South Korea Keeps Fuel Cheap for Holidays as Fiscal Cost Mounts

(Bloomberg) -- With millions of South Koreans set to hit the road this week during a three-day public holiday, the government is extending fuel-price caps, cushioning households from an energy shock that has pushed global oil prices above $100 a barrel.

But the relief is increasingly coming at a cost.

South Korea is one of the few developed economies to have taken extraordinary steps to shield its motorists from rising oil prices, effectively capping prices for gasoline and diesel at the pump while promising to compensate refiners for their losses.

Imposed in March after the US attacked Iran — the first time in three decades that Seoul used the emergency tool — the measures have stretched beyond the six months initially budgeted, causing growing alarm among economists.

South Korea is effectively "enjoying cheap gasoline but has yet to receive the receipt," said Lee Hong, an associate research fellow at the Korea Institute for Industrial Economics and Trade.

The Chuseok holiday, which starts Thursday, makes the balancing act even harder. Many South Koreans travel across the country to visit family, adding to household expenses and fuel demand. The government has rolled out extra measures to ease the burden, including discounts at highway gas stations.

But economists are questioning how long the government can keep shielding motorists from expensive oil without straining public finances, distorting the market and delaying an adjustment to higher energy costs.

On Friday, South Korea's Ministry of Trade, Industry and Resources kept the caps unchanged for another four weeks, citing rising consumer inflation and volatility in oil prices due to uncertainties in the Middle East. The move offers some respite as inflation remains well above the Bank of Korea's 2% target and households grapple with broader cost-of-living pressures that have pushed President Lee Jae Myung's approval rating to a record low.

But keeping fuel artificially cheap may also reduce the incentive for consumers to cut back at a time when South Korea, one of the world's biggest energy importers, remains exposed to a global oil shock. Experts warn that steady prices may be creating a false sense of security.