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Government's oil price cap fails to curb demand, places financial burden on refiners

Published: 20 Apr. 2026, 18:06

Fuel price information is displayed at a gas station in Seoul on April 19. [NEWS1]

The Korean government’s oil price cap is failing to curb demand while placing a growing financial burden on refiners amid volatile global oil prices.

Korea’s four largest oil refiners — SK Energy, GS Caltex, S-OIL and HD Hyundai Oilbank — are estimated to have incurred about 1.2 trillion won ($814 million) in revenue losses over the four weeks since the oil price cap was introduced on March 13, according to the refining industry last Friday. The losses stem from their inability to fully reflect rising international petroleum product prices in domestic retail prices.

The government has allocated 5 trillion won in its supplementary budget to boost the struggling industry with measures including the price cap and stabilizing naphtha supply. However, industry insiders say that the amount falls short of covering the losses.

“If the current situation continues, the funds for compensating losses will not be enough,” a refining industry source said. “There are also differences between the government and the industry in how losses are calculated, which adds to our concerns.”

Dragging peace talks between the United States and Iran are adding to the industry’s concerns.

Crude oil imports typically need to be decided three months in advance, and companies now face difficult decisions ahead of July shipments. Although international oil prices have edged down due to expectations that the war will end, uncertainty remains until Tuesday’s deadline for Iran to reopen the Strait of Hormuz, set by U.S. President Donald Trump.

There are concerns that refiners could end up buying crude at high prices and selling at lower prices, as retail prices must follow current global oil prices rather than past purchase costs, leading to significant losses.

At the same time, switching to light crude, commonly sourced from the United States, is not a viable option. It takes more than 50 days to import, and domestic refining facilities are optimized for heavier crude. Processing light crude would reduce the efficiency of upgrading units to around 30 to 40 percent.

Oil tankers and cargo ships line up in the Strait of Hormuz as seen from Khor Fakkan, United Arab Emirates, on March 11. [AP/YONHAP]

There are also pressures that high oil prices may persist even after the war ends.

“Even if a peace agreement is reached and the Strait of Hormuz blockade is lifted, it will take at least two to four weeks to deploy the personnel and equipment needed to restore oil fields,” Lee Choong-jae, an analyst at Korea Investment & Securities, said. “About 80 percent of oil fields are expected to return to normal operations only after late June.”

Lee added that the remaining 20 percent of oil fields, which the International Energy Agency has said will take a long time to recover, pose a challenge.

“Unless oil production in countries such as Canada and Venezuela increases quickly, it will be difficult to find crude with similar properties, meaning prices are likely to remain around $100 per barrel even after the conflict ends,” the analyst said.

The government is also weighing its options ahead of announcing the fourth round of the oil price cap policy on Friday. President Lee Jae Myung said during a Cabinet meeting last Tuesday that “the argument that lowering oil prices is not entirely the right move is a fair point,” suggesting a possible shift toward allowing price increases.

The energy industry is closely watching the government’s decision.

“If oil prices are adjusted to reflect market conditions, it could increase inflationary pressure,” said an energy industry source who requested anonymity.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
BY KO SUK-HYUN [[email protected]]