Emergency Economic Ministers' Meeting Held on the 15th
9th Extension of Fuel Tax Reduction Decided
Oil Prices Rise Amid Iran-Israel Escalation Concerns
Domestic Oil Prices Also Fluctuate... Will Inflation Rise Again?
The government has decided to extend the fuel tax reduction measure for two more months due to concerns that oil prices could surge amid instability in the Middle East.
Choi Sang-mok, Deputy Prime Minister for Economy and Minister of Strategy and Finance, chaired an emergency economic ministers' meeting at the Government Complex Seoul on the 15th and said, "To prevent the burden on people’s livelihoods from increasing, we will extend the current fuel tax reduction and diesel·CNG fuel price-linked subsidies for an additional two months until the end of June."
Choi Sang-mok, Deputy Prime Minister for Economy and Minister of Strategy and Finance, is presiding over the Emergency Economic Ministers' Meeting at the Government Seoul Office in Jongno-gu, Seoul on the 15th. Photo by Jo Yong-jun jun21@
The fuel tax is 615 won per liter for gasoline, 369 won for diesel, and 130 won for liquefied petroleum gas (LPG) and butane. Compared to before the application of the flexible tax rate, gasoline is 25% cheaper, and diesel, LPG, and butane are 37% cheaper. This extension marks the ninth time the fuel tax reduction has been extended. The government has been reducing fuel taxes since November 2021. It initially started as a six-month temporary measure but has been extended eight times since then.
International Oil Prices Reach Highest Level in Six Months Since October Last Year
The reason for the extension is the anxiety over the escalation in the Middle East. On the 13th (local time), Iran launched up to several hundred armed drones and missiles at Israel. This mainland attack came about ten days after Israel bombed the Iranian consulate located in Damascus, the capital of Syria, on the 1st. Israel has also warned of retaliatory strikes against Iran.
If the conflict between the two countries escalates into a war, oil supply will be directly impacted. The Middle East accounts for one-third of the world's crude oil production. Iran ranks third in crude oil production within the Organization of the Petroleum Exporting Countries (OPEC). If the Strait of Hormuz is blocked, oil prices could rise further. The Strait of Hormuz is a narrow strait connecting the Persian Gulf and the Gulf of Oman and serves as a major export route for Middle Eastern oil-producing countries. One-sixth of the world's oil passes through the Strait of Hormuz, and Middle Eastern crude oil imported into Korea also passes through this strait.
International oil prices have already reached their highest levels since October last year. As of the 12th, the May West Texas Intermediate (WTI) crude oil price on the New York Mercantile Exchange rose intraday to $87.67 per barrel. On the London ICE Futures Exchange, the June Brent crude oil price also rose to $92.18. Intraday prices closed at $85.66 for WTI, up $0.64, and $90.45 for Brent, up $0.71.
There are also forecasts that international oil prices could exceed $100 per barrel. Bob McNally, CEO of the energy consulting firm Rapidan Group, said on the U.S. CNBC broadcast, "If the armed conflict leads to the blockade of the Strait of Hormuz, a major international oil transportation route, oil prices could soar to $120?130 per barrel."
Domestic Fuel Prices Also Fluctuate... Will Inflation Rise Again?
Domestic fuel prices are also fluctuating. According to the Korea National Oil Corporation's oil price information system OPINET, the average retail price of gasoline at gas stations nationwide in the second week of this month was 1,673.3 won per liter, up 26.3 won from the previous week. This marks a rise for two consecutive weeks following the beginning of the month. As of this date, the price was 1,689.54 won, approaching the 1,700 won level.
The increase in fuel prices is a factor that drives up overall domestic inflation. According to Statistics Korea, the consumer price inflation rate last month was 3.1%, marking two consecutive months above 3%. Petroleum product prices turned from -1.5% to 1.2% in February as the rise in international oil prices was reflected with a time lag.
The government explained that, so far, there have been no disruptions in crude oil supply and supply chains, but risks could expand depending on developments. Deputy Prime Minister Choi said, "We will operate a joint emergency response team with related agencies daily to monitor the situation and domestic and international economic and financial trends in real time," adding, "We will respond promptly according to contingency plans and fulfill necessary roles in a timely manner regarding excessive volatility in financial and foreign exchange markets."
He continued, "All economic ministries will act as one team to concentrate all policy capabilities until the current uncertainties are resolved," and added, "We will firmly reflect the public’s will to do our best for livelihood stability in the fiscal strategy meeting, tax reform plans, and budget proposals."
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