Economic Measures for High Oil Prices

The government has hastily put forward measures in response to the boom in oil prices which threatens to deal an immense blow to the national economy. These include prohibiting public office vehicles from operating a day of every 10 according to the final digit of their license plates, closing public baths once a week, and discouraging the operation of night-time businesses. It will certainly be difficult for the government to unfold a policy of minimal inconvenience to the public. It appears that the government intends to moderate the total amount of oil use as a first step, and if that does not work, then put in place a more invasive and fundamental scheme. Government officials have already indicated that energy tax rates will not be flexible, which means that the hike in oil prices could impact consumers directly.

There are some steps the government must take. First of all, it must admit that it has made policy mistakes and apologize to the public. One of the most important government functions is to give reliable signals and directions to the myriad economic groups to guide their economic activities. This government, however, sent the wrong signals from the outset. Early this year, the World Bank warned about the likelihood of an oil crisis and many people in Korea voiced concern about a pending period of swelling oil prices. The government ignored them and instead expressed optimism. The government must also explain why industrial structure has not been made energy efficient despite its promises, and how the energy special accounts amounting to 8 trillion won - collected from the general public since 1995 - were used. If the government does not intend to adopt a flexible tax rate, why did it lower the energy tax rate before the general elections last April? These days the general public has less confidence in the government even without an oil crisis. Energy measures cannot be successful without public understanding and cooperation. For this reason, the government must apologize to the Korean people in a bid to recover their trust.

Only afterward should the government promise to implement mid- and long-term measures, including the development of overseas oil fields and alternative energies and the transformation of the economy into an energy efficient structure. These are staple measures that are always used in oil crises, and no better schemes exist. In the short term, the only measure is to induce citizens to conserve energy. Yesterday the government announced that electricity rates would be increased. This move went in the right direction, including the increase on peak-load pricing, but it went too far: the price hikes were excessive.

The government is not free to raise prices as it sees fit. When inflation occurs with the rise in oil prices, wages rise next, which in turn leads to another cycle of inflation. To prevent this scenario, the government must simultaneously adopt policies geared at seeking public understanding. In this vein, the government must examine the following policies: a gradual increase in prices through the adoption of flexible tax rates, a cut in income taxes, and efforts to improve income distribution.

by Bae Myong-bok