Price Cap Lowered by 150 Won, but Exit Strategy for Petroleum Price Cap Remains Unclear

The Longer the System Persists, the Greater the Need for Loss Compensation

Government: "Comprehensive Judgment Based on Hormuz and Market Conditions"

Yonhap News Agency

With the government lowering the 7th oil price ceiling by 150 won per liter, attention is now turning to the government's exit strategy for the oil price ceiling system. Although the crisis that prompted the introduction of the system has largely subsided—thanks to the rapid stabilization of international oil prices following the signing of a ceasefire memorandum of understanding (MOU) between the United States and Iran—tensions surrounding the Strait of Hormuz have not been fully resolved. In addition, the government is still faced with the challenges of compensating losses in the refining industry and managing fiscal burdens, so it remains cautious.

According to authorities on June 28, the stabilization of international oil prices was a key factor behind the government's decision to lower the price ceiling. Prices for Brent crude, West Texas Intermediate (WTI), and Dubai crude oil have all fallen to around $70 per barrel this month, and civilian vessels are gradually resuming passage through the Strait of Hormuz. The government has previously outlined the following conditions for ending the price ceiling system: the end of the Middle East war, normalization of navigation through the Strait of Hormuz, and stable international oil prices. On June 18, the government maintained the 6th price ceiling but stated, “If a new (7th) ceiling is set, the system could be maintained for at least 2 to 4 more weeks,” signaling a wait-and-see approach.

However, there is analysis suggesting that it will not be easy for the government to immediately terminate the price ceiling system. The main reason is the continued uncertainty surrounding the Strait of Hormuz. Despite a recent period of ceasefire, there have been a series of attacks on merchant ships sailing near the strait, heightening tensions once again. While navigation has resumed, insurance premiums and freight rates remain elevated, and major shipping companies are normalizing their operations in stages as they monitor safety conditions. The government also maintains that “whether navigation through the Strait of Hormuz has genuinely normalized is the most important criterion for decision-making.”

The problem is that the longer the system remains in place, the greater the government’s fiscal burden may become. As long as the price ceiling is maintained, refiners are required to supply oil at prices below the international market rate, so the losses that the government must later compensate will continue to accumulate. The government has currently secured about 4.2 trillion won in resources, but if international oil prices rise again or the price ceiling system is further extended, the required budget could also increase.

Meanwhile, differences in perspective between the government and the industry over the scale of losses remain unresolved. The government has recently issued an administrative notice for the “Fiscal Support Regulation for Loss Compensation Related to the Designation of Maximum Oil Selling Prices” and has begun the process of settling losses with refiners. The actual cost is calculated based on factors such as each refiner’s crude oil import cost, transportation fees, insurance premiums, manufacturing and distribution costs, depreciation, and labor costs, and the government adds a reasonable profit margin before compensating the losses. However, the government did not accept the industry’s demand to fully compensate for the difference between the international oil product price (MOPS) and the domestic maximum price.

Accordingly, the government believes that 4.2 trillion won will be sufficient for loss compensation. In contrast, the refining industry claims that if opportunity costs caused by the price ceiling are included, cumulative losses exceed 5 trillion won. If full-scale negotiations over the scope of recognized losses and compensation amounts begin, significant friction is expected.

An official from the Ministry of Trade, Industry and Energy stated, “Loss compensation will be calculated rationally, based on the actual cost burden incurred. We will ensure that support is provided at an appropriate level, following a review of market conditions and verification of the relevant data.”

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