[Editorial] Let prices do their job

As war in the Middle East has sent global oil prices soaring, the government has been enforcing price caps on petroleum products since March 13, ostensibly to ease the burden on households. Price caps are announced every two weeks.

Despite a rise in global petroleum prices in the two weeks before the third announcement — 1.6 percent for gasoline, 23.7 percent for diesel and 11.5 percent for kerosene — the government left price caps unchanged in the third round, effective April 10.

Domestic refiners expected prices to rise to some extent, but the government held off. Diesel prices, in particular, surged by more than 20 percent, yet even that increase was ignored.

Likewise, in the second round of price caps, the government did not fully reflect the rise in global prices, instead raising refiners’ supply prices by a uniform 210 won ($0.14) per liter for gasoline, diesel and kerosene.

The problem is that because the government suppressed prices, people did not cut back on fuel use; rather, their consumption increased.

According to reports, a comparison of gas station sales in the second and fourth weeks of March shows that gasoline sales were 24.7 percent higher in the fourth week than in the second, and diesel sales were 16.3 percent higher.

This can be seen as the result of the government obscuring the true nature of the energy crisis through price controls, leaving consumers less aware of the need to conserve fuel.

Even as countries around the world seek to curb energy consumption amid surging global oil prices triggered by the Middle East war, this policy is inducing Korean consumers to do the opposite.

Also, artificial price suppression puts a fiscal burden on the government because it offsets industry losses resulting from sales below market prices.

The government earmarked about 4.2 trillion won ($2.8 billiob) to compensate refiners’ losses, assuming the price caps would remain in place for six months. However, if high oil prices persist or the gap between global prices and the capped prices widens, the government’s burden could grow even larger.

This policy also presents issues of fairness. The price cap system effectively provides across-the-board subsidies to all consumers — including the wealthy — not just those whose livelihoods are directly threatened by rising fuel costs, such as truck drivers. In fact, users of gas-guzzling SUVs, large passenger cars and luxury sports cars may reap greater benefit from indiscriminate fuel price controls.

Spending vast sums of taxpayer money — even through a supplementary budget — to deliver such inequitable benefits is far from sound fiscal management. It borders on populism.

The current crisis does not appear likely to end anytime soon. Passage through the Strait of Hormuz remains difficult. Even if the crisis subsides, it will take considerable time to restore damaged oilfields and refining facilities.

For a country that does not produce a single drop of oil, conserving resources is essential to navigate a crisis caused by major disruptions in oil supply. If rising oil prices are reflected in the market, prices themselves will send a powerful signal of the need to conserve.

If the market’s natural role of curbing demand through price changes disappears, energy-saving measures such as odd-even driving rules for public-sector vehicles will become less effective. Blanket price caps undermine energy conservation by encouraging consumption, and will simply waste taxpayers' money if abused over an extended period.

Given the likelihood of a prolonged Middle East conflict, there is a need to review more effective policy instruments to drive energy conservation. Price caps run counter to this. Prices should be allowed to reflect reality, with support targeting vulnerable groups. Those who need help, such as transport workers, would be better supported directly.