South Korea considers price controls to curb fuel costs

South Korea plans to implement a maximum price designation for petroleum products this week as domestic gas prices soar amid the Middle East crisis. Officials say controlling prices is necessary to stabilize the market in what they describe as an emergency. If enacted, it would be the first government intervention in oil pricing since deregulation in 1997, and authorities are preparing carefully to manage potential side effects.

Under the Petroleum Business Act, the government can set maximum prices for oil products when prices spike. However, officials warn that price controls can distort markets and increase fiscal burdens. During the oil crises of the 1970s and 1980s, government-set prices below production costs led to reduced output from refiners and hoarding at gas stations. In Europe, a 2023 cap on wholesale natural gas prices prompted some suppliers to redirect sales to Asia at higher prices, highlighting how controls can shift supply rather than contain costs.

To minimize such side effects, authorities say strict measures to prevent hoarding or collusion are essential. Compensating refiners and gas stations for the gap between production costs and capped prices may also be necessary. The Korea Petroleum Association, which supports the maximum price policy, has stressed that compensation and reconciliation of losses are key conditions. While the Petroleum Business Act allows for such support, large fiscal outlays require careful design.

Government-imposed energy price reductions can also remove incentives to conserve fuel. This could lead to hoarding and higher import costs, placing additional strain on public finances. Critics warn that subsidies could disproportionately benefit wealthy consumers of luxury cars or large SUVs. Like previous extensions of fuel tax cuts, once energy prices or taxes are lowered, raising them again can be politically difficult.

The duration of the Middle East crisis remains uncertain. Authorities say the timing, duration, and termination conditions of price controls must be clearly defined to prevent fiscal waste if the crisis continues.

To fund emergency measures, the government is considering an early supplementary budget using increased revenues from the stock market rally and strong semiconductor exports. Officials say that in wartime or other emergencies, decisive government action beyond market expectations and existing policies is essential. At the same time, interventions carry costs and risks, making careful targeting of fiscal resources crucial to avoid waste.