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Seoul searches for ways to lift the oil price cap. But is a soft landing possible?

Published: 03 May. 2026, 19:02 Updated: 03 May. 2026, 19:46

A gas station in Seoul on April 30 [YONHAP]

The government’s price cap on petroleum products has reached the 50-day mark, leaving policymakers scrambling to find an exit ramp.

Keeping the cap in place would deepen the fiscal burden and hurt refiners, but lifting it could immediately send prices surging, sparking fears that a soft landing may be impossible.

Making matters worse, a tug-of-war between the government and refiners over compensating losses is also intensifying.

The government credits the petroleum product price cap, introduced on March 13, with reducing short-term volatility in domestic oil prices and helping stabilize consumer prices. The Korea Development Institute estimated that the price cap lowered the March consumer price inflation rate by 0.8 percentage points.

“The basic policy is to end the price cap as soon as possible once the war ends or the situation stabilizes,” Industry Minister Kim Jung-kwan said at a press briefing last Monday.

But setting an end date has proved difficult as international oil prices also remain volatile. Brent crude topped $126 a barrel during trading on Thursday, its highest level in four years, before falling to $108.17 on Saturday. Concerns are also growing that falling crude oil and petroleum product inventories could drive prices sharply higher.

If the war continues until the end of June, all stocks would be exhausted, Amrita Sen, founder of consultancy Energy Aspects, told the British daily Financial Times on Saturday.

Industry Minister Kim Jung-kwan takes part in the delivery process of fuel subject to the price cap at a gas station in Osong, North Chungcheong, on March 16. [YONHAP]

“The repricing is from today onwards," Sen told the Financial Times, suggesting the futures price of Brent could climb to $150 to $200 a barrel. "We expect significant upside to both crude and products."

Even if the Middle East crisis settles down, the risk of price volatility will not disappear.

The accumulated amount of price increases suppressed since the second round of the price cap on April 27 stands at around 125 won per liter ($0.35 per gallon) for gasoline, 628 won per liter for diesel and 573 won per liter for kerosene, according to data from the Ministry of Trade, Industry and Resources.

Once the cap is lifted, the suppressed prices are likely to be reflected all at once, causing a sharp increase over a short period — which is why lifting the cap is potentially troubling for a government that has put price control at the forefront of its policy agenda.

Similar cases have occurred overseas. In Pakistan, gasoline and other fuel prices were frozen at government-set prices from February to May 2022. After the policy ended, gasoline prices jumped 66 percent from 149.9 rupees per liter ($6.00 per gallon) to 248.7 rupees per liter, according to a report by the Korea Institute for Industrial Economics and Trade.

“There is also a possibility that the rebound will widen when suppressed price adjustments resume after the system ends,” the report said.

SK Innovation’s Ulsan Complex, measuring 2.5 million pyeong (2,042 acres), which began operation in 1964 as Korea's first oil refinery [SK INNOVATION]

The longer the system remains in place, the heavier the fiscal burden becomes. The government has set aside 4.2 trillion won ($2.84 billion) in reserve funds for six months to compensate refiners for losses, but the high volatility of international oil prices makes it difficult to estimate how much the companies actually lost, especially in terms of the scale of losses.

The battle between the government and refiners over compensation criteria has also begun in earnest. The government wants compensation based on production costs, while the refining industry demands it be based on product prices.

Refiners argue that because crude oil refining produces liquefied petroleum gas, gasoline, kerosene and diesel simultaneously as joint products in a single process, it is difficult to separate the cost of any one product.

If — as refiners desire — losses are calculated as the difference between the Singapore international petroleum product price (MOPS), which serves as a benchmark for gasoline and diesel supply, and domestic supply prices reduced by the price cap, the scale of losses would snowball.

Some estimates already put losses suffered by the four major domestic refiners — SK Energy under SK Innovation, GS Caltex, S-OIL and HD Hyundai Oilbank — at nearly 3 trillion won, based on price gaps and sales volumes.

Cargo ships in the Persian Gulf, near the Strait of Hormuz, as seen from northern Ras al-Khaimah, near the border with Oman’s Musandam governance, amid the U.S.-Israeli war with Iran, in the United Arab Emirates on March 11. [REUTERS/YONHAP]

The government, however, is rejecting the industry’s argument.

“The principle of cost-based compensation was publicly announced before the price cap began, and we do not believe it is reasonable to calculate losses by reflecting MOPS, which tripled because of the Iran war,” a government official said. “It is also fully possible from a systems perspective for companies to calculate costs for each product.”

The key is deciding how to calculate and allocate costs by fuel type, given the characteristics of joint products, according to accountant Park Dong-heum.

“Each refiner also uses a different method of determining inventory costs, so if all those factors are taken into account, it could take quite some time before the actual settlement is completed,” Park said.

Experts say it is time to think about an exit strategy.

“Given the possibility of a prolonged Middle East crisis and the fiscal burden, the government should consider maintaining the cap on diesel, which is mainly used by freight operators and self-employed workers, while gradually raising the gasoline cap to narrow the gap with international prices or ending it only for gasoline,” said Kim Hyung-gun, a professor of economics at Kangwon National University. “Reducing the shock through selective support, such as vouchers or subsidies for vulnerable groups, could also be an option.”

The government is also weighing when to lift the system. “We are considering conditions for lifting the system, such as a narrowing of the gap between international petroleum prices and the price cap,” a government official said.

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 AHN HYO-SEONG [[email protected]]