The government has extended its price ceiling on petroleum products yet again. It is the seventh month of the measure since it was first introduced in March, when fuel prices began climbing on the war in the Middle East. Under the extension, supply-based ceilings of 1,784 won per liter for gasoline, 1,773 won for diesel and 1,380 won for kerosene — frozen since late June — will remain in place for four more weeks. With tensions in the Strait of Hormuz escalating again and international oil prices surging to $120 a barrel, the gap between market prices and administered prices can only widen.
A cut in the fuel tax, which had been set to expire at the end of this month, was also extended by two months through November. On top of that, gasoline and diesel prices at 226 highway service stations run by the Korea Expressway Corporation will be lowered by 100 won per liter during the Chuseok holiday next week. The government calls the steps a response to concerns about the cost-of-living burden on low- and middle-income households, but holding fuel prices down by force for a prolonged period does more harm than good at a time when energy conservation is badly needed. It sends the mistaken signal that people can keep using fuel as they always have, and it can encourage excessive energy consumption. Indeed, from the second week of March, after the price ceiling took effect, through last month, domestic gasoline consumption fell only 2.1% despite the surge in oil prices.
The fiscal burden the government must shoulder is also snowballing. To cover losses stemming from the price ceiling, the government set aside about 4.2 trillion won in a supplementary budget for the first three quarters of this year. Another 1.4 trillion won for fourth-quarter support was included in next year's budget proposal. By the government's own estimate, that amounts to 5.6 trillion won in fuel subsidies this year. But the cost of forcing prices lower does not disappear. In the end, it must be covered by taxpayers' money and by losses at the refiners.
With the war in the Middle East dragging on, the price ceiling cannot be maintained indefinitely. The government should draw up an exit strategy now, one that takes into account fiscal soundness and the need to curb demand. Concentrating support on vulnerable groups and drivers who depend on their vehicles for a living, while ending the price ceiling, is the way to minimize market distortions. The fuel tax cut, too, needs to shift from blanket extensions to targeted support. There is no such thing as a free lunch.
