[Exclusive] Emergency Reserve Oil to Be Released if Fuel Prices Rise

Concerns Rise Over Inflation as Oil Prices Continue Soaring
Strategic Reserves, Usually Released Only During Supply Crises, Considered for 'Price Stability' Use

When oil prices rise, the option of releasing national reserve oil is being seriously considered. The strategy is to use reserve oil, which has so far been used only for 'supply-demand stabilization,' for 'price stabilization' purposes to calm inflation.

According to a comprehensive report by Asia Economy on the 8th, Korea National Oil Corporation recently decided to establish a future growth plan centered on this idea. The goals are to set new oil reserve targets to strengthen resource security and stabilize domestic oil prices. To this end, the Oil Corporation plans to release reserve oil into the market during periods of sharp oil price hikes. They will stockpile 'Altteul Oil' in advance and quickly supply it when oil prices rise to lower prices. The reserved oil is likely to be supplied through 1,286 Altteul gas stations nationwide.

Under the current system, reserve oil can only be stored or released in emergencies such as war or natural disasters when supply disruptions are expected. Accordingly, although the reserve project started in 1980, releases have been extremely limited. To date, reserve oil has been released only six times: during the Gulf War in 1991, Hurricane Katrina in 2005, the Libya crisis in 2011, U.S. allied cooperation in 2022, and the Russia-Ukraine war (first and second rounds) in 2022. If the conditions for releasing reserve oil change, it will be possible to release reserve oil when oil prices rise even if there is no supply problem.

The background for the Oil Corporation considering such measures is the inflation concerns arising from geopolitical instability. Since the conflict between Israel and the Palestinian armed group Hamas in October last year, the Middle East situation has become increasingly unstable. Recently, Israel and Iran exchanged airstrikes, raising the possibility of a full-scale war. There are warnings that if the Middle East war worsens or Iran blocks the Strait of Hormuz, international oil prices could surge to $120?130 per barrel, similar to past oil shocks.

Domestic oil prices are already on a high trajectory. The nationwide average gasoline price per liter was 1,600 KRW in March but entered the 1,700 KRW range by mid-last month. In the first week of this month, it rose by 4.6 KRW from the previous week to 1,712.9 KRW. Especially in Seoul, where the highest price was recorded, it rose by 3.0 KRW to 1,782.5 KRW, approaching the 1,800 KRW range. Petroleum prices have been rising for two consecutive months after turning positive in March for the first time in 14 months. Last month, prices increased by 1.3%, pushing inflation up by 0.05 percentage points.

Containing 'Oil Inflation' with Massive Reserve Oil

If oil prices surge sharply, the government currently has no clear countermeasures. The government states that since last October, a cross-ministerial Oil Market Monitoring Team has been operating to prevent oil prices from stimulating inflation. However, this mainly focuses on cracking down on illegal activities exploiting high oil prices and is insufficient to control overall inflation. The fuel tax reduction measure has been extended nine times consecutively and will apply until June, but considering tax revenue, it is difficult to increase the reduction further.

If reserve oil is released into the market, it is expected to have a significant price stabilization effect during periods of sharp price hikes. There are a total of nine domestic oil reserve bases with a facility capacity of 146 million barrels. As of December last year, the actual reserve oil (excluding jointly reserved volumes) was 96.9 million barrels, ranking fifth in the world. This amount can sustain supply for 111 days without external assistance, exceeding the International Energy Agency (IEA) recommended standard of 90 days. Considering oil jointly reserved with the international community, including the United Arab Emirates (UAE), the government's available reserve oil is substantial.

However, funding is an obstacle. Purchasing additional reserve oil for price stabilization would require a huge budget. The Oil Corporation is considering using profits from some of its businesses to purchase reserve oil. The Corporation operates the Altteul gas station business and plans to use the profits earned there to secure oil for price stabilization. Another idea is to temporarily use profits from other reserve assets as funding for price stabilization when oil prices rise.

The Oil Corporation plans to finalize new reserve targets by September after discussions. The reserve targets will include a price stabilization model, examples of oil price stabilization from advanced overseas countries, new reserve volume targets, and facilities.