🚨 The Perception Gap and Optical Illusion Controversy of Gasoline and Diesel Price Decreases
Today Korean Economic News | 2025.02.16
📌 Have Gasoline and Diesel Prices Really Decreased? Consumer Perception is '0', Optical Illusion Controversy
💬 Despite the decrease in gasoline and diesel prices, consumers are not feeling the effect, leading to an optical illusion controversy. The main causes are analyzed to be international oil price volatility and regional price differences leading to perception mismatch.
1️⃣ Easy to Understand
Recently, the government and media have announced that gasoline and diesel prices have decreased, but many consumers using gas stations say they don't feel the price decrease. I'll explain why this discrepancy occurs in simple terms.
According to government statistics, the average gasoline price at gas stations nationwide decreased by about 50 won per liter compared to last month, and diesel decreased by about 30 won. This is a result of the slight decrease in international oil prices and the strengthening of the Korean won. However, many consumers say, "There is no actually perceptible price decrease." Why does this perception difference occur?
First, the large regional price variation is a cause. While gasoline prices in Seoul and major metropolitan areas still maintain above 1,800 won per liter, some smaller provincial cities have seen prices drop to the early 1,700 won range. Statistics are based on the national average, but consumers only experience the prices at the gas stations they primarily use, creating a difference in perception.
Second, the price decrease is relatively small compared to inflation. A 50 won decrease represents about a 2.7% reduction rate, which is offset by the price increases of other daily necessities during the same period. For example, filling a family car's fuel tank (about 50 liters) would save about 2,500 won, which can easily be overshadowed by increases in weekly grocery costs or one meal out.
Third, psychological factors also play a role. People generally tend to be more sensitive to price increases but relatively less sensitive to decreases. Also, since most consumers refuel by amount (e.g., 50,000 won, 70,000 won) rather than volume, it's difficult to directly perceive getting a slightly larger quantity for the same amount.
Fourth, there is a time lag in price adjustments between gas stations. Even if international oil prices and exchange rates fluctuate, this is not immediately reflected in retail prices, and the timing of price adjustments varies by gas station depending on inventory situations and business strategies. Particularly, large gas stations in major urban areas tend to reflect price decreases more slowly and increases more quickly, reducing the effect felt by consumers.
Ultimately, there is bound to be a gap between statistical price decreases and changes perceived by consumers. This difference is a result of complex factors including regional variations, refueling habits, psychological factors, and overall inflation, rather than a simple 'optical illusion.' For consumers to feel the actual effect of price decreases, more transparent price information provision along with larger price reductions through improved distribution structures seem necessary.
2️⃣ Economic Terms
📕 Oil Price
Oil price refers to the price of petroleum products and is influenced by international situation, supply and demand conditions, and exchange rates.
- Price fluctuations in Dubai crude, Brent crude, and WTI (West Texas Intermediate), which serve as benchmarks in the international crude oil market, significantly influence domestic petroleum product price formation.
- It fluctuates due to various factors such as geopolitical tensions, OPEC+ production decisions, and world economic growth outlook.
📕 Refining Margin
Refining margin is the difference between crude oil purchase price and petroleum product sales price, indicating the profitability of refineries.
- Simple refining margin is the value obtained by subtracting crude oil purchase cost from product sales price, while complex refining margin is a real profitability indicator obtained by further subtracting operating costs of the refining process.
- The higher the refining margin, the better the profitability of refineries, which can affect the final consumer price.
📕 Fuel Tax
Fuel tax is a tax imposed on petroleum products with different tax rates for gasoline, diesel, etc.
- Various taxes are imposed in combination, including transportation-energy-environment tax, education tax, driving tax, and value-added tax, accounting for a significant portion (40-50%) of the final consumer price.
- The government sometimes implements policies such as temporary fuel tax reductions depending on economic conditions or oil price fluctuations.
📕 Distribution Structure
Distribution structure refers to the process from crude oil import to consumer sales, with costs and margins at each stage reflected in the final price.
- It goes through the stages of crude oil import → refining → logistics → gas station sales, with costs and profits added at each stage.
- The final consumer price can be higher in markets with lower distribution efficiency or limited competition.
3️⃣ Principles and Economic Outlook
💡 Domestic Petroleum Product Price Determination Mechanism and Perception Gap
The price of domestic petroleum products is formed through a complex determination mechanism, and in this process, a gap occurs between statistical price fluctuations and consumer perception.
First, it is necessary to examine the structure of domestic petroleum product price determination. Domestic gasoline and diesel prices basically follow an 'international linkage system' method, determined based on international oil prices (mainly Singapore spot market prices) and exchange rates. To this, refining costs, distribution costs, various taxes, and margins of refineries and gas stations are added to form the final consumer price. Due to this complex price determination structure, even if international oil prices decrease, this is often not immediately and proportionally reflected in retail prices. For example, even if international oil prices decrease by 10%, domestic retail prices typically decrease by less than 5%.
Second, price adjustment asymmetry acts as an important factor. Generally, when international oil prices rise, domestic retail prices reflect this quickly, while they reflect decreases relatively slowly, resulting in a 'rockets and feathers' phenomenon. This is a result of complex interactions between refineries' and gas stations' business strategies, inventory management methods, and market structural characteristics. According to research by the Korea Petroleum Management Institute, it takes an average of 2-3 weeks for international oil price fluctuations to be fully reflected in domestic retail prices during rises, while it takes 4-6 weeks during falls.
Third, regional and gas station price disparities distort consumer perception. Depending on the location, size, brand, and operation method (directly managed/self-employed) of gas stations, price differences of up to 200 won or more per liter can occur at the same time. Government statistics use the average of these various prices, but individual consumers only experience the prices at specific gas stations they primarily use. Especially in urban areas with high traffic or highway gas stations, which tend to reflect price decreases later and to a lesser extent, consumers in these areas find it difficult to perceive price decreases.
Fourth, the tax structure reduces the perceptible effect of price fluctuations. The proportion of taxes in domestic gasoline prices is about 45-50%, and for diesel, about 40-45%. Due to this high tax proportion, even if international oil prices fluctuate, the fluctuation range of consumer prices is inevitably limited. For example, even if international oil prices decrease by 10%, only 10% of the real price excluding taxes decreases, so the final consumer price decreases by only about 5-6%.
These factors work together to create an 'optical illusion' where consumers do not feel the decrease despite prices statistically showing a decrease. This needs to be understood as a structural phenomenon stemming from the characteristics of petroleum product price determination and distribution structure, not just a simple psychological phenomenon.
💡 International Oil Price Trends and Future Outlook
Recent international oil price trends and future outlook are expected to have a significant impact on domestic consumer perceived prices.
First, recent international oil prices are showing relative stability, but with high volatility. Since the second half of 2024, international oil prices have been fluctuating within the range of $70-85 per barrel. This is a result of conflicting factors — concerns about global economic slowdown and geopolitical risks — working simultaneously. On one hand, concerns about demand decrease due to China's economic growth slowdown and the continuation of major countries' tight monetary policies are acting as factors causing oil price decreases, while on the other hand, geopolitical tensions in the Middle East and the maintenance of OPEC+'s production cut policy are acting as upward pressure on oil prices.
Second, regarding the future oil price outlook, the view that international oil price volatility will continue for the time being is predominant. Major investment banks' oil price forecast for 2025 is in the range of $75-90 per barrel, with the current level of volatility expected to be maintained. However, this outlook may be periodically adjusted depending on factors such as global supply chain reorganization, acceleration of eco-friendly energy transition, and changes in US shale oil production volume. In particular, there is also a risk that oil prices could surge in the short term if geopolitical crises expand or unexpected supply disruptions occur.
Third, exchange rate fluctuations are also an important factor affecting domestic petroleum product prices. Domestic petroleum product prices are directly affected by KRW/USD exchange rate fluctuations because crude oil import costs are settled in dollars. The recent trend of Korean won strengthening has partially complemented the effect of oil price decreases, but if exchange rate volatility expands due to changes in US monetary policy, global economic outlook, or geopolitical risks, it is expected to affect domestic oil prices as well.
Fourth, seasonal factors and refining margin fluctuations should also be considered. Generally, diesel prices tend to rise in winter due to increased demand for heating petroleum products, and gasoline demand tends to increase in summer due to increased driving during the vacation season. Additionally, fluctuations in refining margins also affect final consumer prices, and with the expansion of refining margin volatility in recent years, uncertainty in price prediction has also increased.
Considering these factors together, future domestic petroleum product prices are expected to maintain stability with a certain level of volatility. For consumers to perceive actual price decreases, a more clear downward trend in international oil prices needs to emerge, and a mechanism needs to operate where this is quickly and sufficiently reflected in domestic prices.
💡 Policy Approaches to Resolve Consumer Perception Gaps
Various policy approaches are needed for consumers to actually perceive oil price decreases.
First, transparency in petroleum product price determination needs to be enhanced. The current domestic petroleum product price determination process has a complex structure that is difficult for consumers to understand. The government and the petroleum industry need to more transparently disclose information about the linkage mechanism between international oil price fluctuations and domestic retail prices, the proportion of price components, and the timing and extent of price adjustments. For example, they could publish the expected range of domestic price changes based on international oil price fluctuations on a weekly basis and strengthen the system for monitoring differences from actual selling prices.
Second, institutional arrangements to mitigate price adjustment asymmetry are needed. Policy efforts are needed to mitigate the 'rockets and feathers' phenomenon where domestic prices reflect international oil price increases quickly and decreases slowly. For example, they could monitor the price adjustment details of refineries and major agents in real-time and strengthen market surveillance for unreasonable price maintenance. Also, improving the price information provision system so that consumers can easily find cheaper gas stations could be considered to promote price competition in the market.
Third, promoting price competition through improved petroleum product distribution structure is needed. The current domestic petroleum product market has a oligopolistic structure dominated by a few refineries, with limited price competition. To improve these structural characteristics, policies such as expanding economical gas stations, creating a fair competitive environment between directly managed gas stations and self-employed gas stations, and lowering market entry barriers for new businesses should be strengthened. In particular, it is important to further expand the economical gas station system, which has been successfully established in recent years, to broaden the options for consumers to purchase petroleum products at lower prices.
Fourth, price stabilization methods through flexible operation of the tax system need to be explored. The current taxes, which account for 40-50% of domestic gasoline and diesel prices, act as a buffer that mitigates price volatility, but also as a factor that reduces the perceptible effect of price decreases. Flexible tax policies could be considered, such as temporarily reducing fuel taxes during rapid international oil price increases and gradually normalizing them during rapid decreases, to alleviate consumer burden. However, since fuel taxes are an important source of tax revenue and part of environmental policy, a cautious approach considering balance with long-term policy direction is needed.
Fifth, it is also important to seek fundamental solutions through improved energy efficiency and expanded alternative energy. In the long term, a policy shift towards reducing oil dependence and increasing energy efficiency is needed. Efforts to lower the economy's sensitivity to petroleum product price fluctuations should be pursued in parallel through expanded adoption of eco-friendly vehicles such as electric and hydrogen cars, improved public transportation infrastructure, and enhanced energy efficiency in the building and industrial sectors.
Through these various policy approaches, efforts are needed to create a market environment where international oil price fluctuations are reflected more fairly and transparently in domestic consumer prices, enabling consumers to perceive actual price fluctuations.
4️⃣ In Conclusion
The 'optical illusion' controversy, where consumers do not perceive the decrease despite falling gasoline and diesel prices, can be seen as a phenomenon stemming from the structural characteristics of the domestic petroleum product market and price determination mechanism, not just a simple difference in perception. Various factors such as complex price components, price adjustment asymmetry, regional price disparities, and high tax proportion are widening the perception gap for consumers.
In the short term, it is important for the government and industry to increase transparency in price determination and provide accurate information in a timely manner. They should disclose information that consumers can easily understand about the linkage mechanism between international oil prices and domestic retail prices, the proportion of price components, and the timing and extent of adjustments, and strengthen market surveillance for unreasonable price maintenance. Additionally, efforts are needed to promote price competition in the market by improving the price information provision system so that consumers can easily find cheaper gas stations.
In the medium to long term, promoting price competition through improved petroleum product distribution structure is important. The current oligopolistic market structure should be moved away from to create an environment where various businesses can compete fairly. It is necessary to expand consumer choice and activate price competition through expanding economical gas stations, creating a fair competitive environment between directly managed gas stations and self-employed gas stations, and lowering market entry barriers for new businesses.
Additionally, price stabilization methods through flexible operation of the tax system should be considered. Fuel taxes could be flexibly adjusted during rapid international oil price fluctuations to alleviate consumer burden. However, a cautious approach is required as fuel taxes are an important source of tax revenue and part of environmental policy.
In the long term, a policy shift towards reducing oil dependence and increasing energy efficiency is needed. Efforts to lower the economy's sensitivity to petroleum product price fluctuations should be pursued in parallel through expanded adoption of eco-friendly vehicles such as electric and hydrogen cars, improved public transportation infrastructure, and enhanced energy efficiency in the building and industrial sectors.
Ultimately, to enhance the effect of oil price decreases perceived by consumers, transparency in price determination and adjustment processes, improved distribution structure, and appropriate policy support should be comprehensively implemented. Through this, a market environment should be created where international oil price fluctuations are reflected more fairly and promptly in domestic consumer prices, moving towards effectively reducing consumers' energy cost burden.