[Insight & Opinion] Government Intervention in the Market: Oil Refining and Petrochemicals Also Need Clear Justification

The Miracle of a Resource-Poor Oil-Producing Nation,
Yet Social Perception Remains at Rock Bottom Due to Collusion Suspicions
The Oil Product Price Ceiling System Ignores Market Realities
Industry Survival Must Come Before Calls for Mutual Growth

With the prospect of a ceasefire on the horizon, the Middle East war continues to remain unresolved, and the clouds hanging over the region are not dissipating easily. The world remains heavily weighed down. The global community has been suffering for a prolonged period since the disruption of Middle Eastern oil supply due to the blockade of the Strait of Hormuz. However, the British current affairs weekly, The Economist, assessed that "the world is not experiencing the same extreme turmoil as four years ago when Russia invaded Ukraine." The analysis suggests that smaller oil-producing countries outside the Middle East have learned from repeated energy shocks. Of course, this situation cannot be considered sustainable. There are clear limits, and we must consider what comes next.

Korea, which depends on the Middle East for 70% of its crude oil, 20% of its natural gas, 35% of its naphtha, 38% of its urea, and 65% of its helium, also appears to be withstanding the shock of the Middle East war relatively well. Although oil prices have risen, the only concerns were temporary shortages of volume-based garbage bags and disposable syringes. Such almost miraculous resilience can be attributed to the "dream of a resource-less oil-producing nation," which began in 1964 in Ulsan against all odds. Today, Korea's oil refining and petrochemical industry, equipped with the world's fifth-largest refining capacity and fourth-largest ethylene production facilities, is fulfilling its role as a core national industry.

However, in contrast, the actual perception of the oil refining and petrochemical industry in Korean society is close to the worst. Whenever oil prices soar, the public suspects collusion among refiners. This time was no exception. Just a month after the Middle East war began, the prosecution launched an investigation into refiners and the oil association. The clear fact that global oil prices were skyrocketing due to the blockade of the Strait of Hormuz was deliberately ignored. No news has yet emerged that the prosecution confirmed any evidence of collusion among refiners. In retrospect, social aversion toward the oil refining and petrochemical industry began with former President Lee Myung-bak's odd remark in 2011 that "oil prices are strange." Then, Minister Choi Joong-kyung, who moved from the Blue House to the Ministry of Knowledge Economy, created budget gas stations as a way to pressure refiners and pushed for the import of diesel from Japanese refiners, which compete with Korean companies. As a result, gas stations closed one after another, and minimum wage fuel attendants were replaced by self-service pumps. To make matters worse, the humidifier disinfectant disaster occurred, leading to uncontrollable distrust of the chemical industry. Ultimately, even stricter regulations such as the Chemicals Control Act and the Chemicals Registration and Evaluation Act were introduced, further tightening the industry.

The Ministry of Trade, Industry and Energy's negative perception of the oil refining and petrochemical industry is clearly evident in the recently implemented and ongoing "oil product price ceiling system." The price ceiling system is an unfamiliar policy that the government hastily pushed forward on March 13, just two weeks after the outbreak of the Middle East war. While it is true that the ceiling system has helped stabilize society, it is also true that the government has shifted the entire burden onto refiners. The government providing financial compensation to refiners for their losses is not a privilege. It is a very reasonable compensation mechanism explicitly stipulated in Article 23 of the Petroleum Business Act. Compensation for losses incurred by the implementation of the price ceiling is usually based on the Singapore Mean of Platts (MOPS) for international oil product prices, which serves as the benchmark for domestic oil prices. This is the fair opportunity cost that refiners had to forgo due to the price ceiling system. Such demands by refiners are by no means unreasonable.

The government's insistence on using the "cost" of the representative bundled products—gasoline, diesel, and kerosene—as the standard is an unreasonable argument that contradicts even the most basic accounting principles. The controversy over the cost of gasoline and diesel began with Minister Choi Joong-kyung's embarrassing claims in 2011, when he emphasized his credentials as an "accountant." Sirloin and ribs, both produced from slaughtered cattle, are also bundled products. Unlike cars, where the cost is calculated by adding parts prices and labor, there is no separate cost for sirloin and ribs. From the butcher's perspective, selling the sirloin at a higher price and giving away the ribs as a bonus poses no issue. The price of bundled products is strategically determined in the market based on consumer choice. There are absolutely no secrets that refiners are hiding.

On the 23rd of last month, drivers were refueling at a gas station in Seoul. At that time, the Democratic Party of Korea, the government, and the Blue House decided to comprehensively consider market impact, international oil prices, and public burden before determining whether to implement the fourth oil price ceiling system. Photo by Yonhap News Agency

There is no reason to engage in unseemly arguments over the standards for compensation. What is needed is a social consensus on the extent to which refiners' losses should be compensated. In reality, even refiners who earn profits by producing petroleum products from crude oil do not expect 100% compensation for their losses. Refiners may also need the opportunity to make a generous contribution for the benefit of the public suffering from the shock of the Middle East war. Furthermore, the four major refiners posted an unexpected operating profit of 5.9635 trillion won in the first quarter. Of course, no one knows how long this wartime windfall will last. In any case, it is absolutely undesirable to accuse refiners of disregarding public suffering and being excessively greedy in pursuit of higher profits.

In fact, there is a more serious issue that the Ministry of Trade, Industry and Energy should be concerned about: the price of diesel. Due to the Middle East war, diesel prices in the international market have soared much higher than gasoline prices. In the Singapore international oil product market, diesel is traded at a price 33% higher than gasoline. On April 6, diesel in the Singapore market was traded at a price more than 1,000 won per liter higher than in Korea. In the United States as well, diesel is 31% more expensive than gasoline. This means that it is now impossible for the Ministry to distort diesel as a "cheap fuel" through fuel taxes.

The political sphere's perception is also distorted. The ruling party's Euljiro Committee (the Committee for the Protection of People's Livelihoods) is pressuring refiners and the petrochemical industry to sign a "mutual growth agreement" under the pretext of protecting livelihoods from the shock of high oil prices. The justification that large petrochemical companies should pursue mutual growth with small gas stations or plastic manufacturers may sound reasonable. However, it is unrealistic to demand unlimited concessions from the petrochemical industry, which is already struggling with deficits due to oversupply from China and the Middle East and excessively high industrial electricity rates. For the petrochemical sector, mutual growth with small businesses is not the only concern. Their own survival is an urgent issue. Simply rolling back raw material price increases retroactively and restricting exports cannot be the solution. In any case, reckless market intervention by the government and political circles is never desirable.

Deokhwan Lee, Professor Emeritus at Sogang University · Science Communication

This content was produced with the assistance of AI translation services.