(Han Joo-hyung)
South Korean oil refiners are raising concerns over mounting losses from the country’s fuel price cap system as oil price volatility intensifies amid the prolonged conflict involving the United States, Israel and Iran.
The industry is closely watching the government’s fifth decision on the fuel price ceiling scheduled for Friday, with refiners warning that compensation for losses under the system may fall far short of actual costs despite expectations of strong first-quarter earnings.
The government has maintained that compensation will be based on “physical and accounting costs,” while refiners argue reimbursements should reflect the actual prices they pay for crude imports.
According to industry sources Wednesday, the premium for Saudi Arabia’s Arab Light crude for July delivery has climbed to a record $19.50 per barrel. South Korean refiners purchase crude based on benchmark Dubai and Oman crude prices plus additional premiums.
Although Saudi Aramco is reportedly planning to lower the premium for next month’s Arab Light shipments to $15.50 per barrel, down $4 from May cargoes, import costs remain near record highs.
Oil prices have also surged after the U.S. government reportedly launched “Project Freedom” operations aimed at escorting third-country vessels out of the Strait of Hormuz. Dubai crude prices jumped 6 percent on May 4 to $106.93 per barrel.
An industry official said oil market volatility had reached dangerous levels, adding that refiners were seeking alternative supplies from the United States and Central Asia but were already under severe cost pressure.
The South Korean government introduced the fuel price cap system in March and promised to compensate refiners afterward for losses incurred under the policy. Authorities initially planned to adjust prices based on the average two-week fluctuation in The Mean of Platts Singapore (MOPS), but later froze prices during the third and fourth rounds to ease inflationary pressure on consumers.
Another refining industry official expressed concern that the policy could remain in place longer than expected despite comments from Industry Minister Kim Jung-kwan that the system would end as quickly as possible.
The government and refiners remain divided over how to calculate compensation. While authorities favor a cost-based method, companies argue that product-specific costs are difficult to determine and that compensation should instead be linked to MOPS benchmarks.
Under that method, estimated industry losses from roughly eight weeks of fuel price controls could exceed 3.5 trillion won ($2.4 billion), more than 80 percent of the government’s 4.2 trillion won emergency reserve fund allocated for the policy.
The dispute is expected to intensify as the country’s four major refiners — SK innovation, S-Oil, GS Caltex and HD Hyundai Oilbank — are forecast to post large first-quarter profits. Securities firms estimate operating profit of 2.3 trillion won for SK innovation, 1.1 trillion won for S-Oil, 1.4 trillion won for GS Caltex and 200 billion won for HD Hyundai Oilbank.
Industry officials stressed that much of the earnings improvement stems from temporary inventory valuation gains following the Middle East conflict rather than fundamental profitability improvements.
“Most of the profits earned during this period are being used to purchase more expensive crude oil,” one official said. “It is unreasonable to view refiners as generating excessive profits when those gains could quickly turn into losses once oil prices stabilize.”
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