Lee Tae-hoon, a 33-year-old office worker who lives in eastern Seoul, keeps hearing news that global oil prices have reached record lows.
Lee, who drives his car to and from his office every day, had hoped that the major cooldown in global crude oil prices would be reflected in local gasoline prices.
Yet, Lee says regular gasoline prices near his home in Jamsil have stood at around 1,450 won ($1.23) per liter now, which “seems to reflect only a minor drop in prices compared to other countries like the U.S., where prices for gas (sold in gallons) are reportedly cheaper than coffee.”
Lee is one among many Koreans left wondering why local gas prices, though cheaper than before, are not falling significantly when global oil prices have plunged.
After the recent decision by the Organization of the Petroleum Exporting Countries not to cut production amid a global oil glut, Dubai crude prices dropped to about $35 a barrel this month, down from around $66 a barrel a year ago in December 2014.
As of Tuesday, the average price of regular gasoline in Korea stood at 1,433.1 won per liter, down slightly from about 1,700 won seen during the same time last year, according to the Korea National Oil Corp.’s Opinet.
In other words, while global oil prices have declined by more than 40 percent, Korea’s gasoline prices have dropped by a slower 15.7 percent.
While admitting that local gas prices are higher than expected, Korean refiners say structural issues, including the time gap that occurs from processing to production and high oil taxes, disallow significant price cuts that directly reflect global prices.
“It takes around two months to import crude oil and process it into marketable goods like gasoline,” a refining industry official explained. In other words, the gasoline now in circulation is based on higher-priced crude purchased and refined around two months ago.
A bigger factor is the high tax levied on oil products, which accounts for around 60.3 percent of the local market price of gasoline.
That includes fixed amounts for an energy and environment tax, educational taxes, driving tax and additional commodity taxes — which remain unaffected by fluctuations in global oil prices.
“Fixed taxes of between 800-900 won prevent general consumers from benefiting from drops in crude oil prices and sharp increases in high prices when crude prices suddenly rise,” said the official.
Right now, the price of imported crude before taxes make up around 30 percent of regular gasoline prices, of which refiners take away 9 percent in profits.
This means that even if global oil prices were to plummet to below $20, the breakeven price for refiners to remain profitable is about 1,100 won, given taxes close to 900 won must still be paid.
Such calculations have led many industry watchers to assert that the biggest beneficiary of low oil prices is the government, which collects more tax revenues upon increases in gasoline and commodity consumption.
Although critics have repeatedly called for the state to lower oil taxes, there is reportedly widespread agreement that it is unwilling to forgo the immense tax revenues that flow in from oil product sales, particularly when prices are low.
“As the government remains adamant about retaining oil taxes at current levels, consumers will likely be stuck with high gasoline prices for now,” said one industry watcher.