[Diesel Price Shock] Impact Extends to Ships and Excavators on Trucks... Sweeping from Small Businesses to Large Corporations

Truck and Freight Drivers Face 'Livelihood Emergency'
Government Quickly Implements Subsidy Support but Effectiveness in Doubt

Following Renewable Energy Policy Shift
Diesel Prices Experience Repeated Sharp Fluctuations
No End in Sight for Soaring Diesel Prices Amid Supply Instability

As domestic diesel prices recently surpassed gasoline prices and continue to soar, they have crossed the 2,000 won per liter mark for the first time in history. [Image source=Yonhap News]

#Cargo driver Park Jong-won (44) saw his income drop to the high 2 million won range last month. While there were months when his income exceeded 5 million won during periods of high logistics volume, the sharp rise in diesel prices wiped out all his earnings. In May last year, diesel prices were around 1,340 won per liter, but recently they have been at the 1,900 to 2,000 won level. Filling up a 100-liter fuel tank on a cargo truck now costs about 60,000 to 70,000 won more than a year ago. Park said, "Although logistics costs are increasing, cargo drivers still find it hard to feel the impact in their income," adding, "Due to the growing fuel costs from long-distance driving, there is even a trend among cargo drivers to take fewer long-distance jobs."

The surge in diesel prices despite expanded fuel tax cuts is causing increasing ripple effects across the industrial sector. Diesel is used broadly in manufacturing, agriculture, and metal industries. Particularly, the logistics sector, which relies on diesel-powered tankers, trains, and trucks, is affected, and the pressure on prices is expected to increase the burden on general consumers as well.

According to the Korea National Oil Corporation's oil price information service OPINET, as of noon on the 26th, the average diesel price at gas stations nationwide rose by 0.88 won from the previous day to 2,003.56 won. Diesel prices have been higher than gasoline prices since the 11th (diesel at 1,947.59 won vs. gasoline at 1,946.11 won), continuing this reversal for over two weeks. This also surpassed the previous record high of 1,947.75 won set in July 2008 during the financial crisis.

◆Premature Renewable Energy Transition...The 'Structural Surge' in Diesel Prices= The structural cause of the recent sharp rise in diesel prices is widely believed to be the rapid global transition to renewable energy policies after COVID-19. In April 2020, following the outbreak of COVID-19, global demand dropped, causing diesel prices to fall below 1,000 won per liter, reaching 954 won?a 25% decrease from 1,273 won five months earlier. Major countries announced carbon neutrality and renewable energy investment plans one after another. The profitability of fossil fuels like oil and gas declined, and massive subsidies for renewable energy disrupted the balance of energy supply and demand. The 'global misstep' in energy transition became apparent as COVID-19 vaccines were distributed and global demand recovered. By March last year, diesel prices rose to 1,231 won per liter, regaining pre-pandemic levels.

The situation worsened with Russia's invasion of Ukraine in February. A global shortage of diesel inventory, especially in Europe where diesel vehicles are common, was a key factor. When Russia invaded Ukraine on February 24, international oil prices surged. Europe depends on Russia for about 60% of its diesel imports, and sanctions on Russian oil products following the invasion caused diesel prices to rise sharply. Consequently, domestic diesel prices also rose from 1,364 won in January, just before the war, to about 2,003 won now?a 46% increase in four months.

Since Korea refines imported crude oil to produce diesel, international diesel supply shortages do not immediately affect domestic diesel prices. However, domestic gasoline and diesel prices are set by a 'linked system' aligned with international prices traded in Singapore. This means there is a limit to selling diesel domestically at lower prices than the international market. Therefore, when international diesel prices rise, domestic diesel prices naturally follow.

Baek Young-chan, a researcher at KB Securities, said, "Since there has been no significant supply expansion from refiners recently, diesel prices are expected to remain strong in the second half due to supply shortages, and demand is unlikely to drop sharply due to factors like COVID-19 endemicity. While it is difficult to specify price forecasts, prices may not fall below current levels for a considerable period."

Diesel prices have risen sharply, with diesel vehicles such as tour buses parked in a lot in Seoul.
[Image source=Yonhap News]

The logistics industry, which has a high proportion of fuel costs, is taking a direct hit. A logistics industry official explained, "Individual truck owners sometimes operate only short distances because long-distance trips result in losses," adding, "From the perspective of logistics companies, there are difficulties in meeting the volume of orders." For example, Korean Air's fuel costs increased from 325 billion won in the first quarter of last year to 660 billion won in the first quarter of this year, roughly doubling. During the same period, HMM's fuel costs rose from 208 billion won to 332.9 billion won. Hyundai Glovis also saw transportation and vessel operation costs surge from 769.3 billion won and 283.2 billion won to 2.02 trillion won and 388.9 billion won, respectively. Before the COVID-19 crisis, Hankook Tire paid 200 billion won for shipping costs, but last year paid 440 to 450 billion won for logistics. This year, logistics expenses are expected to approach 1 trillion won.

◆Government Quickly Increases Subsidies as Taxi and Cargo Drivers Face 'Livelihood Crisis'= As diesel prices, considered 'fuel for the common people,' soar, the government has decided to increase diesel subsidies starting next month. This is based on the urgent need to support cargo truck and taxi drivers.

Accordingly, the price threshold for fuel-linked subsidies will be lowered from the current 1,850 won per liter to 1,750 won starting June 1. The government will subsidize half of the amount exceeding the threshold. For example, if the diesel price is set at 2,000 won, the government previously subsidized 75 won but will now increase the subsidy to 125 won. The subsidy targets approximately 445,000 cargo trucks, 21,000 buses, 93,000 diesel taxis, and 13,000 coastal cargo ships.

However, expanding fuel-linked subsidies alone is insufficient to ease the financial burden on livelihood workers such as cargo truck and taxi drivers. The fact that the government has exhausted nearly all policy tools available to stabilize fuel prices, including fuel tax cuts, is a bigger problem. Last year, the government cut fuel taxes by 20%, and this month expanded the cut to the legal maximum of 30%. Considering the flexible tax rate adjusted according to economic conditions, the fuel tax cut can be increased up to 37%. However, if international oil prices rise further, the effect of the tax cuts diminishes, and the government's policy capacity shrinks, which is a concern.