In January, President Lee Myung-bak said there was something fishy about domestic gasoline prices. When international crude prices soared, he said, domestic prices of gasoline seemed to go up correspondingly without delay, but when crude oil costs dropped, retail gasoline prices appeared to fall slowly and by a smaller margin.
The president’s comment was a signal that the government would step up pressure on the four domestic refiners ― SK Innovation, GS Caltex, S-Oil and Hyundai Oilbank ― to lower the prices of gasoline and other oil products as part of its fight against inflation.
Hence it launched a task force to determine whether there were asymmetries in the movements of crude oil and retail gasoline prices. The team has wrapped up its investigation and presented its findings Wednesday. As expected, it said it found many instances of disparity, suggesting that domestic refiners earned more profits during the periods when retail prices diverged from crude oil quotes.
But Yoon Won-cheol, a professor of Hanyang University who was a member of the task force, begged to differ. He said asymmetries might or might not appear depending on how the price data was divided into periods. More importantly, he stressed, it would be mistaken to view such discrepancies as evidence that refiners fixed prices or earned excessive profits.
Nevertheless, the task force drafted a set of measures to align the movements of domestic prices of oil products with those of international crude prices. The package included launching an online market for petroleum products within this year; promoting the establishment of a futures market by late 2012; and supporting the growth of independent gas stations not affiliated with the four refineries.
It also called for easing the rules to allow a gas station affiliated with one of the four refiners to purchase fuel from other refiners. This is intended to stimulate competition among refineries, which in turn would lower fuel prices.
These measures, however, are unlikely to be of much help in bringing down petroleum product prices given the little room for price cuts available within the current pricing structure. Last year, domestic refiners earned 9.1 won in operating income per liter of gasoline they sold. This means the maximum price reduction they can offer for gasoline, even when they give up their entire operating income, is less than 10 won per liter.
Nevertheless, the four refiners have decided to lower their prices of gasoline and diesel by 100 won per liter for three months starting Thursday. Announcing the price cuts, the refiners stressed their decisions were voluntary and reflected their desire to help the government bear down on inflation. But it is as plain as day that they were browbeaten by economic ministers and other high-ranking government officials into cutting the prices of the key transportation fuel.
Their decisions would help ease inflationary pressure to some degree. But the government should have avoided forcing them to make such costly sacrifices. If oil prices had to be lowered to curb inflation, it should have taken an ax to oil taxes as it did in 2008.
Taxes, customs tariffs and surcharges levied on oil imports account for more than 50 percent of retail gasoline prices. Thanks to the recent surge in crude prices, the government’s oil-related tax revenues during the first three months of this year increased by about 1 trillion won from a year ago. If crude prices remain at the current level throughout the year, the revenue increase would exceed 4 trillion won. The government should have sacrificed some of this windfall before twisting the arms of private companies.
