An Easy but Reluctant Card to Play... Why Is the Government Lowering the Fuel Tax? [Biz View]

Various Taxes on Petroleum Products Resurface
Fuel Tax Cut in 2018
Fuel Price Drop More Influenced by International Oil Prices
Pushed as Part of "Stabilizing the Low-Income Economy"

A gas station in downtown Seoul on the 21st. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Choi Dae-yeol] The 'fuel tax cut' is a card the government is reluctant to play. There are already many taxes attached to petroleum products under various names, and this would further highlight parts they prefer to keep hidden.

According to government sources, the fuel tax cut is expected to be around 15%, which alone would lower gasoline prices by about 120 KRW per liter. The fuel tax currently stands at about 820 KRW per liter, including transportation tax, education tax, and driving tax. When the top official of past policies remarked that "gasoline prices are strange" (Lee Myung-bak, January 2011 Price Stabilization Meeting), the cold response from inside and outside the industry was due to this reason.

The constantly fluctuating international oil prices are likely to diminish the policy's effectiveness. If oil prices continue to rise, even with a fuel tax cut, the reduction in consumer burden will be limited; conversely, if oil prices fall, the government is likely to be criticized for acting too hastily. This means it is difficult to time the policy appropriately. Another concern is the low proportion of directly operated gas stations outside Seoul where the tax cut effect would be immediately visible. According to the Korea National Oil Corporation, the proportion of directly operated gas stations is about 26% in Seoul, but only about 6.8% nationwide.

Trends in gasoline price changes after the 2018 fuel tax reduction. The price supplied from refineries to gas stations (blue line) and the retail price borne by end consumers (red line) move with a time lag of about 1 to 2 weeks.

International Oil Price Trends Since November 2018

2018 was such a case. In October of that year, international oil prices exceeded 80 dollars per barrel, and the government lowered the fuel tax in the first week of November. However, a month later, oil prices dropped by 10 dollars, and another month later, they fell by about another 10 dollars. By the end of the same year, prices had fallen to the 50-dollar range per barrel (Dubai crude basis, WTI was 45 dollars).

According to the Korea National Oil Corporation's oil price information site OPINET, gasoline prices were about 1,660 KRW per liter in the first week of November 2018 but dropped to around 1,400 KRW by the end of the year. Considering the time lag between international oil price fluctuations and their impact on domestic petroleum product final prices, the level of consumer burden decreased less than the extent of the international oil price drop.

Deputy Prime Minister for Economy Hong Nam-ki is attending the National Assembly's Public Accounts Committee hearing on the Ministry of Economy and Finance, the Bank of Korea, and others held at the National Assembly on the 21st, responding to questions from lawmakers. Photo by Yoon Dong-ju doso7@

Since cutting taxes does not dramatically increase fuel consumption, the government must be prepared for reduced tax revenue. Similar to 2018, it is expected that about 20 trillion KRW more in taxes will be collected by the end of this year, so the fuel tax cut is framed as a measure to ease the burden on the low-income economy, but there are already skeptical views about whether it will be effective. There is talk about the need for more precise measures to support low-income and vulnerable groups hit by COVID-19.

Despite being a card with limited benefits from the government's perspective, it is interpreted that the decision to use it stems from a strong will to stabilize prices. With recent consecutive increases in raw material prices causing inflationary pressures everywhere, prices of daily necessities have already soared. Since petroleum products like gasoline affect the producer and consumer price indices surveyed by the Bank of Korea, lowering the fuel tax is intended to 'manage' price indicators.

An industry insider who wished to remain anonymous said, "There is enough reason for prices to rise given the large amount of money that has been pumped into the market through disaster relief funds and other means," adding, "With only a few months left until the election, there is ample reason to at least superficially adjust prices directly related to people's livelihoods."