South Korea expands auto fuel tax cuts for second time as pump prices soar

The South Korean government would expand the scale of auto fuel tax cuts to a record 37% effective July 1 until end-2022 in an emergency measure to curb surging inflation and retail fuel prices, the finance ministry said June 20.

An emergency cabinet meeting was held to urgently roll out new measures to support domestic consumers and businesses, with ministers in charge of economic affairs deciding to cut the retail gasoline price by an additional Won 57/liter ($0.04/liter), diesel Won 38/l and butane Won 12/l, according to the Ministry of Economy and Finance.

This marks the second time Seoul has expanded the cuts after the government raised the scale of oil tax cuts to 30% effective May 1, from 20%.

The new 37% deduction would be the maximum rate of oil consumption tax cut allowed under the current law, the ministry said in a statement, indicating that any further tax cuts would require an amendment or a revision in constitution by the National Assembly.

The government at the emergency cabinet meeting also decided to expand diesel subsidies to cargo truck and taxi drivers to ease the burden from rising fuel costs at the pumps.

In addition, the government will remove the 3% tariff currently imposed on jet fuel imports from August to December to reduce the upward pressure on domestic airfares.

The set of emergency measures came as South Korea's headline consumer prices jumped 5.4% in May year on year, from 4.8% in April, marking the fastest increase in 14 years. In particular, the prices of oil-related products jumped 34.8% in May and 34.4% in April from a year ago.

Taxes account for about 50% of retail gasoline prices, 40% of diesel, and 30% of butane, that have prompted consumers to ask for a bigger reduction.

"The government will immediately implement [the new tax cut] measures to ease the burden from high oil prices," said Minister of Economy and Finance Choo Kyung-ho, who is also the country's top economic policy maker as a deputy prime minister.

Consumer confidence, exports

Even the maximum tax cut rate may not be sufficient to boost consumer confidence, while domestic auto fuel demand in the third quarter could fall behind last year's levels despite the removal of COVID restrictions, middle distillate marketers and distributors in Seoul said.

"Unless members of the National Assembly quickly revise the law and allow oil tax cuts of a giant scale like a 70%-80% cut, everyday consumers would continue to tighten their belt," said a distribution and sales associate at Korea Oil Station Association.

Retail auto fuel prices have steadily climbed over the past year to hit record highs in the wake of surging international benchmark crude and oil product prices.

Retail gasoline prices averaged Won 2,081/liter, or $1.61/liter, over June 12-18, up 31% from the same period a year ago, despite the 30% tax cut in May, according to state-run Korea National Oil Corp., or KNOC.

Pump prices of diesel jumped more rapidly, rising as much as 50.4% year on year to average Won 2,083/l, or $1.62/l, in the week ended June 18.

South Korea's consumer sentiment faltered due climbing retail prices and gasoline demand fell for the third straight month in April, dropping 21% year on year to 5.639 million barrels, latest KNOC data showed.

Diesel demand also fell for the third straight month in April, falling 17% year on year to 11.72 million barrels and marking the smallest volume in 2 1/2 years, or since September 2019.

As South Korean refiners maintain high run rates to capture robust Asian middle distillate cracks and export margins, a decline in domestic consumption could lead to incremental South Korean supplies into the regional spot market, diesel marketers at South Korean refiners and middle distillate traders based in Singapore told S&P Global Commodity Insights.

Refiners in the Middle East are mainly focused on delivering oil products to Europe, and with limited exports from China, many net importers of transportation fuels -- especially those in Southeast Asia and Oceania -- are relying heavily on South Korea for their fuel requirements.

"We have been receiving countless enquiries from Australian traders and distribution companies for additional auto fuel supplies," said a middle distillate marketer at a South Korean refiner, who declined to be identified due to the sensitive nature of corporate trading relationships. "I understand Australia has drastically reduced fuel trades with China in the past year, while they are also not keen to take much oil products from Indian refiners who process Russian crude."