[Friday Story] First Day of Fuel Tax Cut at Gas Stations: "Prices Unchanged VS Less Burden"

Average Gasoline Price Drops by 32.2 Won on First Day of Fuel Tax Cut
Decline Larger Than 24.8 Won Drop on First Day of November 2018 Fuel Tax Cut
Discount Reflected at Directly Operated Gas Stations... Independent Stations Unable to Lower Prices Due to Inventory
Price Fell 75 Won in First 3 Days Back Then, Down 15% in 10 Days
Price Decline Trend in First Week of Fuel Tax Cut Is Crucial
Effect of Oil Production Increase If Iran Nuclear Deal Reached... Low Probability

Fuel price information at a gas station in Seoul on the 11th, one day before the fuel tax reduction. The government will temporarily reduce the fuel tax by 20% for about six months starting from the 12th. Photo by Hyunmin Kim kimhyun81@

[Asia Economy reporters Choi Dae-yeol and Hwang Yoon-joo] "The fuel tax cut starts today, right? Why are the prices still the same? I'll just put in 30,000 won worth."

At 9 a.m. on the 12th, a driver who visited a gas station in Deungchon-dong, Gangseo-gu, Seoul, looked at the prices posted at the entrance, asked the gas station staff, and then refueled gasoline. Two more vehicles that arrived afterward asked the same question. The staff replied, "The prices haven't dropped yet. For privately owned gas stations, the prices will go down soon after the existing stock is sold out."

Around the same time, at a Hyundai Oilbank directly operated gas station in Sangdo-dong, Dongjak-gu, about ten cars were waiting in line. On the opposite road, some vehicles trying to enter the gas station were blocking the way, causing some disorder in the area. Kim, an office worker commuting to Bundang, said, "I stopped by on my way to work because directly operated gas stations were lowering prices early," adding, "Fuel costs had been somewhat burdensome, so I hope it will ease a bit."

On the first day of the fuel tax cut application, a morning survey revealed varying responses among gas stations in Seoul. Most directly operated gas stations, where prices reflect the refiners' decisions immediately, lowered prices promptly in line with the tax cut, while privately owned gas stations showed mixed reactions. Some lowered prices slightly by 30 to 40 won, others by around 150 won similar to directly operated stations, but many had not reduced prices yet.

According to data from the Korea National Oil Corporation's price information service Opinet, 139 gas stations in Seoul lowered the price of regular gasoline by 164 won per liter, reflecting the 20% fuel tax cut. Including those that lowered prices even slightly, a total of 209 stations participated in the price reduction. This accounts for about 40% of all gas stations in Seoul. Considering that there are about 119 directly operated gas stations and 12 discount gas stations in Seoul, it appears that price cuts were mainly led by directly operated stations, with some privately owned stations following suit.

On the 12th, when the government's six-month temporary 20% reduction in oil tax began, fuel price information was displayed at a directly operated gas station in downtown Seoul. The photo on the left shows the fuel price information at the same gas station on the 11th. Photo by Mun Ho-nam munonam@

The temperature difference between directly operated and privately owned stations was somewhat expected. Large refinery companies absorbed some losses to lower fuel prices, but privately owned gas stations, as individual businesses, had purchased existing stock at full tax rates, making it difficult to immediately reduce selling prices. However, unlike in the past, organizations mainly composed of privately owned gas station owners, such as the Petroleum Distribution Association and Gas Station Association, have agreed to reflect the fuel tax cut as soon as possible, so the timing of price reductions is expected to be accelerated. An industry insider said, "Since discussions about the fuel tax cut began a few weeks ago, inventory has been managed to bring forward the timing of price reductions by about a week."

The start is not bad. According to Opinet, as of 11 a.m., the average nationwide gasoline price was 1,778.4 won, down 32.2 won from the previous day. This decline is larger than the 7.4 won drop on the first day of the previous fuel tax cut in November 2018. The one to two-week lag in price perception after past fuel tax cuts was mainly because privately owned gas stations overwhelmingly outnumbered directly operated ones outside Seoul.

The effect of the fuel tax cut over the next three days depends on the participation of privately owned gas stations in price reductions and international oil prices. During the first three days of the November 2018 fuel tax cut, prices dropped significantly, helping stabilize fuel costs. Cho Sang-beom, team leader at the Korea Petroleum Association, explained, "The price drop was large on the first and second days of the 2018 fuel tax cut due to the combined effects of directly operated gas stations lowering prices and falling international oil prices."

While the upward trend in international oil prices has paused, the Iran nuclear negotiations scheduled for the 29th are expected to be a major variable. Although the likelihood of an agreement is low, if reached, sanctions on Iranian crude oil would be lifted. Kim So-hyun, a researcher at Daishin Securities, analyzed, "If Iran's crude oil exports are permitted, supply in the oil market could increase in the short term," adding, "Exports could increase by 2 million barrels within a month at the earliest."