Government twists refiners’ arms but under fire for failing to share responsibility


The heat is increasingly being turned on the government for failing to curb the soaring gas prices, especially as critics are pounding Seoul for failing to address a more direct cause of the price increase ― the high taxes slapped onto gas.

Instead, the government has turned to twisting the arms of local refiners to cut costs. Months of government pressure on the private sector had four major oil refiners ― SK energy, Hyundai Oilbank, S-Oil and GS Caltex ― to cut fuel prices by 5 to 6 percent for the next three months.

Oil refiners are bound to cooperate with the government capable of retaliating through tax probes or stiff penalties.

The cuts would compromise their revenues and the refiners are consequently calling on the government to join in such efforts, but Seoul has yet to clarify its position despite that slashing taxes may be the most effective way to lower gas prices.

This is because tax makes up 47 percent of gasoline and 40 percent of diesel here.

“A cut in oil taxes would be desirable as it would push domestic prices down significantly. And the cut should be applied differently according to income baskets,” Lee Sang-jae, an economist at Hyundai Securities said.

Conscious of the mounting calls to address the tax issue, Prime Minister Kim Hwang-sik on Friday said the government may be ready to consider lowering taxes in order to help ease inflationary pressure.

“Cutting oil taxes decreases tax revenue and it is somewhat contrary to Seoul’s energy saving plans, but our priority is to tame inflation so we will actively consider (a tax cut),” Kim said at a policy meeting.

However, critics said the remarks lacked credibility because just a day earlier, Finance Ministry officials said a tax cut would be inappropriate. But even those comments came immediately after Finance Minister Yoon Jeung-hyun hinted that his ministry may consider trimming oil taxes. 

In March, oil prices here rose to a 29-month high of 4.7 percent, causing gasoline prices to surge to over 2,000 won per liter.

The gas prices, along with overall inflation have been President Lee Myung-bak’s top concern but asking private companies on rising costs has proven ineffective for the past six months. Consumer price index exceeded Lee administration’s target band of 2 to 4 percent for the seventh consecutive month.

Annually, the country earns about 20 trillion won in oil taxes, so a 10 percent cut would mean the government loses 2 trillion won per year, but experts have said Seoul can afford to do this, a move that would translate into a 300 won reduction per liter of gas.

The government raised 1 trillion won ($922 million) of incremental tax in the past three months, compared with the same period last year. The figure is still steep at 370 billion won even after tax returns.

The Korea Customs Service said Wednesday that the country imported a total of 25.6 trillion won of crude oil in the first quarter, up almost 40 percent in value from a year ago.

Nomura Securities said government pressure on private sector will achieve no long-term good.

“In the long run, Korea needs to increase the efficiency of gasoline and diesel consumption by letting higher prices affect household behavior,” Nomura economist Kwon Young-sun said in her report.

The strong push on refiners to cut costs is causing confusion on the consumer end as well.

The four oil refiners announced that they would deliver gasoline and diesel 100 won lower per liter starting Thursday, but gas stations refused to do so.

“We were told to buy a lump-sum of fuel in the last week of March at a high cost and were suddenly told to sell them at lower cost,” the Korea Oil Station Association said Friday.

“Our profit margin is less than 5 percent. We will only be able to start selling fuel at lower cost, as advertised, in one to two weeks time.”

International crude prices are around two-and-a-half-year highs. Korea’s average prices of gasoline remained relatively high compared with those of other nations, at around 1,971 won and 1,800 won, respectively, as of this week.

By Cynthia J. Kim  (cynthiak@heraldcorp.com)