[Exclusive] Crude Oil Prices Plummet... Government Crisis Manual Lacks 'Low Oil Price' Scenario

Industry Ministry-Led Oil Price Response Team Focuses on Monitoring Oil Price Trends
Industry: "Apply Tariff Exemption on Imported Crude Oil and Reduce Middle East Oil Import Charges"
Government: "Premature to Consider Tax System Reform Due to Short-Term Oil Price Fluctuations"

Crown Prince Mohammed bin Salman of Saudi Arabia (Photo by Reuters)

Vladimir Putin, President of Russia (Image source=Reuters Yonhap News)

[Asia Economy Reporter Moon Chaeseok] As the 'production increase war' among major oil-producing countries intensifies, the domestic industry is facing an emergency due to low oil prices, yet the government remains helpless. This is because the existing crisis response manual created by the government is only tailored to 'high oil price' situations. Experts advise that in the current crisis caused by low oil prices, support measures such as reducing the tax burden on related companies are necessary.

According to the Ministry of Trade, Industry and Energy on the 16th, the 'Crude Oil Supply and Demand Crisis Response Manual' created in March 2014 contains measures only for high oil prices and does not include any response plans for low oil prices.

Crude Oil Supply Crisis Response Manual (Source: Ministry of Trade, Industry and Energy)

This manual, used by the government to formulate energy supply and demand measures in emergencies, outlines response plans according to 'crisis alert levels' in stages: Interest (Blue) → Caution (Yellow) → Warning (Orange) → Severe (Red). However, there is no mention of countermeasures for low oil prices caused by increased production from oil-producing countries at any stage.

The Ministry of Trade, Industry and Energy has not updated this manual since its creation in March 2014, when international oil prices hovered around $100. A ministry official explained, "When events occur, technical and detailed matters are applied according to the situation, but there has been no major change to the manual's overall framework."

Crude Oil Supply Crisis Response Manual (Source: Ministry of Trade, Industry and Energy)

As a result, although the government formed an international oil price response team on the 10th with the Ministry of Trade, Industry and Energy, Korea National Oil Corporation, and the Korea Energy Economics Institute, there is nothing they can do beyond monitoring. The current response team is mainly focused on checking oil price trends. A member of the oil price response team said, "Since the current low oil price trend might be temporary, we are prioritizing monitoring price trends."

Crude Oil Supply Crisis Response Manual (Source: Ministry of Trade, Industry and Energy)

However, experts point out that the government must promptly prepare response measures as the related industry is struggling due to prolonged low oil prices. Moreover, oil-producing countries could further lower prices through additional production increases. There is criticism that the current approach cannot adequately respond to the global low oil price trend.

For example, just as strategic reserves are released to lower fuel prices during high oil prices, support measures such as applying zero tariffs on imported crude oil and reducing petroleum import levies, which are quasi-taxes, are being discussed for low oil prices.

According to the Korea Petroleum Association, among OECD member countries, only three impose tariffs on imported crude oil: Korea (3%), the United States (0.1?0.2%), and Chile (6%). Korea is the only non-oil-producing country among them. Companies also have to pay an import levy of 16 won per liter on crude oil and petroleum products imported from the Middle East.

[Image source=Yonhap News]

An industry insider said, "Unlike the past 'low oil price' period when falling prices increased consumption and improved margins, the current 'low oil price crisis' is a situation where the petroleum industry, a key national industry, faces existential uncertainty due to a sharp drop in demand caused by COVID-19. If it is difficult to expand factories or provide financial support, at least temporary measures such as reducing import tariffs on crude oil and petroleum import levies should be taken."

Professor Lee Deokhwan, Emeritus Professor of Chemistry and Science Communication at Sogang University, advised, "If it is difficult to provide taxpayer-funded support to refiners or increase capital investment in the Korea National Oil Corporation, temporary measures such as applying zero tariffs on imported crude oil should at least be implemented."

The Ministry of Trade, Industry and Energy holds the position that it is premature to announce support measures for specific industries. A ministry official said, "If the low oil price trend is judged to continue for a long time, we will prepare (practical) responses. Although this is an unprecedented situation where demand reduction due to COVID-19 overlaps with low oil prices, opinions that tax system reforms should be considered due to short-term oil price fluctuations are somewhat premature."