South Korea's diesel subsidy hike likely to boost consumer sentiment during peak driving season

South Korea's surging retail diesel prices have dampened consumer sentiment, but the government's subsidy rate hike and rapid removal of COVID-19 restrictions would lead to higher demand for the middle distillate fuel over the peak summer driving season, refinery sources and industry analysts said over May 18-20.

The government would provide more diesel subsidies to cargo truck and taxi drivers, who are suffering from surging pump prices, to ease their fuel cost burden and revive consumer confidence, the Ministry of Economy and Finance said May 18.

The government will lower the threshold diesel price set for subsidy payments to Won 1,750/liter ($1.37/liter), from Won 1,850/l ($1.45/l), currently, effective June 1, the ministry said in a statement.

The government will compensate for half of the difference between the average retail price and the threshold base price through subsidy, the ministry said.

The threshold price will be lowered by Won 100/l to Won 1,750/l, allowing the government to provide more subsidies as the gap between the base price and retail price widens, effectively lowering diesel filling costs for the drivers.

As diesel is currently being sold at an average Won 1,976/l ($1.55/l) at fuel stations, truck and taxi drivers would be entitled to receive half of the gap between the new base price of 1,750/l, which equates to roughly Won 113/l (8.8 cents/l), according to S&P Global Commodity Insights calculation. This would be up from Won 63/l (4.9 cents/l), based on the current threshold price of W1,850/l.

The government has also decided to extend the subsidy scheme by two months until end-September, the ministry said. The government had first offered diesel subsidies on May 1. The subsidy scheme was originally set to expire July 31.

The diesel subsidies have been applied to diesel-fueled logistics vehicles across the nation, including 445,000 cargo trucks, 21,000 buses, 9,300 taxies, and 1,300 cargo ships, according to the ministry.

The move comes as retail diesel prices rose above gasoline prices on May 11 for the first time since the global financial crisis amid tight supply of gasoil across Asia and the globe.

Retail diesel price had long been priced at a discount of about Won 200/l (15.7 cents/l) to gasoline.

However, the national daily average retail diesel price jumped to Won 1,946/liter ($1.517/liter) May 11, surpassing the 92 RON unleaded gasoline average price of Won 1,945/liter ($1.516/liter) on the day, Korea National Oil Corp. data showed. The last time diesel commanded premium over gasoline in South Korea was in August 2008, according to KNOC.

Despite the surging pump prices, the country's overall auto fuel demand is expected to increase over the coming months as Seoul lifted most of the mobility, social distancing, and international travel restrictions in April, middle distillate marketers at major South Korean refiners, including S-Oil said.

Monthly diesel demand could surpass 15 million barrels in June and July, compared with 12.5 million barrels consumed in March, according to the middle distillate marketers.

South Korea's new president Yoon Seok-youl's administration is under enormous pressure to tame inflation, curb the fuel price uptrend and lift broader consumer sentiment, amid surging diesel prices that have sparked protests by cargo truck and taxi drivers in recent weeks, according to analysts at Korea Petroleum Association based in Seoul.

The government extended oil tax cuts to a record 30% in April for three months from May, from 20% earlier, as part of its efforts to ease upward pressure on inflation and surging energy prices.

The tax cuts have led a comparative rise in diesel price, due to bigger taxes on gasoline than diesel. Taxes account for almost 50% of the retail gasoline price, 40% of diesel price, and 30% of butane price.