Where the End of Energy Price Controls Leads [Energy-topia]

One Month Since the Implementation of the Petroleum Price Ceiling
Concerns Over Tax Fairness, Government Fiscal Burden
Market Distortion Becomes a Reality
Spike in LNG Prices Emerges as a Hidden Risk
A Second KEPCO Bond Crisis Could Ha

On April 2, 2026, at a gas station in downtown Seoul, a notice board displaying gasoline and diesel prices was seen as President Lee Jae-myung delivered a policy speech at the National Assembly regarding a supplementary budget for responding to the Middle East crisis. Photo by Yonhap News Agency

The war between the United States and Iran, which broke out on February 28, has entered a two-week ceasefire, but tensions surrounding the Strait of Hormuz, considered the energy lifeline of the Middle East, remain high. The much-anticipated negotiations have broken down, and the United States has imposed a blockade on the Strait of Hormuz. International oil prices are surging again.

This war has clearly exposed the vulnerability of South Korea's energy structure. South Korea relies on imports for 93% of its energy supply. Fossil fuels account for 80% of its primary energy, and 70% of crude oil is imported from the Middle East. As a result, South Korea is experiencing a greater shock than the United States, which is a party to the conflict.

After the Middle East war caused a sharp rise in prices of petroleum products such as gasoline and diesel, the government revived the petroleum price ceiling system, which had disappeared 30 years ago. This has been in effect since the 13th of last month, marking nearly a full month.

Experts expressed concerns about side effects ahead of the introduction of the petroleum price ceiling system. They warned that government intervention could distort the market. While the petroleum price ceiling system can stabilize prices and ease the burden on consumers in the short term, it can undermine tax fairness because losses suffered by oil refiners are compensated with taxpayer money.

The government allocated 4.2 trillion won in the supplementary budget to compensate for oil refiners’ losses resulting from the petroleum price ceiling system. If this amount had been used for direct support to those actually affected by high oil prices, such as truck drivers or farmers, the aid package could have been much more substantial. Naturally, there would have been no complaints such as, “Why should people who commute daily by subway or bus have to bear even the fuel costs of those commuting in luxury cars?”

However, oil refiners did not welcome the petroleum price ceiling system either. If the situation drags on, their actual losses could far exceed the government’s estimates. The government’s fiscal burden could also snowball.

Byungdo Han, Floor Leader of the Democratic Party of Korea, is speaking at the Social Dialogue and Win-Win Agreement Ceremony between Gas Stations and Oil Refiners held at the National Assembly on April 9, 2026. Photo by Hyunmin Kim

Despite the introduction of the petroleum price ceiling system, oil consumption actually increased. According to the Korea Institute of Petroleum Management, from the third week of March to the first week of April, after the system was implemented, gasoline sales reached 848,619 kiloliters, a 0.25% increase from the same period last year, which saw 846,511 kiloliters. This was due to speculative demand as consumers rushed to buy in anticipation of future price hikes.

As oil consumption did not decrease, the government implemented an alternating-day driving restriction (odd-even system) for public sector vehicles, following the already existing five-day rotation system. The government also strongly encouraged the private sector to participate. While large corporations and various associations responded, the measures have not escaped criticism as merely performative administration. If the government had not implemented the petroleum price ceiling system, perhaps citizens would have voluntarily minimized unnecessary vehicle use.

So far, petroleum products have been the main issue, but liquefied natural gas (LNG) prices are a hidden risk.

South Korea’s share of LNG imports from the Middle East is about 15%, so the country did not face a direct supply shortage as a result of this war. Although LNG prices in the Asian market more than doubled after the war, the impact on the Korean economy was limited in the short term because LNG is contracted at long-term fixed prices.

However, if high oil prices persist, LNG prices will inevitably become a burden. Industry observers expect domestic LNG prices to rise sharply starting around May or June.

Half of the LNG imported into South Korea is used for power generation. LNG, which is the most expensive among power generation fuels, determines the System Marginal Price (SMP), the wholesale price of electricity. Therefore, when LNG prices rise, it exerts upward pressure on electricity rates.

However, the government has already made it clear that electricity rates will be frozen. President Lee Jae-myung said at the Emergency Economic Inspection Meeting held at the Blue House on March 26, “As much as possible, we intend to maintain the current electricity rates without change.”

President Lee Jae-myung is presiding over the Emergency Economic Inspection Meeting at the Blue House on the 26th. March 26, 2026. Photo by Yonhap News

We know well what happened when electricity rates were suppressed during the Russia-Ukraine war. Korea Electric Power Corporation (KEPCO) was unable to reflect the soaring power generation costs in the electricity rates in a timely manner, resulting in a cumulative deficit of 47.8 trillion won from 2021 to 2022. To cover the deficit, KEPCO issued a large volume of bonds at high interest rates. As funds flocked to KEPCO bonds, the bond market fell into turmoil.

Many experts predict that even after the war ends, tensions in the Strait of Hormuz will persist, keeping oil prices elevated for the time being. In the worst-case scenario, the ceasefire negotiations between the United States and Iran could break down completely.

It is impossible to control energy prices indefinitely. President Lee has urged, “I ask all citizens to make special efforts to conserve electricity and reduce consumption where possible.” However, there is no energy-saving policy as effective as restoring market functions.

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