[why&next] Chaotic Oil Prices... Uncertainty for Next Year

[Oil Price Reversal] ① Why Are Petroleum Product Prices Inverted?
Gasoline Has Been Cheaper Than Diesel and Kerosene for Over Six Months
Differences in Tax Cuts Due to Fuel Tax Reduction
Sharp Rise Amid International Supply Reductions and Other Factors

Editor's NoteIt has been a year since the government introduced the fuel tax reduction measure as a countermeasure against high oil prices. Although the once sharply rising oil prices have recently stabilized, the sighs of ordinary people have deepened. This is because the abnormal phenomenon of diesel and kerosene prices, considered representative 'fuel for the common people,' being sold at higher prices than gasoline has been prolonged. People chose diesel vehicles to reduce the burden of fuel costs, but are instead facing greater losses, and ordinary people using kerosene boilers for heating are only worried about heating expenses. There are calls for tailored measures to reduce the burden on ordinary people, such as temporarily suspending the individual consumption tax on kerosene. Asia Economy will examine the causes of the abnormal oil price phenomenon, its economic ripple effects, and what measures are needed in households and industries.

On the 20th, at a gas station in Seoul where the price of kerosene, known as a "common people's fuel," continues to rise and is being sold at a higher price than gasoline in some areas, gasoline is sold at 1,609 KRW per liter, kerosene at 1,650 KRW, and diesel at 1,835 KRW per liter. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Oh Hyung-gil] The unusual 'price inversion' phenomenon, where diesel prices are higher than gasoline prices, has continued for more than six months. Amid geopolitical crises causing fluctuations in diesel prices and the surge in heating demand during winter, there are concerns that this trend will persist into next year. [Related Article] 'Betrayal of Oil Prices'

As only gasoline prices have dropped significantly, the price gap with indoor kerosene has narrowed to within 50 won per liter. With winter approaching, there are calls for tailored measures for ordinary people who use kerosene for heating.

According to the Korea National Oil Corporation's oil price information service OPINET on the 23rd, as of the 22nd, the nationwide average diesel price was 1,879.6 won per liter, which is 233.4 won more expensive than the gasoline price of 1,646.2 won. The price inversion of diesel over gasoline, which had appeared intermittently this year, has continued for over 160 days since June 13.

Overall, oil prices are showing a downward stabilization trend. Gasoline and diesel peaked at 2,144.9 won and 2,167.6 won per liter respectively on June 30 and have been declining since. However, as gasoline prices have fallen relatively more than other petroleum products, the price reversal has become entrenched.

On the same day, kerosene's nationwide average was 1,601.5 won per liter, but in some regions including Seoul, Busan, Daegu, and Incheon, it has already surpassed gasoline prices.

The most direct cause of this price inversion can be found in the fuel tax reduction measures.

By applying a uniform reduction rate to both gasoline and diesel, gasoline prices, which originally had higher taxes, dropped relatively more.

The government has continuously implemented fuel tax cuts to curb oil prices. Last November, the tax was reduced by 20%, in May this year by 30%, and in July it was expanded to the legal maximum rate of 37%. Due to these reductions, the current fuel tax on gasoline has decreased from 820 won per liter to 516 won, and on diesel from 581 won to 369 won. Gasoline tax was reduced by 304 won, while diesel tax was reduced by a smaller amount of 212 won.

Additionally, the price difference has widened due to the reflection of international petroleum product prices.

As of the third week of November, in the Singapore oil market, gasoline traded at an average of 95.3 dollars per barrel, while diesel traded at 131.7 dollars per barrel. Since the Russia-Ukraine war, the price gap between diesel and gasoline has widened significantly.

Europe imported more than 60% of its diesel consumption from Russia, but after economic sanctions against Russia blocked imports, new supply sources were sought, and this 'balloon effect' caused diesel prices to surge globally.

According to the U.S. Energy Information Administration (EIA), U.S. diesel prices rose from 2.7 dollars per gallon in January to 4.7 dollars in the second week of November. Major oil companies have avoided new investments in refineries that inevitably emit greenhouse gases, reducing refining capacity, and maintenance periods have increased due to aging existing refineries, leading to decreased production.

With heating demand overlapping ahead of winter, diesel international prices are expected to remain strong into early next year.

Wood Mackenzie, an energy consulting firm, warned, "Northwest Europe's diesel inventories will increase from December to January and then be rapidly depleted," adding, "With the European Union's ban on Russian petroleum product imports taking effect in February next year, the worst supply disruptions could occur."