PetroDollars: South Korea tries to tame gasoline prices

Irresistible force is meeting immovable object in South Korea. Rising crude prices–or at least, rising until recently–is running up against the country’s regulation of gasoline prices and its desire to keep them as low as possible. Mriganka Jaipuriyar discusses the dilemma in this week’s Oilgram News column, PetroDollars.

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The South Korean government can’t be accused of not trying. The administration of President Lee Myung-Bak has been working very hard over the past year to lower gasoline and diesel pump prices and has come up with some creative solutions.

The fact that retail oil prices have continued to rise can only be attributed to the country’s absolute dependency on imported oil, which makes it vulnerable to volatility in international markets. South Korea imports around 2.5 million b/d of crude, with more than 80% of that coming from the Middle East.

The four local refiners have been at the receiving end of most of the government’s measures to cut prices. SK Innovation, GS Caltex, S-Oil and Hyundai Oilbank almost fully control the supply chain from production to retail through exclusive contracts with the country’s 13,000 retail outlets, around 25% of which are directly operated by them.

The government has held refiners responsible for high pump prices and has accused them of acting as an oligopoly, even fining them for price collusion.

For their part, the refiners say pump prices are linked to international markets and follow global trends, a position that is supported by a closer look at the numbers. Retail gasoline prices in South Korea had increased by 4.7% year on year to Won 2,030 ($1.79)/liter at the end of March, according to data from state-run Korea National Oil Corporation. Over the same period, benchmark Mean of Platts Singapore 95 RON gasoline gained 11.76% to $136.46/b, or 86 cents/l.

In an effort to boost transparency and competition, Seoul earlier this year set up “discount” gasoline pumps and launched an online spot trading platform for oil products. There are currently 450 discount outlets in the country and the target is 1,000 before the end of the year.

These outlets are supplied by KNOC, which in turn buys fuel via tender from refiners and importers. More recently, the government signed an agreement with Samsung Total Petrochemicals to supply gasoline produced at its petrochemical facilities to the discount pumps. Samsung Total has until now been exporting all the gasoline it produces.

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Average gasoline and gasoil prices at the discount stations are around Won 35-40/l or 1%-2% cheaper than regular outlets, one energy ministry official said. But prices are expected to drop further once new fiscal incentives–mainly tax breaks for the discount outlets–kick in and Samsung Total starts supplies, he said.

The new online oil products spot market was launched on March 30, in theory providing a trading platform for the retail station owners as buyers and the refiners and importers as sellers. But daily trade has so far just been 81,000 liters of gasoline and gasoil, a tiny fraction of national demand of around 90 million liters.

The online market’s poor performance has prompted the government to offer a tariff exemption on any imported products traded, compared with the 3% levy imposed on products sold in the regular market. Seoul also offered to refund Won 16/l of tax on imported products traded online and has eased regulations to boost imports.

Starting this month, oil importers are not required to maintain stocks equivalent to 30 days of imports and can qualify to import refined products as long as they have minimum storage capacity of 5,000 kiloliters (31,500 barrels), down from 7,500 kl earlier.

Prices on the online market have been Won 10-50/l lower than supply prices by oil refiners at regular outlets. “Online prices would be [further] lowered when more oil importers and refiners join the market,” the ministry official said.

The government has also turned its focus on consumers and is planning measures to curtail rising demand. South Korea’s products use in the first quarter of 2012 rose 1.2% year on year to 209.11 million barrels, according to KNOC, with gasoline use up 5.3% at 17.18 million barrels and diesel up 1.9% at 32.71 million barrels.

“The government has taken various steps to bring down retail oil prices, which have focused on suppliers, but the demand side should be addressed as well,” one energy ministry official said. The measures, expected to be announced in coming weeks, might include regulations to lower oil demand for power generation and automobiles.

Critics meanwhile have blamed high taxes, which account for 45% of pump prices, and an export-oriented foreign exchange policy for the high domestic oil prices. Given any appreciation of the local currency, the won, would damage exports–which account for 53% of South Korea’s GDP–the only viable choice appears to be a tax cut.

Oil taxes accounted for 14% of the government’s revenue in 2010, however, and Seoul has ruled that option out.

“The government will consider lowering taxes on oil prices [only] if the price of Dubai crude stays above $130/b,” a senior finance ministry official said recently. With Dubai now at $116/b, South Koreans might just need a higher oil price in order to pay less to fill their cars.

Platts