10% Cut in Oil Tax to Slowly Affect Price

Despite the government’s decision to cut oil tax from today, consumers will have to wait for a couple more weeks to enjoy reduction in pump price.

The benefit of tax cut, however, is likely to be temporary, since the international oil prices are soaring without any slowdown in sight.

The price of Dubai crude, Korea’s benchmark, was $96.26 per barrel on March 7, setting a new record for two consecutive days. The government, in anticipation of the Dubai crude price surpassing $100 per barrel, is scrambling to draw up measures to mitigate the hike’s impact on the national economy, including nation-wide campaign to leave one’s car at home one day a week.

○ How long the effect of tax cut would last

The government is to cut taxes on gasoline and diesel products by 10 percent from today, according to the Ministry of Policy Coordination and Finance and the Ministry of Knowledge Economy. Gas and diesel prices will go down by 82 won and 58 won per liter, respectively.

The government is set to monitor gas stations to ensure the tax cut can lead to consumer benefit.

Consumers may well have to wait for some time to enjoy the benefit, however, since the pump price reflects the international market price of two weeks ago on average. The government would apply the tax cut to the price after gas stations consume their current stocks. When the tax was reduced for kerosene products earlier this year, it took three weeks for the tax cut to take visible effect on consumer price.

“Gasoline and diesel products have faster time-to-consumer, and gas stations have already reduced their stocks in preparation for the tax cut. So, it will take one or two weeks before consumers feel the benefit of the tax cut,” said a source from the oil refinery industry.

The benefit of the tax cut may not last long, however, since the price spike in crude oil prices pushed up international oil product prices.

The international gasoline price in the third and fourth week of February, which directly impacts the domestic gas price for the second week of this month, was $106.84 and $109.57, a $5 and $2.73 increase from the previous weeks, respectively. The price of diesel products also jumped to $116.67 and to $119.88, respectively, over the same period.

○ Measures to reduce oil consumption

Dubai crude oil, which accounts for 80 percent of Korea’s total oil imports, put the government on alert as its price neared the $100 mark. The government is now trying to come up with proactive measures to reduce oil consumption, including encouraging a car owner to leave one’s car at home one day a week.

The government earlier said it would not intervene in the oil market without a major disruption from supply or demand side. However, the oil price hikes, combined with fears of a global economic slowdown, is shaking the government`s hands-off principle.

The government is considering extending the campaign of no driving day of the week, which is mandatory for public officials and some provinces, to private sectors and the entire nation. Overnight sports or sauna facilities may also face compulsory cut in their opening hours.

changkim@donga.com