 Price Caps on Petroleum: Implications and Policy DirectionsHong Lee and
Sung Wook Hong
i-KIET Issues and Analysis from Korea Institute for Industrial Economics and Trade Abstract: This study examines worsening instability in the oil industry’s supply chain due to the ongoing conflict in the Middle East and the blockade of the Strait of Hormuz, which has placed severe upward pressure on international oil prices. Prices of petroleum-based products in South Korea have risen rapidly, increasing the burden on consumers and fueling inflation concerns. Rising international oil prices are highly likely to feed through to the real economy through increased transportation, logistics, and manufacturing costs. Skyrocketing prices for Dubai crude (up 49.8 percent) and domestic gasoline prices (up 12.7 percent) since the US and Israel began their campaign against Iran have exceeded the initial increases seen when Russia invaded Ukraine. In response, the Korean government implemented a price cap system to mitigate market anxiety and the spread of inflation expectations. This system, which sets a cap on the prices that oil refiners are allowed to sell at every two weeks, has been in effect since March 13, 2026. Following its implementation, national average gasoline and diesel prices fell by KRW 70 to KRW 120 from their peaks, showing a stabilizing trend. The government is also considering a packaged response that combines price caps with other policy instruments, such as fuel tax cuts and direct subsidies to consumers. This package of policies could temporarily suppress rapid price surges and ease the burden on consumers, but it also risks exacerbating non-price rationing and long-term supply shortages. Ceilings on prices prevent the price signal from constraining demand, which during a supply shock can worsen shortages, lead to long lines at the pump, and eliminate price competition among retailers. Therefore, price caps on petroleum need to be utilized with great care as a short-term market stabilization tool, rather than as a permanent feature. Future policy responses should take a package approach that combines various policy instruments, including fuel tax cuts, direct support, the utilization of strategic petroleum reserves, and diversification of import sources. Given that fuel dependency and cost structures vary by industry, a differentiated policy response considering industry-specific characteristics is necessary, rather than a uniform price regulation. Industries such as logistics, freight, fisheries, agriculture, and public transportation are particularly exposed to fuel costs, meaning oil price shocks are highly likely to be passed through to production and transportation costs. Thus, the government should design targeted support or fuel-cost subsidies. For the oil refining, petrochemical, and energy-intensive manufacturing sectors, a policy approach considering supply stability and cost buffering is needed so that medium- to long-term security of supply and investment incentives are not adversely affected Keywords: energy; energy supply and demand; energy pricing; price ceilings; price caps; energy policy; energy markets; oil prices; US-Iran war; Hormuz (search for similar items in EconPapers) Published in i-KIET Issues & Analysis No. 208 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ris:kietia:022568 Access Statistics for this paper More papers in i-KIET Issues and Analysis from Korea Institute for Industrial Economics and Trade Sejong National Research Complex, Korea Institute for Industrial Economics and Trade, 370 Sicheong Dae-ro C-dong 8-12F 30147, Republic of Korea. Contact information at EDIRC. |
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