South Korea rolls out new relief measures to aid consumers, refiners battle surging oil prices

South Korea decided to extend the duration of its oil tax cut scheme by three months and bring in most of the country's equity crude holdings from various overseas upstream projects as Seoul extends efforts to tame accelerating inflation and cushion the impact of surging oil prices on consumers and its refining industry.

In November 2021, Seoul lowered taxes on auto fuels by as much as 20% for six months from November to April, as part of efforts to ease the rise in pump prices. The government has now decided to extend the duration until July 31, the Ministry of Economy and Finance said March 4.

Taxes account for 55% of the retail gasoline price, 46% of the gasoil price, and 30% of the butane price, which prompted consumers to request a tax reduction.

The ministry cited high oil prices as a major factor behind increasing inflationary pressure. Consumer prices rose 3.7% month on month in February, which marked the fifth straight month that consumer price growth has stayed over 3%.

"If economic uncertainty should mount further as international oil prices grow at a faster pace than current levels, we will also consider expanding the extent of fuel tax cuts," Economy and Finance Minister Hong Nam-ki said during a cabinet meeting March 4 to discuss about accelerating inflation.

For South Korea, surging oil prices is a much bigger concern and issue than growing uncertainties over Russian oil supply disruption, as light and medium sweet crudes from the OPEC+ producer make up only a small portion of the country's refinery feedstock import basket, industry sources and officials at major South Korean refiners told S&P Global Commodity Insights.

Fuel marketers and crude traders at major South Korean refiners said higher oil prices can work in favor of their balance sheet as the companies could lock in inventory gains, while outright product prices would also rise in tandem with benchmark crude markers.

However, the refinery sources warned that the companies can only sustain such profitability and margins when backed by healthy consumer demand.

"Surging oil prices have seriously hurt consumer confidence as well as business sentiment ... the government's tax cut extension was a prudent and swift move," a middle distillate marketing manager at S-Oil said.

Nationwide retail 92 RON unleaded gasoline prices averaged Won 1,764/liter, or $1.46/liter, in the first week of March, up 8.5% from the average Won 1,626/liter, or $1.35/liter, in the final week of December 2021, despite the 20% tax cut, according to state-run Korea National Oil Corp.

Diesel pump prices averaged Won 1,591/liter in the first week of March, a 24% jump from Won 1,283/liter in the same period a year earlier, KNOC data showed.

Lowering feedstock cost burden

South Korea will also bring home directly from overseas oil fields, in which state-run oil explorer KNOC holds a stake, in case of oil supply disruptions, the ministry said.

KNOC said it can bring home 30 million barrels of its equity barrels in various overseas upstream projects.

Seoul's latest measure to help lower feedstock procurement costs for local refiners would directly translate to the reduction in retail sales prices, the fuel marketers said.

In an effort to help reduce refiners' feedstock cost burden, the Ministry of Trade, Industry and Energy said in January that Seoul agreed with the six-member Gulf Cooperation Council to resume talks on their free trade agreement, which could help South Korea, the world's fourth biggest crude importer, increase Middle Eastern sour crude purchases in a cost effective way.

A free trade deal with the GCC states is expected to make Middle Eastern crude oil more economically attractive, which will prompt South Korean oil refiners to increase purchases of light, medium and heavy sour crude, as well as condensate from the Persian Gulf nations, the MOTIE official said.

In addition, the ministry said in February the government is ready to release more oil from its strategic petroleum reserves, though it did not elaborate on the specific volume and crude grades to be released; on top of the 3.17 million barrels that were previously announced to be dispatched during the first quarter.

South Korea currently holds 97 million barrels of strategic reserves -- 83 million barrels of crude and 14 million barrels of oil products -- equivalent to around 106 days worth of domestic demand as recommended by the International Energy Agency, according to the energy ministry and KNOC.