Gov’t, oil refineries at odds over domestic gas prices

President Lee Myung-bak’s comment of “strange oil prices” last month has revived the dispute over gas prices between the government and the oil refining industry.

At an economic policy coordination meeting Wednesday, Strategy and Finance Minister Yoon Jeung-hyun blasted the oil refining industry as “monopolistic” and called gas prices in Korea the highest among member countries of the Organization for Economic Cooperation and Development.

The sector immediately denied Yoon’s allegation.

The government and the industry also hold different opinions on the asymmetry between international and domestic oil prices and on the cause of huge profits the industry reaped last year.

○ Highest gas prices in the OECD

Yoon provoked controversy by saying, “The pre-tax gasoline price in Korea is 113.2 while the OECD average is 100. This is incomprehensible.”

According to Korea National Oil Corp., the average pre-tax gas price for an OECD member country was 924.9 won (83 U.S. cents) per liter last month, but Korea’s was 1,046.7 won (93 cents), the second highest after Japan’s 1,173.5 won (1.05 dollars).

The oil refining industry claimed the government’s analysis is wrong, however, saying the state-run oil company’s statistics that Yoon cited apply to high-quality gasoline that Koreans rarely use.

The industry said most advanced economies use high-quality gasoline with octane higher than 95, but that in Korea, high-octane gasoline accounts for just 1 percent of gasoline sales. The octane is a measure of the ignition quality of gasoline, with a higher octane meaning higher prices.

In a rebuttal to the government’s claim that Korea’s gas prices are among the highest in the OECD, oil refiners said the price of gasoline with an octane rating between 91 and 94, which Korea uses the most, is around 5 percent lower than the OECD average.

The industry’s counterargument is incorrect, however. A comparison with 11 OECD countries that use gasoline with a similar quality to Korea’s (92 octane) shows that gasoline in Korea is not that cheap.

According to the International Energy Agency, the price of regular gasoline in Korea was 814.2 won (73 cents) per liter in late September last year, fifth highest among the 11 countries and higher than the OECD average of 802.8 won (72 cents).

○ Rise more and fall less

The government is also determined to tackle the asymmetry between international and domestic oil prices, or a situation in which domestic oil prices rise more and falls less than international prices.

The oil refining industry, however, said the asymmetry is inevitable because of a time gap between the price setting of international oil and domestic sales.

The international gas price (the price of Singapore oil futures), which is the base price domestic oil refiners use when they set domestic gas prices, is set a week ahead. In addition, one or two months are needed for oil imports to reach Korea so a simple comparison between international and domestic oil prices is impossible, according to the industry.

Given the time gap, however, the asymmetry still exists, the government said.

According to a 2009 Fair Trade Commission report that considered the two-month time gap between international and domestic gas prices, when the domestic gas price rose 1 won from January 1997 through November 2008, that of international oil rose 1.15 won.

When the latter fell 1 won, the former fell just 0.93 won, however. This means the domestic gas price grew 15 percent more and fell 7 percent less than that of international oil.

○ Export prices lower than domestic prices

The government also disagrees with the industry over the cause of the sector’s stellar performance last year.

SK Innovation recorded 30.36 trillion won (27.1 billion dollars) in sales last year, up 25.1 percent from the previous year, and 985.4 billion (879 million dollars) won in operating profit, up 23 fold.

GS Caltex’s sales rose 26.5 percent to 35.32 trillion won (31.5 billion dollars) and its operating profit grew 60.3 percent to 1.2 trillion won (1.07 billion dollars) last year.

On this, the industry said, “The sales margin of domestic gasoline is a meager 2 percent, so most profits come from exports.”

The government has a different opinion, however, saying export and domestic sale prices are different.

A Fair Trade Commission report said that when international oil prices rose 1 won from January 1997 through November 2008, the export price of domestic gasoline rose 0.9 won. In other words, the industry raised export prices less and domestic prices more when international oil prices rose, meaning oil companies reaped profits at the expense of Korean consumers.

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