South Korea struggles with rising fuel costs and inflation

Rising inflation rates and the impact of high fuel costs are taking its toll on South Korea. Statistically, South Korea remains dependent on oil as its primary source of energy. In 2009, oil made up 42 % of the country’s total fuel consumption. Other sources of energy include coal (28.2%), liquefied natural gas (13.9%), nuclear power (13.1%) and renewable energy (2.2%). Currently, South Korea imports approximately 83% of its fuel to the tune of US$91.2 billion. Industry analysts estimate that for each 10% increase in annual average prices in the international oil markets, the country’s inflation rate jumps by a fifth of a percentage point. In response to the increasing problems of inflation and the rising costs of crude oil, South Korean President Lee Myung-bak recently called for a “war on inflation” and a revision in the country’s energy policies. To help keep retail fuel costs down, the government has asked domestic refiners to absorb the costs of higher oil prices. Several refiners have responded by cutting domestic gasoline and diesel prices, including GS Caltex, SK Energy and S-Oil Corp. However, analysts fear that these price cuts could be in vain and may lead to increases in demand. There is also the risk that leaving the refiners holding the bag for as much as US$643 million in losses will damage the country’s reputation with investors and erode the market value of the industry. The government has indicated that they may cut oil taxes to ease the burden of high fuel prices for consumers. (April 7, 2011)