The price gap between regular gasoline, which is subject to a government price cap, and premium gasoline, which is exempt, has nearly doubled, prompting consumers to sharply cut back on premium fuel.
The average retail price difference between regular and premium gasoline widened to 466 won per liter in August from 240 won in February, before the price cap took effect, according to Opinet, the oil price information system run by Korea National Oil Corp., on the 26th. Regular gasoline rose 10.3% to 1,863 won per liter from 1,689 won, while premium gasoline jumped 20.8% to 2,329 won from 1,929 won.
The gap widened sharply because the price cap applies only to regular gasoline. The measure, which sets a ceiling on refiners' supply prices for a set period, took effect in March after oil product prices surged in the wake of conflict in the Middle East. The ceiling on refiners' supply price for regular gasoline currently stands at 1,784 won per liter.
Analysts say the cap ultimately widened the gap by restraining increases in regular gasoline prices. A report titled "Price Stabilization Effects of the Oil Price Cap," released recently by the Korea Institute for Industrial Economics and Trade, estimated that the policy lowered the relative price of regular gasoline against premium gasoline by as much as 239 won per liter. The analysis used unregulated premium gasoline prices as a counterfactual benchmark for what would have happened without the policy. The report said the cap may have cushioned upward pressure on regular gasoline prices or accelerated the pass-through of falling costs to consumer prices.
The price gap has also changed consumer behavior. Premium gasoline consumption totaled 368,000 barrels in February, up 17.2% from a year earlier, but plunged 24.6% to 293,000 barrels in April, when the policy was in full force, according to the oil industry. Declines continued in June, down 21.1%, and August, down 22.5%. Premium gasoline's share of total gasoline consumption fell 1.1 percentage points to 3.8% in August from 4.9% in February.
"Premium gasoline has higher price elasticity than regular gasoline, so the wider price gap created by the cap likely amplified the consumption response," said Kim Hyoung-gun, a professor at Kangwon National University. "If the policy becomes entrenched, long-run elasticity will rise and premium gasoline consumption could fall further."
Concerns are also mounting that substantial costs are accumulating, separate from the policy's price-stabilizing effect. With international oil product prices running high, a prolonged price cap would inevitably increase the fiscal burden of compensating refiners for cumulative losses. Critics also say artificial price controls simultaneously weaken refiners' incentive to supply and consumers' incentive to conserve energy.