Government Pushes for 'Maximum Petroleum Price System,' Sparking Price Intervention Debate and Loss Concerns... Alternatives Include Fuel Tax Rate Cuts [US-Iran War]

"Impossible to Induce Gas Stations to Lower Prices"

Refiners Warn of Potential Fair Trade Act Violation

Gas Station Industry Agrees but Calls for Supplementary Measures

Loss Compensation Among Alternatives to Stabilize Oil Prices

As domestic fuel prices have surged due to the ongoing US-Iran war, the government is expressing a strong determination to crack down on unfair practices such as price collusion. When some gas stations raised fuel prices by more than 100 won per liter in a single day, President Lee Jaemyung not only raised suspicions that these companies are exploiting the chaos to take excessive profits, but also referred to them as "malicious businesses," putting intense pressure on the refining and gas station industries. While the industry acknowledges the seriousness of the situation, it argues that a cautious approach is needed regarding the "maximum price designation system" currently under government review. There are concerns that unilateral price controls could increase losses, leading to reduced sales and, ultimately, consumer harm.

As gasoline prices surged domestically due to the airstrikes on Iran by the US and Israel, vehicles are lined up on the afternoon of the 5th at a gas station boasting the lowest prices in Ojeong-dong, Daedeok-gu, Daejeon. Photo by Yonhap News

On March 6, the refining industry stated that, in the absence of clarity on how a maximum price system would be implemented, it is difficult to respond hastily. Although President Lee mentioned the previous day that "realistic maximum prices for each region and type of petroleum should be designated quickly," no concrete details have been announced yet.

The industry also explained that it is impossible for refiners to force gas stations to lower their retail prices. This could be considered illegal price intervention. An industry representative commented, "If the headquarters intervenes in the prices set by individual gas stations, it could constitute resale price maintenance and potentially violate Article 29 of the Fair Trade Act. In reality, petroleum is a product with one of the most transparently disclosed prices, so the current price increases should be seen as a reflection of unstable market conditions and sentiment."

There are also concerns that price controls could affect market supply and demand, especially given the high volatility of international oil prices. A refiner representative added, "Refiners do not only sell their products domestically; they also export a significant portion overseas. Therefore, they maintain domestic supply while accepting a certain degree of opportunity cost. Compared to international market prices, it is difficult to say that domestic fuel prices have surged excessively."

The gas station industry also agrees with the intent behind the maximum price designation system but maintains that supplementary measures should be considered, taking into account real-world conditions. The reason is that gas stations could face losses in the sales process. A representative of the Gas Station Association explained, "The distribution margin that gas stations can control in their retail prices is very small; most of the price is made up of the supply price from refiners and fuel taxes. The recent increase in gas station retail prices is largely due to the rise in refiner supply prices."

However, the representative added, "If only gas station retail prices are capped while refiner supply prices are rising, gas stations will have to bear the losses. Therefore, mechanisms such as linking to supply prices or future loss compensation should also be reviewed as supplementary measures."

Other alternatives to stabilize fuel prices include: ▲ lowering the maximum flexible fuel tax rate ▲ providing fiscal support for loss compensation under the Petroleum and Alternative Fuel Business Act (Petroleum Business Act). Currently, the fuel tax cut is reducing gasoline prices by 57 won per liter and diesel prices by 58 won per liter. The statutory upper limit for the flexible fuel tax rate is 50%; if this rate is applied, gasoline could be reduced by an additional 352 won per liter. The fuel tax reduction measure is scheduled to end on April 30, but it can be extended through an amendment to the enforcement decree.

Attention is also focused on whether the government will provide fiscal support to compensate for industry losses. The amount of crude oil distributed domestically is about 40 billion liters; if there is a loss of 100 won per liter, this translates mathematically to about 4 trillion won in losses. Article 23, Paragraph 3 of the Petroleum Business Act allows for fiscal support to compensate refiners, petroleum importers/exporters, or petroleum distributors for losses incurred due to maximum price designation. However, this clause is discretionary, so it is not mandatory. A refining industry representative stated, "Given the government's strong stance, it seems inevitable that the industry will have to bear losses."

☞Maximum Price System for Petroleum

Under Article 23, Paragraph 1 of the Petroleum and Alternative Fuel Business Act, the Minister of Trade, Industry and Energy may set the maximum or minimum price for petroleum sales. This is permitted when petroleum import or sales prices fluctuate sharply or are at risk of fluctuating, in order to ensure stability in people’s livelihoods and smooth economic operation.

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