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Park Chan-kyong

For the first time in over three decades, South Korea is doing something it hoped it would never do again: telling the market what it can charge for fuel.
President Lee Jae Myung’s order is more than a mere policy reversal, however.
For a country that imports nearly every barrel it consumes, it is an act of pre-emptive self-defence – the reflex of an economy watching the Middle East burn and knowing exactly what that means.
Fuel prices have already surpassed 1,900 won (US$1.28) per litre at some Korean petrol stations for the first time in more than three years.

Behind that number lies a cascade of anxieties, from surging import costs to sluggish growth, creeping inflation and the spectre of stagflation.
“This extraordinary measure reflects its sense of crisis in the face of Middle East conflagrations and surging gas prices that are beyond its control,” said economics professor Hur Joon-young of Sogang University. “The government is trying to curb consumers’ expectations of rising prices.”
Speaking at an emergency meeting of economy ministers on Monday, Lee was blunt. Conflict in the Middle East was placing “a considerable burden on our economy, which relies heavily on global trade and energy imports”, he said.
His instruction to officials was direct: act swiftly, act boldly and plan for the worst.

“For petroleum products, whose prices have recently risen excessively, a maximum price system must be swiftly introduced and boldly implemented,” Lee told the assembled ministers.
He also warned that the government’s existing 100 trillion-won (US$67 billion) financial market stabilisation package, designed to inject liquidity into strained money markets, might need to be expanded.
Allegations have surfaced that some refiners and petrol stations may be using the war as a pretext to raise prices beyond what global movements would justify.
Lee ordered a crackdown on collusion, price gouging and hoarding, promising fines several times the profits generated.
“We must sternly punish those who seek to exploit the difficult market environment for illicit profits,” he said. “A crisis always imposes greater hardship on ordinary citizens who are already struggling.”
US$150 oil nightmare
Kim Yong-beom, the presidential policy chief, told reporters that the price cap would be in place within the week.
Under the proposed framework, the government would set a maximum allowable fuel price, adjusting the ceiling in line with global crude movements.
Officials say the mechanism is also designed to address what they describe as price “asymmetry”, or the long-observed tendency of refiners and stations to quickly raise prices at the pump when crude costs climb, but to drag their feet when global prices fall.
The move will help to ease the disproportionate cost burden falling on lower-income households, according to economics professor Kim Gwang-suk of Hanyang University.
“But it cannot prevent surging oil prices from adding inflationary pressure and affecting the broader economy, particularly the country’s petrochemical industry,” he said.

As one of the most oil-dependent economies in the Organisation for Economic Cooperation and Development, South Korea is set to struggle amid sustained disruption to Middle Eastern supply routes.
In a pessimistic scenario where the crisis drags on and the Strait of Hormuz is closed for several months, a recent report by the Hyundai Research Institute forecast that growth would fall by at least 0.3 percentage points and consumer prices would rise by an additional 1.1 points.
In a more severe scenario, with oil above US$150 per barrel and a prolonged blockade, growth could fall by at least 0.8 points and consumer prices rise by as much as 2.9 points.
“Under these circumstances, inflation would deal a significant blow to domestic demand,” said Joo Won, the institute’s head of research. “If signs of stagflation emerge in the global economy, exports could also decline.”
Growth in doubt
South Korea’s economy was already skating on thin ice before the energy crisis.
After roughly 1 per cent growth last year, the economy was expected to grow by about 2 per cent this year – but even that modest figure is now in doubt.
The geopolitical shock presents policymakers with a dilemma that has no comfortable resolution.


Traditionally, central banks respond to oil-driven inflation by raising interest rates. But that medicine could prove worse than the disease in an economy where investment and consumption are already subdued.
“Now it is difficult to do so,” Kim Jeong-sik, professor emeritus of economics at Yonsei University, told local news agency Newsis.
He warned that higher rates risked choking off growth, or worse. “Our economy is already slowing, and stagflation could further worsen the situation and even lead to a national debt crisis.”
Instead, Kim and others are urging the government to lower fuel taxes, expand infrastructure investment and find ways to stimulate the construction sector and create jobs without stoking the very inflation they are trying to contain.
The price cap buys time. Whether it buys enough will depend on how long the fires in the Middle East keep burning.


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South Korea enacts historic fuel price cap to fight Iran oil shock

A board shows prices as cars queue at a petrol station in Seoul, South Korea, on Monday. Photo: Reuters

A woman fills up her car at a petrol station in Seoul, South Korea, on Monday. Photo: Reuters

South Korean President Lee Jae Myung addresses a meeting on Monday to discuss the potential economic fallout from the Middle East conflict. Photo: Yonhap/dpa

A man fills up a vehicle at a petrol station in Seoul, South Korea, on Monday. Photo: AFP

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As a nation that imports nearly every drop of oil it consumes, South Korea is hitting the panic button to shield citizens from rising prices


As a nation that imports nearly every drop of oil it consumes, South Korea is hitting the panic button to shield citizens from rising prices.


South Korea enacts historic fuel price cap to fight Iran oil shock

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}As a nation that imports nearly every drop of oil it consumes, South Korea is hitting the panic button to shield citizens from rising prices

As a nation that imports nearly every drop of oil it consumes, South Korea is hitting the panic button to shield citizens from rising prices