Fuel Taxes and Crude Oil Tariffs Likely to Be Cut; Stockpiles to Be Released to Stabilize Supply and Demand [Era of $100 Oil]

As the war between the United States and Iran pushed international oil prices above $110 per barrel and began to seriously damage the real economy, the economic authorities effectively shifted into an emergency mode. The won–dollar exchange rate also broke through the 1,490-won level, soaring to its highest point since the global financial crisis. Faced with a triple whammy of high oil prices, inflation and exchange rates, the government is being forced to scrap its earlier optimistic outlook and substantially revise its economic strategy to address stagflation—high inflation combined with economic slowdown.
On the 9th, the government decided to begin procedures this week to set maximum prices for petroleum products such as gasoline and diesel, whose prices have surged. At the same time, it will cut fuel taxes and provide direct support to consumers to stabilize prices.
At the emergency economic review meeting convened that day by President Lee, the economic authorities reported these plans. The president ordered, "Swiftly carry out the relevant procedures." The Ministry of Finance and Economy, the Korea Fair Trade Commission (KFTC) and other related ministries immediately began implementing the measures.
Economic policymakers at the Ministry of Finance and Economy are searching for additional measures to minimize the blow to the real economy. They had originally set this year’s targets—2% growth and 2.1% inflation—on the assumption that oil would stay in the $60 range. But the U.S.–Iran war has completely changed the economic landscape, putting them under intense pressure to respond.
One of the government’s emergency price-stabilization tools is a cut in fuel taxes. The government is expected to sharply reduce fuel taxes to the legal ceiling for cuts—up to 37%—within the next two to three weeks, the period when higher international oil prices typically feed through to the real economy.
Currently, the government is maintaining fuel tax cuts of 7% on gasoline and 10% on diesel. There is still room to expand these reductions up to the maximum 37% that can be implemented without revising the law. Cutting fuel taxes only requires amending the enforcement decree of the Transportation, Energy and Environment Tax Act and obtaining approval at a Cabinet meeting, so the procedure is relatively quick.
Setting maximum prices for petroleum products is a measure based on the Petroleum and Alternative Fuel Business Act, which allows the government to designate price ceilings by public notice. However, significant friction and side effects are expected both before and after any ceiling is imposed.
Shin Se-don, an economics professor at Sookmyung Women's University, said, "When the government sets a maximum price for fuel, what matters is the level of that ceiling. If it is set at 2,000 won per liter, consumers will feel almost no benefit, but if it is set at 1,500 won, the losses for refiners will be substantial," adding, "It will be difficult to determine an appropriate benchmark."
In addition, the government can lower the tariff rate applied to crude oil under the tariff quota system. Reducing the quota tariff would cut import costs, which in turn could lower domestic prices of petroleum products such as gasoline, ease fuel cost burdens, and reduce transportation (logistics) and manufacturing costs, thereby alleviating overall inflationary pressure. Under the 2026 regular tariff quota operation plan, tariff rates on fuels such as Liquefied Natural Gas (LNG) for residential heating are being kept at the same level as this year—between 0% and 2%—through the first half of this year, depending on the fuel type.
At the same time, the economic authorities plan to release oil stockpiles to help balance supply and demand. The Ministry of Trade, Industry and Resources (MOTIR) is pursuing phased releases of strategic reserves under its emergency response scenarios to generate immediate effects.
The authorities are also cracking down hard on any attempts to exploit the turmoil by raising prices excessively, shrinking product volumes, hoarding, or engaging in collusion. They have been issuing daily warnings on such behavior. In practice, strong sanctions such as imposing fines or ordering price readjustments could be announced as early as the first half of the year.
Given the government’s stated commitment to maintaining an expansionary fiscal stance, the likelihood has increased that it will draw up a supplementary budget of 10 trillion–20 trillion won to fund oil price subsidies and energy supply measures. Ju Won, head of economic research at the Hyundai Research Institute, noted, "Now there is a clear justification in the form of an economic downturn, and if nothing else works, the government will have no choice but to inject money, so the chances of a supplementary budget in the first half of the year have risen further." SONG Yeongkwan, a senior research fellow at the Korea Development Institute (KDI), said, "The government is continuously warning against price collusion and sending a message that it will keep a close watch on capital and foreign exchange markets," adding, "In a domestic market where oil prices and exchange rates are highly volatile, reassuring foreign investors is crucial."
skjung@fnnews.com Jeong Sang-gyun, Kim Chan-mi and Choi Jong-geun Reporter