Korea's Fuel Price Cap Faces Mounting Costs as Global Oil Prices Soar

Korea has been shielding its economy from global oil price swings by capping domestic fuel prices and restricting exports of petroleum products. However, as crude prices climb again, this buffer is becoming increasingly costly to maintain.

The government imposed a cap on prices for petroleum products in March, including gasoline and diesel. Under the scheme, refiners must keep prices below a state-set ceiling even as international crude prices rise, with the government compensating them for the resulting losses.

This measure has helped ease pressure on household costs. Inflation slowed to the 2 percent range in both June and July, while the cap was estimated to have reduced consumer price inflation by 0.5 percentage points in August, when the headline rate stood at 3.1 percent.

Renewed escalation in the Middle East has pushed international oil prices to their highest levels since May 19. Brent crude for November delivery settled at $108.75 a barrel in London on Tuesday (local time), while West Texas Intermediate for October delivery rose 4.38 per cent to $105.83 in New York.

The government and refiners are reportedly at odds over the scale of compensation and the methodology used to calculate losses, leaving even the first round of settlements unresolved.