South Korea extends fuel tax cut through October amid rising crude prices

South Korea will extend tax cuts on auto fuels for another two months until the end of October to help ease consumers' financial burdens amid rising international crude oil prices, despite concerns over the country's dwindling tax revenue, Economy and Finance Minister Choo Kyung-ho said Aug. 16.

"The government will extend the oil tax cuts through the end of October as international crude oil prices have been on the rise, which would put bigger burdens to the public and worsen inflation," said Choo.

"As for the period beyond October, we plan to come up with an additional measure by reviewing the situation then."

The extension comes as the country's utility prices have been growing sharply, surging 21.1% year on year in July, as the state-run Korea Electric Power Corp. raised electricity bills to make up for its snowballing losses.

Since July, retail pump prices in South Korea have been on the rise, with gasoline pump prices rising 7.8% on the month to an average of Won 1,694/l ($1.27/l) in the second week of August, compared with Won 1,572/l ($1.18/l) a month earlier, according to state-run Korea National Oil Corp.

Diesel pump prices climbed 10.4% on the month to an average of Won 1,526/l ($1.14/l) in the second week of August, compared with Won 1,382/l ($1.04/l) a month earlier.

Cuts to be reviewed

The South Korean government has been providing tax cuts for auto fuels such as diesel, gasoline and liquefied petroleum gas butane since November 2021, to help curb inflationary pressure sparked by surging oil prices.

On Jan. 1 this year, tax cuts for gasoline were lowered to 25% while cuts for diesel and butane were kept at 37%, and the cuts were slated to end Aug. 31, following an extension in April.

"The government will review the tax cuts again in mid-October to decide whether to extend them," a ministry official said, noting the government may seek to lower tax reduction for diesel to gasoline.

The government had considered extending the fuel tax cuts by four months through the end of December but decided to extend by two months due to mounting concerns about the country's falling tax revenues, the official added.

South Korea's tax revenue slid 18.2% year on year to Won 178.5 trillion ($133 billion) in the first half of 2023 amid the slump in the property market and the country's economic slowdown, according to the Ministry of Economy and Finance.

In July, the ministry unveiled its tax code revision bill, focusing on providing tax cuts for businesses and reducing financial burdens for the people to counter a prolonged slowdown and revive economic vitality.

Market impact

Industry sources told S&P Global Commodity Insights that the tax cut extension could result in leaner spot middle distillate supplies through October as South Korean refiners' trim exports to meet domestic demand on the back of reduced pump prices stemming from the tax cut.

"The extension of the tax cut was expected because it has become a politically-charged issue. The government would want to avoid the strikes by truck drivers amid rising fuel costs last year," a regional middle distillates trader said.

Another regional middle distillates trader said: "There could be a chance that South Korea exports could see slightly more exports in September but less in October because some refineries had previously thought that the tax cut wouldn't be extended."

The country's domestic gasoline demand is expected to remain firm following the extension, market sources said, but others have added that South Korea's exports may not decrease, as the country had already bolstered its gasoline supplies prior to the announced tax cut extension.

South Korea's gasoline demand rose 23% year on year to 7.56 million barrels in June, while diesel demand was up 14% from a year earlier at 13.8 million barrels, latest data from Korea National Oil Corp. showed.