🚨 Fuel Tax Benefits Reduction: Preparing for Rising Fuel Prices and Oil Market Outlook

Today Korean Economic News | 2025.04.23

📌 Fuel Tax Benefits Reduced... The Government's Gradual Return to Normal

💬 The government has decided to extend fuel tax reduction measures until the end of June, but has reduced the discount rate from 15% to 10% for gasoline and from 23% to 15% for diesel. This effectively signals a normalization of fuel taxes, with consumers expected to feel less benefit. While international oil prices are showing a gradual decline, volatility is expected to continue due to Middle East tensions and U.S. plans to expand strategic petroleum reserves.

1️⃣ Easy Understanding

The government has decided to reduce fuel tax benefits. This means the price you pay when filling up at gas stations will gradually increase. Let me explain why this decision was made and how it will affect our daily lives.

Fuel tax is a tax imposed on petroleum products such as gasoline and diesel. The government has been implementing a policy of cutting these taxes for the past two years. However, they've now decided to reduce this benefit - the discount rate for gasoline will decrease from 15% to 10%, and for diesel from 23% to 15%. As a result, gasoline prices are expected to rise by about 68 won per liter, and diesel by about 101 won per liter.

The government made this decision for two main reasons. First, with international oil prices lower than last year, there's less need to maintain high tax discounts. Second, the government is considering fiscal soundness as the tax reductions have increased financial burden. It's reported that fuel tax reductions over the past two years have decreased tax revenue by about 8 trillion won.

However, this decision may place a burden on consumers and businesses. Car owners will face increased refueling costs, while professions where fuel costs directly impact income, such as truck drivers and taxi drivers, may be hit harder. There's also the possibility that various necessities might become more expensive due to increased logistics costs.

The government plans to normalize fuel taxes gradually, starting with this reduction in discount rates. Consumers may need to consider developing economical driving habits or alternatives such as carpooling and public transportation to prepare for future fuel price increases.

2️⃣ Economic Terms

📕 Fuel Tax

Fuel tax refers to the collective taxes imposed on petroleum products such as gasoline and diesel.

• It consists of various taxes including transportation, energy, and environmental taxes, individual consumption tax, education tax, and driving tax.
• It serves as a major source of government revenue and a policy tool to regulate energy consumption.

📕 Petroleum Product Price Structure

The petroleum product price structure consists of crude oil price, refining margin, distribution margin, and taxes.

• About 50-55% of domestic gasoline prices and 45-50% of diesel prices are taxes.
• It takes about 2-3 weeks for international oil price fluctuations to be fully reflected in domestic prices.

📕 Strategic Petroleum Reserve

Strategic petroleum reserve refers to oil storage maintained by a country for emergency situations.

• International Energy Agency (IEA) member countries are recommended to maintain oil reserves for at least 90 days.
• It can be released in crisis situations such as supply disruptions or price surges to stabilize the market.

📕 Gasoline-Diesel Price Gap

The gasoline-diesel price gap refers to the consumer price difference between these two fuels.

• In the past, diesel was significantly cheaper than gasoline, but the difference has narrowed due to strengthened environmental regulations and tax rate adjustments.
• Many countries are reducing tax benefits for diesel as part of their trend toward decreasing diesel vehicles and promoting eco-friendly policies.

3️⃣ Principles and Economic Outlook

💡 The Meaning and Impact of Fuel Tax Policy

• Let's analyze the background and economic impact of the decision to reduce fuel tax benefits.

  • First, fuel tax is an important source of fiscal revenue and an energy policy tool. Fuel tax is not just a simple tax but a means to achieve various policy objectives. From a government financial perspective, it's an important source of revenue amounting to about 14 trillion won annually. It also functions as a policy tool to regulate energy consumption and reduce environmental pollution. High taxes discourage unnecessary energy consumption and encourage the transition to eco-friendly transportation. However, when international oil prices surge or economic difficulties increase, tax rates are temporarily lowered to ease the burden on citizens. This reduction in fuel tax benefits can be seen as a gradual normalization of the reduction measures that have been in place since 2023. Compared to other countries, Korea's fuel tax rate is higher than that of the United States, but lower than European countries, placing it at a middle level.

  • Second, changes in fuel tax have various effects on households and businesses. This measure is expected to increase gasoline prices by about 68 won per liter and diesel by about 101 won per liter. For an average passenger car that refuels 200 liters per month, this means an additional burden of 13,600 won for gasoline cars and 20,200 won for diesel cars. Professions where fuel costs directly impact income, such as truck drivers and taxi drivers, may be hit harder. Rising logistics costs may also affect overall prices. Given Korea's logistics characteristics with a high proportion of road transportation, increased fuel costs might be reflected in the prices of daily necessities. However, as international oil prices are currently stable and the reduction in discount rates is being implemented gradually, the shock is expected to be limited.

  • Third, in the long term, the transition to eco-friendly energy will accelerate. While fuel tax normalization may be a burden in the short term, it can serve as an opportunity to promote the transition to eco-friendly transportation in the long term. Higher fuel costs increase the economic viability of alternative energy vehicles such as electric and hydrogen vehicles. They also encourage energy-efficient transportation methods like carpooling and public transportation. The government is also implementing policies such as subsidies for eco-friendly vehicle purchases and expansion of charging infrastructure to support this transition. Looking at global trends, many countries are reducing tax benefits for fossil fuels and pushing for tax reforms that reflect environmental costs to achieve carbon neutrality targets. Korea also needs to restructure its energy pricing system in line with these trends in the long term.

• While the reduction in fuel tax benefits aligns with securing fiscal soundness and eco-friendly policy directions, it may burden households and businesses in the short term. The government should mitigate the shock of this transition process by supporting vulnerable groups and expanding eco-friendly transportation infrastructure.

💡 International Energy Market Trends and Outlook

• Let's examine the current status and future outlook of the global oil market.

  • First, international oil prices are stable but uncertainties persist. Current international oil prices are in the mid-$70 per barrel range, about 10% lower than the same period last year. This is a result of demand reduction due to global economic growth slowdown, increased shale oil production in the U.S., and weakened effects of OPEC+ production cuts. However, international political instability remains high. The Israel-Hamas conflict, the Ukraine war, and tensions in the Middle East region are factors that could cause oil prices to surge at any time. Also, the fact that the U.S. has begun to refill its strategic petroleum reserves could act as a factor for oil price increases. The International Energy Agency (IEA) expects an increase in oil demand due to global economic recovery from the second half of this year, so the possibility of oil price increases cannot be ruled out.

  • Second, structural changes in the energy market are underway. The traditional structure of the oil market is changing. The United States has now established itself as the world's largest oil producer, while China has become the largest importer and consumer. This has weakened OPEC's market dominance compared to before. Also, as the trend toward eco-friendly energy accelerates, the growth of oil demand is expected to slow down in the long term. Major automobile manufacturers are expanding electric vehicle production, and many countries are setting timelines for banning the sale of internal combustion engine vehicles. However, there are many variables such as the speed of electric vehicle adoption, alternative energy infrastructure construction, and the economic growth of developing countries, making it difficult to accurately predict when oil demand will decrease. Amid this uncertainty, energy companies are also pursuing business diversification and low-carbon strategies.

• The international energy market will continue to see volatility due to geopolitical risks and economic fluctuations in the short term, but the long-term trend towards eco-friendly energy transition will continue. In this environment, Korea needs a strategy that balances energy security and eco-friendly transition.

💡 Consumer and Business Response Strategies

• Let's explore ways to respond to fuel tax benefit reductions and changes in the energy market.

  • First, households need to improve fuel efficiency and find alternatives. As the burden of fuel costs increases due to the reduction in fuel tax benefits, individuals and households need to prepare response strategies. First, it's important to improve fuel efficiency through economical driving. Avoiding rapid acceleration and braking, maintaining appropriate speed, and reducing unnecessary idling can save 10-15% of fuel consumption. Increasing carpooling or public transportation use is also a good method. In the long term, when replacing vehicles, one can consider vehicles with good fuel efficiency, hybrids, or electric vehicles. In the case of electric vehicles, while the initial purchase cost is high, the operating cost is significantly lower, which can be economical in the long run. The burden can be reduced by utilizing government subsidies and tax benefits.

  • Second, businesses need to improve energy efficiency and cost structure. Industries with high fuel cost proportions, such as logistics and transportation companies, need more active responses. Fuel consumption can be reduced through logistics optimization, reduction of empty vehicle rates, and eco-driving training. It's also important to design contract structures to respond flexibly to fuel cost fluctuations. Some companies have already introduced a 'fuel surcharge' system to distribute the risk of oil price fluctuations. In the long term, consideration should be given to transitioning to eco-friendly vehicles such as electric trucks and hydrogen commercial vehicles. General businesses can also reduce fuel consumption related to business trips and commuting by expanding remote work and utilizing video conferences.

• While the reduction in fuel tax benefits and changes in the energy market may be a burden in the short term, they can serve as an opportunity to transition to more efficient and eco-friendly energy consumption patterns in the long term. Both consumers and businesses need a forward-looking approach to adapt to these changes and explore new opportunities.

4️⃣ In Conclusion

The government's decision to reduce fuel tax discount rates can be seen as an inevitable measure for fiscal soundness recovery and energy policy normalization. The dramatic tax reductions that have been maintained were temporary measures, and it is a natural flow to normalize them gradually as international oil prices show stability.

However, the impact of this decision on consumers and businesses should not be overlooked. Detailed measures are needed especially for groups whose livelihoods are directly linked to fuel costs, such as truck drivers and taxi drivers, and industries affected by rising logistics costs. The shock should be mitigated through gradual increases and support programs for vulnerable groups.

In the long term, this measure could serve as an opportunity to expedite the transition to an eco-friendly transportation system. Higher fuel costs will increase the economic viability of alternative energy vehicles such as electric and hydrogen vehicles, and promote energy-efficient transportation methods like public transportation.

The global energy market is expected to continue experiencing volatility amid two major trends: geopolitical risks and eco-friendly transition. In this environment, it's important to find a balance between energy security and eco-friendly transition.

Ultimately, changes in fuel tax policy should be evaluated from a long-term perspective rather than the short-term burden. Consumers and businesses need a forward-looking approach to adapt to these changes and explore new opportunities. The government should also increase policy consistency and predictability to support market participants in establishing long-term plans.