The Fair Trade Commission has launched an investigation to see whether domestic oil refiners are engaged in price-fixing or other unfair trade practices. The commission’s move follows President Lee Myung-bak’s instruction on Thursday to check whether domestic gasoline prices are reasonable.
Lee made the instruction during a briefing on anti-inflation measures by a pan-government task force. He was quoted as saying, “When international crude oil prices shot up to $140 per barrel in 2008, domestic retail oil prices rose to 2,000 won per liter. These days, crude prices have fallen to $80-$90 per barrel. But domestic gasoline prices remain in the range of 1,800 to 1,900 won per liter. Isn’t this bizarre?”
On the face of it, the present level of retail oil prices looks too high. But if we look into the pricing structure, there’s nothing bizarre about it. In 2008, the government lowered the petroleum tax by 82 won per liter. The tax cut was temporary and is not in place now.
In addition, the petroleum import tariff rate has been raised from 1 percent to 3 percent, boosting oil prices by 11 won per liter. On top of that, the won has weakened against the dollar, pushing up domestic oil prices by 81 won per liter. Together, these factors alone increased retail gas prices by 174 won per liter.
But Lee suspects that oil refiners and gas stations make undue profits by raising retail prices quickly when crude prices soar while adjusting domestic prices slowly when international market prices go down. The FTC will find out whether refiners and gas stations have actually engaged in the practice.
According to refiners, the current oil pricing system leaves little room for price cuts. In the first place, crude oil accounts for over 40 percent of retail gasoline prices. Since Korea meets all of its oil demand with imports, there is no room for price reduction here.
Then, taxes, import tariff and surcharge levied on petroleum imports take up another 55 percent. Here, the room for price adjustment is large. But the government has ruled out any tax cuts, saying such a move is inappropriate in light of the need to reduce oil consumption.
The remaining 5 percent consists of distribution costs and margins of refiners and gas stations. Here again, the room for price reduction is narrow. Refiners say their operating profit ratio is 1.5 percent. During the first quarters of 2010, they earned 961.4 billion won in operating income by selling 63.4 trillion won worth of products, a profit ratio of 1.51 percent. If refiners give up their entire profits and cut investment costs, they can barely lower retail oil prices by 20-30 won per liter.
All this shows high domestic oil prices are largely the result of heavy taxes and the fall in the value of the Korean currency against the dollar. Nevertheless, the government is seeking to bring down prices by using its administrative power. Under the FTC pressure, oil refiners and gas stations are likely to lower retail oil prices by squeezing their profits. But this is neither fair nor normal.
President Lee was right in saying that oil prices are important because they affect the prices of a wide range of commodities. But he went too far by instructing officials to pressure refiners and gas stations into lowering oil prices. His coercive approach reminds us of the 1970s when the government controlled prices through administrative guidance.