중앙데일리

Why is the price of diesel getting higher?

The growing global demand for diesel affects its price

June 10,2008
Have you heard in recent news reports that making a living is becoming more difficult because oil prices are getting higher?

The price of diesel, in particular, which oil refiners supply to gas stations, has risen above the price of gasoline for the first time.

Last week, Korea’s three biggest refiners ? SK Energy, GS Caltex and S-Oil ? simultaneously raised their diesel prices above their gasoline prices. As a consequence, the diesel prices at gas stations are expected to rise above the prices of gasoline. The reason is that gas stations have to adjust their prices to the refiners’ new supply prices after selling the existing oil inventory. Some gas stations have already raised their diesel price higher than the price of gasoline.

In the past, gasoline prices were always higher than diesel prices. To help companies that are using more diesel than gasoline, Korean government reduced the tax on diesel. But last year, the government thought the diesel prices had become too low compared to gasoline prices, and adjusted the taxes on diesel.

Last July, the government raised the tax on diesel, so that the prices of gasoline, diesel and liquefied petroleum gas should fit the ratio of 100 to 85 to 50.

But since the international diesel prices have been soaring, the ratio of diesel prices to gasoline has become higher. Diesel prices are now higher than gasoline prices. Accordingly, drivers of trucks with diesel engines are demanding the government should cut the tax on diesel again. The government has not reached a conclusion on this issue.

An association of truck owners has strongly demanded that the government should provide them with tax-free diesel, since the high diesel price causes them losses. They are even threatening to go on a strike if the government rejects their demands. In some regions, truck owners have already stopped their operations. If there is a general strike, companies will not be able to deliver their products from their plants to wholesalers or ports for exports. This could cause a crisis in the Korean economy.

In an attempt to avoid high diesel prices, some truck owners have switched to kerosene. The price of kerosene is 75 percent of the price of diesel, but is illegal to use as truck fuel due to the damage it can cause to truck engines and for safety reasons.

So what is difference between gasoline and diesel?

Simply, diesel is mainly used as fuel for factories and trucks in companies. Gasoline is, on the other hand, used by consumers as fuel for cars.

According to the state-run Korea National Oil Corporation, the international diesel price exceeded $142 per barrel in April, up from $108 in early January. It is now around $175 per barrel. Compared to this, gasoline prices have rise moderately from $138 per barrel currently from $99 in early January.

Why are diesel prices soaring in the global market right now?

Oil experts say that the global demand for diesel has risen sharply. This is caused by that countries such as China and India, with rapid economic growth, are increasing the demand for diesel with their new factories.

Another reason is the increased demand for diesel as fuel for vehicles. With tightening environmental regulations, many car models with environmentally friendly diesel engines have been developed. Those models have been selling well, also increasing the consumption of diesel.

Cars with such diesel engines have high fuel efficiency and emit less carbon dioxide, making many European consumers prefer them over cars with gasoline engines. Besides, some countries including China are hoarding diesel. The association of Korean petrochemical companies forecast that because the gap between diesel and gasoline prices is continuously widening in the global market, it will be difficult to stop the price hikes of diesel above gasoline.

So what measures should Korea take?

The Korean Peninsula produces no crude oil. The prices of oil products in the Korean market therefore depends on international price changes. If the international prices of diesel rise, the domestic prices of diesel also rise in turn. Though the government still imposes less tax on diesel than on gasoline, it has no measures to curb diesel price hikes, because the international prices of diesel are rising so high. For example, the government cut oil taxes in March but the effect lasted shorter than a week. The oil prices rebounded soon after. Now oil refiners and gas stations are concerned.

The Korea Oil Station Association said that they cannot sufficiently reflect the increase in the refiners’ supply prices in their retail prices, as consumers will turn toward gas stations that offer lower prices. This makes their profits decline rapidly.

Oil refiners also suffer from crude oil price hikes. In the first quarter of this year, oil refiners marked losses.

The hikes in diesel prices are ailing not only refiners, gas stations and truck drivers, which we mentioned, but also general businesses and common people.

For example, farmers and fishermen are suffering from diesel price hikes, because greenhouses heaters and farm machines mostly use diesel as fuel. The price of tax-free diesel, which the government provides to farmers, increased by 600 won ($0.58) one year ago to the current 1,200 won per liter. Farmers are greatly concerned about how they go on with their work in the autumn and winter with the diesel prices soaring.

More and more fishermen are giving up fishing, because their boats are fueled by diesel. Their spending on diesel account for 70 percent of their fishing costs. The price of tax-free diesel that the government provides to fishermen is now 176,000 won per 200 liters, up by 60,000 won from last year.

Automakers are also suffering from oil price hikes. Ssangyong Motor Company, the smallest among Korea’s five automakers, recently decided to reduce its production, due to that the company’s main products, sport-utility vehicles, are diesel fueled and the sales have decreased.


By Choi Ik-jae JoongAng Ilbo [symoon@joongang.co.kr]



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