🚨 Gas Price Decline Forecast and Analysis of Influencing Factors

Today Korean Economic News | 2025.02.05

📌 "Honey, let's fill up later"... Gas prices that have been rising for four consecutive months may fall

💬 However, as the upward trend in exchange rates and international oil prices, which are factors driving gas price increases, shows signs of slowing down, there is a possibility that gas prices could fall as early as next week. An official from the Korea Petroleum Association said, "As exchange rates and international oil prices have recently fallen, there is a possibility that oil prices will decrease from next week," adding, "The downward trend is expected to continue for the next two weeks."

1️⃣ Easy to Understand

Gas prices, which have been consistently rising for the past four months, may finally start to decrease. Let me explain why gas prices are expected to fall and what this means for our daily lives.

Gas prices at filling stations are determined by two main factors. The first is 'international oil prices,' which is the price of crude oil traded in the global market. The second is the 'exchange rate,' which is the ratio between the US dollar and the Korean won. Since crude oil is traded in dollars on the international market, if international oil prices rise or the Korean won depreciates (exchange rate increases), the gas prices we pay at filling stations also increase.

For the past four months, both factors have been pushing gas prices higher. International oil prices rose due to heightened geopolitical tensions in the Middle East, and the Korean won depreciated, leading to a higher exchange rate. As a result, you may have felt your wallet getting lighter every time you filled up at the gas station.

But now the situation is changing. Recently, both international oil prices and exchange rates have been showing a downward trend. Global economic slowdown concerns have weakened oil demand forecasts, and signs of easing tensions in the Middle East have contributed to falling international oil prices. Additionally, the Korean won has found relative stability, leading to a decrease in the exchange rate.

These changes directly impact gas prices at filling stations. According to the Petroleum Association, gas prices are expected to start falling as early as next week, with the downward trend continuing for the next two weeks.

Falling gas prices have several positive effects on our daily lives. Consumers who use private vehicles will see reduced transportation costs, and lower logistics costs will help stabilize the prices of various goods. Additionally, heating oil prices may also decrease, potentially reducing heating bills during the winter months.

Now the phrase "Honey, let's fill up later" has real meaning. If you wait a little longer, you'll likely be able to fill up at a lower price. Of course, forecasts can change depending on international developments and economic conditions, but the current situation suggests that we can reasonably expect lower gas prices.

2️⃣ Economic Terms

📕 Oil Price

Oil prices are the prices of petroleum products, determined by international oil prices and exchange rates.

• Domestic oil prices are determined by a complex interaction of factors including international oil prices, exchange rates, distribution margins, and taxes.
• Domestic gas station prices tend to reflect changes in refiners' supply prices with a lag of about 1-2 weeks.

📕 International Oil Price

International oil prices refer to the price of crude oil traded in international markets, influenced by the global economy and oil supply and demand.

• Brent crude, WTI (West Texas Intermediate), and Dubai crude are representative international oil price indicators.
• OPEC+ (Organization of Petroleum Exporting Countries Plus) production adjustments, geopolitical tensions, and global economic outlook are major factors affecting price fluctuations.

📕 Exchange Rate

Exchange rate means the ratio at which one country's currency is exchanged for another country's currency.

• When the KRW/USD exchange rate rises, more Korean won must be paid for the same dollar-denominated crude oil price.
• U.S. monetary policy, South Korea's economic conditions, and international financial market trends influence exchange rate fluctuations.

📕 Oil Supply and Demand

Oil supply and demand is a concept that represents the balance between oil production and consumption.

• On the supply side, OPEC+ countries' production cut agreements and production disruptions in major oil-producing countries have an impact.
• On the demand side, global economic growth rates, seasonal factors, and the spread of alternative energy sources act as important variables.

3️⃣ Principles and Economic Outlook

💡 Domestic Oil Price Fluctuation Trends and Current Status

• Domestic gas station prices have shown a continuous upward trend over the past four months, but signs of decline have recently appeared.

  • First, looking at the recent oil price increase trend, domestic gas station prices continued to rise for about four months from October 2024 to January 2025. According to the Korea National Oil Corporation's oil price information service Opinet, the national average price of gasoline at gas stations rose from the early 1,600 won per liter range in early October last year to the mid-1,800 won range by the end of January this year. Diesel prices showed a similar trend, rising from the early 1,400 won range to the mid-1,600 won range. This represents an increase of about 15%, which has been a significant burden for consumers.

  • Second, regional and gas station price differences are also noteworthy. Metropolitan areas such as Seoul generally had higher average prices than provincial areas, and highway gas stations were often more than 100 won more expensive than regular road gas stations. Also, self-service gas stations and large gas stations tended to maintain relatively lower prices. Due to these differences, the actual burden of gas prices felt by consumers varied depending on region and usage patterns.

  • Third, the main causes of rising gas prices were increases in international oil prices and exchange rates. Heightened geopolitical tensions in the Middle East, especially the Israel-Hamas conflict and concerns related to Iran, reflected a risk premium in the international crude oil market. In addition, the continuation of OPEC+'s production cut policy also acted as a price-increasing factor on the supply side. In terms of exchange rates, the solid growth of the U.S. economy and concerns about South Korea's relative economic slowdown led to a weaker won, increasing the cost of importing dollar-denominated crude oil.

  • Fourth, signs of decline have begun to appear recently. International oil prices began to turn downward from the end of January, and the KRW/USD exchange rate also began to stabilize. These changes have started to be reflected in domestic refiners' supply prices, and the Korea Petroleum Association forecasted that gas station retail prices would fall within the next 1-2 weeks. This can be interpreted as a signal that the continuous upward trend of the past four months is finally breaking.

• These domestic oil price fluctuations go beyond simple price changes and are connected to various economic elements such as prices, business conditions, and consumer sentiment. Considering the impact of energy prices on the cost structure of households and businesses, the downward forecast for gas prices can be seen as a positive signal in terms of alleviating inflationary pressure and expanding consumption capacity.

💡 Recent Trends and Outlook for International Oil Prices and Exchange Rates

• It is necessary to examine the recent trends and future outlook of international oil prices and exchange rates, which are key variables in the domestic gas price decline forecast.

  • First, international oil prices have recently turned to a downward trend. Brent crude prices, which had risen to the mid-$80 per barrel range by the end of January, fell to the $76 range in early February. WTI prices also showed a similar trend, falling to the $72 range. The main causes of this downward trend include weakened demand outlook due to concerns about a global economic slowdown, increased U.S. crude oil inventories, and partial easing of tensions in the Middle East. In particular, poor manufacturing indicators in major economic regions such as the United States, China, and Europe have raised concerns that future oil demand growth may be weaker than expected.

  • Second, the future outlook for international oil prices is somewhat uncertain, but downward pressure is expected to prevail in the short term. The International Energy Agency (IEA) forecasted that oil demand growth in 2025 would slow compared to the previous year and that supply growth from non-OPEC+ countries would continue. However, the possibility of additional production cuts by OPEC+ and geopolitical uncertainties in the Middle East still remain as upside risks. Many market experts expect oil prices to fluctuate in the $70-80 range during the first and second quarters.

  • Third, the KRW/USD exchange rate has also shown stability recently. The exchange rate, which had risen to the 1,450 won range in January, fell to the 1,420 won range in early February. Factors contributing to this exchange rate stabilization include expanded expectations for U.S. Fed rate cuts, easing global dollar strength, and improvement in Korean export indicators. In particular, as U.S. employment and inflation data emerged in a direction that increased the possibility of Fed rate cuts, improved risk preference sentiment in global financial markets contributed to the stabilization of the Korean won.

  • Fourth, the future outlook for exchange rates will largely depend on global monetary policy and economic trends. The timing and pace of the Fed's rate cuts, the Bank of Korea's monetary policy response, and global economic recovery will be major variables. The market predominantly believes that the KRW/USD exchange rate is likely to form in the 1,400-1,450 won range, but volatility may increase in case of increased volatility in global financial markets or heightened geopolitical risks.

• Considering these trends in international oil prices and exchange rates, factors for domestic gas price decreases appear to be more dominant in the short term. Of course, since uncertainty in international crude oil markets and foreign exchange markets is still significant, a cautious approach is needed for mid- to long-term outlooks. In particular, it should be considered that the situation can change rapidly depending on geopolitical risks, major countries' economic indicators, and OPEC+ policy decisions.

💡 Impact of Oil Price Fluctuations on the Economy and Consumers

• Gas station price fluctuations have various ripple effects on the overall economy and consumer life beyond the simple issue of energy costs.

  • First, from a consumer perspective, it affects household spending structure and consumer sentiment. Korean households' transportation expenses account for about 10% of average household spending, and oil price fluctuations directly impact household budgets. The impact is even greater for suburban residents or long-distance commuters who use private vehicles frequently. If gas prices, which had risen by about 15% over four months, turn to a downward trend, this can contribute to increasing household disposable income and improving consumer sentiment. In particular, since energy prices have a significant psychological impact on consumer sentiment, falling gas prices can also help improve overall consumer sentiment.

  • Second, from a business and industry perspective, it affects cost structure and competitiveness. Industries that directly use a lot of fuel, such as transportation, logistics, and delivery, react sensitively to oil price fluctuations. It also indirectly affects manufacturing as a whole through logistics costs. Falling gas prices can help improve business profitability by alleviating cost burdens, which may lead to expanded investment and employment. In particular, it can be a factor in alleviating cost pressure for small businesses and self-employed individuals who have struggled with rising logistics costs recently.

  • Third, at the macroeconomic level, it affects prices and economic trends. Petroleum products, as both direct consumer goods and inputs for various production activities, account for a large proportion of the price index. A decrease in gas prices has a direct effect on lowering the Consumer Price Index (CPI) growth rate and indirectly contributes to price stability for other products and services. Alleviating inflationary pressure also provides flexibility in central bank monetary policy operations, increasing the possibility of creating a business-stimulating policy environment.

  • Fourth, in the mid to long term, it also affects energy consumption behavior and policy directions. Oil price volatility affects consumers' and businesses' energy consumption patterns, vehicle choices, and alternative energy investments. When gas prices consistently rise, there tends to be increased interest in eco-friendly vehicles such as electric or hybrid cars. Conversely, when gas prices fall, this transition motivation may weaken. Government energy and environmental policies also significantly consider international oil price and domestic gas price trends.

• Thus, oil price fluctuations have meaning beyond simple price changes. The forecast that gas prices will fall from next week is a positive signal for consumer burden relief and price stability in the short term. However, considering the inherent volatility of energy prices, whether this trend will continue in the long term may vary depending on various variables such as the global economic environment and geopolitical factors.

4️⃣ In Conclusion

Gas station prices, which had been rising for four consecutive months, are likely to turn to a downward trend. With both international oil prices and exchange rates showing a downward stabilizing trend, the Korea Petroleum Association forecasts that gas price decreases will continue for two weeks starting next week. This is expected to act as a positive factor for household burden relief and price stability.

From a consumer perspective, falling gas prices are expected to lead to direct relief of household burdens. This is especially welcome news for consumers who use private vehicles for commuting or business purposes. The phrase "Honey, let's fill up later" can now lead to actual economic benefits. However, as there are price differences by gas station and region, it is also wise to use oil price information services like Opinet to find affordable gas stations.

From a business perspective, there is a possibility of improved cost structure due to reduced transportation and logistics costs. In particular, industries with high fuel costs such as delivery, parcel, and freight transport are expected to see significant profitability improvements. Manufacturing companies can also strengthen their competitiveness through reduced raw material and product transportation costs. Businesses need to consider strategies that connect these cost structure improvements to consumer price stability or service quality improvements.

From a policy perspective, falling gas prices are expected to contribute to price stability. In a situation where the consumer price inflation rate exceeds the target of 2%, energy price stability can help alleviate overall price pressure. However, as oil prices are a highly volatile factor, a comprehensive approach to price stability remains important rather than relying excessively on temporary decreases.

From a long-term perspective, it is still necessary to continue pursuing structural changes to respond to energy price volatility. Policies such as transitioning to eco-friendly vehicles like electric and hydrogen cars, improving public transportation infrastructure, and enhancing energy efficiency can contribute to reducing oil dependence and mitigating economic shocks due to oil price fluctuations. The importance of this mid- to long-term transition does not diminish even if oil prices temporarily decrease.

In conclusion, the forecast for falling gas prices is positive news for consumers and businesses in the short term. However, considering the uncertainties in international affairs and the global economic environment, the volatility of energy prices can expand again at any time. Therefore, a balanced approach is needed to enjoy short-term cost-saving effects while reducing oil dependence through improved energy efficiency and expanded use of alternative energy in the mid to long term.