of global energy instability.
Traffic levels during the holiday period earlier this month, which reportedly approached those normally seen during major national holidays, reflected that trend. By artificially suppressing prices, the system has disrupted the normal market function through which supply and demand adjust according to price signals.
Inflationary distortions are also deepening. Consumer prices last month rose 2.6 percent from a year earlier despite the oil price cap. The government estimated that the policy reduced inflation by 1.2 percentage points, implying inflation would otherwise have reached 3.8 percent. Officials from the government and ruling party have praised the system as a “breakwater” protecting households from global oil shocks.
In reality, however, the policy amounts to using taxpayer money to temporarily suppress inflation. As the system continues, losses within the refining industry are rapidly mounting. Refiners are expected to post combined first-quarter losses of around 5 trillion won ($3.45 billion). The 4.2 trillion won allocated in the supplementary budget to offset those losses will likely prove insufficient.
Although the government says the policy is intended to reduce pressure on ordinary people, the structure of the subsidy effectively benefits drivers who consume more fuel, including owners of expensive imported vehicles, while public transportation users receive little direct support. To reduce unnecessary oil consumption and limit the growing fiscal burden, the government should move quickly to end the oil price cap and instead focus support on low-income households and vulnerable consumers who genuinely need assistance.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
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