Seoul Gasoline Prices Likely to Exceed 2,000 Won This Week... Sharp Divisions Over Tax Reform

Macroeconomics, Taxation, and Energy Experts All
Express "Agreement" on Easing the 3% Rule for Crude Oil Import Tariffs

A scene of gasoline being sold at a price in the 2000 won range per liter at a gas station in Seoul. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Moon Chaeseok] Due to Russia's invasion of Ukraine and other factors causing a sharp rise in international oil prices, domestic fuel prices in South Korea are approaching 2,000 won per liter. Although oil prices have recently plummeted, domestic prices typically reflect international trends with a 2-3 week delay, so gasoline prices are expected to continue rising for the time being. However, opinions are divided on whether to expand tax reforms such as fuel tax cuts, with some advocating for action and others urging caution.

According to the Korea National Oil Corporation's oil price information site Opinet on the 10th, the average gasoline price in Seoul was 1,969.88 won per liter, up 9.05 won from the previous day. Jeju, where gasoline prices are the highest nationwide, rose by 0.41 won to 1,973.53 won. The national average also increased by 6.92 won to 1,899.32 won during the same period. Domestic gasoline prices had been falling for nine consecutive weeks since November 12 last year due to government fuel tax cuts but reversed to an upward trend from early this year. The recent surge in international oil prices due to the Ukraine crisis has accelerated this rise.

Possibility of Gasoline Price Surge Despite Falling International Oil Prices

International oil prices, which had surged close to $140 per barrel, declined due to expectations of increased production by oil-producing countries. On the 9th (local time), West Texas Intermediate (WTI) crude oil closed at $108.70 per barrel on the New York Mercantile Exchange (NYMEX), down $15 (12.1%). This was because the United Arab Emirates (UAE) announced it would request OPEC Plus (+) producers to increase output more rapidly.

Although international oil prices have sharply dropped, concerns are growing that domestic fuel prices will continue to rise. The WTI price fluctuated significantly, rising from $102 to $122.53 per barrel within a week from the 1st to the 8th. A bigger issue is that domestic gasoline prices reflect international oil prices with a 2-3 week delay, meaning the recent surge in international prices following the Ukraine crisis has not yet been fully reflected in domestic gasoline prices. This delay raises fears that gasoline prices could rise sharply once the increase is reflected.

As a result, forecasts suggest that Seoul's gasoline price will exceed 2,000 won this week, and the national average will surpass 1,900 won. If Seoul's gasoline price exceeds 2,000 won, it will be the first time in 12 years since 2010. Some in the industry even pessimistically predict prices could soar to the 3,000 won range. This outlook is supported by factors such as Western countries like the U.S. and the U.K. imposing sanctions on Russian oil imports and the government's fuel tax cut policy not effectively countering external variables.

Fuel Tax 20% Cut: "Expand the Scope" vs. "No Patchwork Law"

The government has decided to extend the 20% fuel tax cut and 0% liquefied natural gas (LNG) tariff allocation period by three months, which was originally set to end next month. However, some voices call for stronger measures, suggesting the fuel tax cut rate should be expanded to 30% considering the pressure on low-income households. To raise the cap to 30%, the current Transportation, Energy, and Environment Tax (Transportation Tax) law must be amended. According to the Korea Petroleum Association, expanding the fuel tax cut from 20% to 30% is expected to reduce prices by an additional 141 won per liter. Professor Kim Young-ik of Sogang University Graduate School of Economics said, "Since the global economy is likely to enter a recession soon, it is a time to manage the economy flexibly, which is why temporary fuel tax cuts are being considered. We must consider the risk of stagflation, where prices rise during economic slowdown."

However, some argue that tax reform should be approached cautiously to avoid creating a "patchwork tax system," and that it would be better for consumers to criticize price adjustments at certain gas stations rather than amending laws. Professor Ahn Chang-nam of Gangnam University’s Department of Taxation pointed out, "The recent surge in international oil prices was caused by a mismatch of supply and demand due to the Ukraine crisis, but oil prices may fluctuate sharply again during the energy transition process. Changing tax rates each time could result in a patchwork law." Lee Seo-hye, research director of the Energy and Oil Market Monitoring Group, a civic organization monitoring gasoline prices, said, "At SK Energy's Seonam gas station in Jung-gu, Seoul, gasoline is being sold at 2,829 won per liter, the highest ever, even exceeding prices during the high oil price period of 2012-2013. If international oil prices surge to $150 or $200 per barrel as some international investment banks forecast, expanding fuel tax cuts will be necessary. However, it is preferable to guide consumers to avoid gas stations with relatively high prices rather than relying solely on government measures."

Temporary Relaxation of 3% Crude Oil Import Tariff "Worth Considering"

Experts in macroeconomics, taxation, and energy unanimously agree that temporarily improving the 3% crude oil import tariff rule is worth considering. This regulation, which has not been touched for 14 years since 2008, is applied only in South Korea, the U.S., and Chile worldwide. Among non-oil-producing countries, South Korea is the only one applying it.

While fuel tax cuts have a greater impact on crude oil and gasoline prices, reducing import tariffs would also significantly affect the cost of crude oil inflow for refiners and the manufacturing cost of petroleum products for petrochemical companies. Considering the government's goal of price stabilization, this measure is worth considering. Moreover, with the possibility of a prolonged war and international investment banks forecasting prices up to $200 per barrel, there is growing demand for the government to take proactive and bold measures.

Professor Ahn said, "If South Korea's import tariffs on certain items are excessively high compared to competing countries, adjustments should be made to support export companies' price competitiveness. Comparing South Korea's tariff rates with those of competing countries among non-oil-producing nations, if Korea's rates are higher, they should be lowered."

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