Riders refuel their motorbikes at a gas station in Hongdae district in Seoul, South Korea, on Saturday, July 2, 2022.
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South Korea is set to impose a price cap on fuel products for the first time in 30 years, as oil prices skyrocketed on Monday due to the war in Iran.
In a briefing on Monday, President Lee Jae Myung said the government will “swiftly introduce” a fuel price cap, adding that Seoul will explore ways to diversify its energy import sources, according to a TV broadcast.
Oil prices surged on Monday as key Middle East producers cut output and the U.S. called for Tehran’s “unconditional surrender” over the weekend.
Brent futures surged 13% to $104.7, while U.S. West Texas Intermediate crude futures jumped 30% to $118.46, before paring gains to last trade up 13% to $102.4. The 30% jump is the largest one-day gain since late 1988, according to LSEG data.
“We must swiftly introduce and boldly implement a maximum price system for petroleum products, which have recently seen excessive price increases,” Lee said.
South Korean media outlet Yonhap reported that the average gasoline price in Seoul crossed 1,900 won ($1.28) per liter on Friday for the first time in nearly four years, and further rose to 1,945 won on Sunday.
“We need corresponding emergency measures. We should cooperate with strategic partners to swiftly identify alternative supply lines that do not transit the Strait of Hormuz,” Lee said.
Over the weekend, U.S. President Donald Trump struck a defiant tone amid the rising prices, saying that a gain in “short-term oil prices” was a “very small price to pay” for destroying Iran’s nuclear threat.
“Only fools would think differently!” Trump added.
Market stabilization
During the briefing, the South Korean president said the crisis in the Middle East had placed a “significant burden” on his country’s economy, which is heavily dependent on trade and energy imports from that region.
He also called on authorities to “proactively respond” to the increased volatility in the financial and foreign exchange markets.
Over the past week, the country’s benchmark Kospi has seen wild swings, marking its worst day on record on Wednesday with a 12% fall before surging 10% again on Thursday, and falling again on Friday and Monday.
In the four sessions, multiple trading curbs on futures were enacted, and the Kospi saw circuit breakers enacted twice.
The South Korean won also hit its weakest level against the dollar since 2009 on March 3, reaching an intraday high of 1,506.37, before strengthening to 1,457 the next day and weakening again from there.
Lee called on authorities to “actively expand” the 100 trillion won market stabilization program, if needed, and “proactively prepare additional measures at the government and central bank levels.”
The stabilisation program ordered by Lee last week was launched on March 6, and was designed to calm capital markets.
However, the Korean Economic Daily reported the South Korean president as saying that the program was not designed to artificially prop up stock prices, warning that authorities must avoid purchasing equities in a way that distorts the market.
Other Asian markets react
Japan’s government has also reportedly instructed a national oil reserve storage site to prepare to release crude stocks, according to Reuters on Sunday.
Reuters, citing a senior Japanese parliament member, said details such as the timing of the release remain unclear.
Japan holds emergency oil reserves equivalent to 254 days of domestic consumption as of February, according to government data.
On Friday, Vietnam announced that it would amend import taxes on imports of fuel products so as to ensure energy security, with Reuters reporting the Southeast Asian country will scrap import levies for fuel.
Asian economies have been particularly vulnerable to oil disruptions, according to a March 5 report by the Atlantic Council.
While China is the world’s largest oil importer, it has greater domestic oil production than countries like Japan, South Korea, and Taiwan.
“Its economy is about as oil-intensive as Japan’s or Taiwan’s, and much less so than South Korea’s,” the Atlantic Council said, adding: “Accordingly, while an oil crisis would bring real pain.. it might empower Beijing relative to its regional rivals.”
— CNBC’s Blair Baek contributed to this report.
