By Kim Tong-hyung

The government will consider cutting fuel taxes in an effort to bring inflation under control, Prime Minister Kim Hwang-sik said Wednesday.

Kim’s comments came hours after the country’s economy-related ministries announced a package of measures to stimulate competition among refiners and lower the prices of gasoline and other fuel products. The package included enabling online trading for fuel products by the end of the year and establishing a futures market by 2012.

“The discussion about lowering taxes on petroleum products will proceed only after a comprehensive study on the impact on tax revenues and the country’s energy-related strategies,” Kim said during a National Assembly session.

Although lowering taxes has been ruled out for now, it could be considered among the contingency options should oil prices continue to rise, officials at the Ministry of Strategy and Finance said. 

Despite discussion about taking the air out of energy costs, however, critics continue to be skeptical about whether dramatic changes are in the pipeline. Fast to deliver stinging remarks but following them with subdued press releases, the country’s economic policymakers are quickly developing an “all bark, no bite” reputation in their fight against inflation. 

In January, President Lee Myung-bak declared something was “strange” about the rapid rise in prices of gasoline and other fuel products here. This had government agencies honing in on the pricing systems of the country’s four refiners — SK Energy, GS Caltex, S-Oil and Hyundai Oilbank — to determine whether they had been abusing their market power to charge car owners excessively for gas.

Ending the lengthy anticipation, the joint task force operated by the ministries of finance and knowledge economy announced the much-anticipated result of its investigation Wednesday. However, the sprawling report left more questions than answers about the refiners’ behavior and the damage to consumers, while its “new” suggestions for suppressing energy prices were essentially recycled old ideas that had never left the drawing board. 

The panel, also participated in by civic experts, admitted that refiners have been setting prices “asymmetrically” — charging dramatically more when international oil costs went up, but being slow and coy when crude prices fell. Inexplicably, however, researchers claimed they were unable to find evidence that such pricing has led to undue profit for the companies.

The task force announced a set of measures for massaging consumer egos as well, such as establishing an Internet-based trading system for oil products to jolt price competition between providers and supporting unbranded gas stations by helping them source cheaper fuel independently.

While the concept may look convincing on paper, the Knowledge Economy Ministry had dabbled with the idea of an online fuel market as recently as in 2008, but never managed to act on it. And it remains to be seen whether the government will be serious about encouraging stations to drop major oil companies when the risk is losing its “business friendly” moniker. 

In describing the plans to other policymakers at the government complex in Gwacheon, Gyeonggi Province, Finance Minister Yoon Jeung-hyun repeatedly used the word “considering” to show that no action was conclusive yet. 

“The near-monopolistic structure of the domestic petroleum market limits competition and prevents transparency in pricing ... the government will need to form a stronger and consolidated monitoring system to keep a close watch on refiners’ asymmetric pricing and profit margins,” Yoon said, stressing the need to resolve the traditional hierarchy between refiners, middle agencies and stations. 

“Giving consumers a larger freedom of choice is another priority, which could be achieved by opening more information about the pricing of fuel products to the public. To encourage competition, we are considering launching an online trading site for oil products by the end of the year and also thinking about establishing a futures market for the products by the end of 2012.” 

With policymakers beginning to lose their calm in a losing battle against inflation, refiners have found themselves on the receiving end of their frustration. These firms, along with telecommunications operators, had enjoyed rapid growth in industries where competition is limited. 

However, they now find that protection comes at a cost as the government is pressing them to shave their profit margins to ease the strain on consumer wallets.

The companies are showing signs of yielding to the government demands. SK Innovation, the parent of SK Energy, the country’s top refiner, will cut its gasoline and diesel prices by 100 won per liter for three months starting Thursday, and smaller rivals S-Oil and Hyundai Oilbank have followed with their own discount plans. One can only wonder whether such gestures may have had something to do with the caution and timidity displayed on the recent government report. 

Although inflation has been rising significantly faster than the government’s 3 percent target this year, policymakers are reluctant to clamp down on money supply when the higher prices are coupled with subdued economic activity. 

This has policymakers resorting to price controls, such as stemming the increase in utility bills, university fees and other items of consumer spending, and pressuring refiners and telecommunications firms to lower their prices. 

Lee Kwan-sup, director for energy industry policy at the Knowledge Economy Ministry, said the asymmetric pricing employed by refiners doesn’t necessarily mean they make excessive profits. 

Although fuel prices here have been consistently inconsistent with the changes in international prices, this isn’t much different from what happens in markets in the United States, Britain and Sweden, Lee said. He then confounded reporters by claiming that the findings provide proof that Korean refiners have much room to lower their prices.

“There could be multiple factors behind asymmetric movement in prices, such as the vertical retail hierarchy between refiners and gas stations, refiners traditionally lower prices at the end of months and up them back at the start of the month, and also their response to the bargain hunting behavior of consumers,” said a Knowledge Economy Ministry official. “But these behaviors shouldn’t be simplified as evidence for excessive profit or collusion.” 

The combined operating profit of the four refiners reached 3.8 trillion won (about $3.5 billion) in 2010, with SK and GS, the two biggest companies, reporting profit margins of 3.9 percent and 3.2 percent, respectively. The four companies produce more than 98 percent of the country’s gasoline, diesel and kerosene products. 

According to a study by the KS Economic Research Institute, based on released industry figures, the Korean companies raised their domestic diesel prices by more than 53 percent in 2008, compared to an annual 18.5 percent increase in crude oil prices, while upping their gasoline prices by about 40 percent. 

The crude oil prices dropped by 36.7 percent in 2009, but the prices of diesel sold domestically dropped by 25.4 percent, while gasoline prices were reduced by around 20 percent. The companies however dropped their export prices of diesel by 33.5 percent in 2009, which is more than a 49 percent adjustment when considering that the won fell 15.8 percent to the U.S. dollar that year. This suggests that the companies may have avoided massive losses from exports thanks to the sliding won. Critics speculate whether such a consistency in price strategies would be possible without some sort of collusion among the four refiners.