[Viewpoint] Let the market determine oil prices

Dear Finance Minister Yoon Jeung-hyun,

Pardon me for asking. But why did you do it? Why did you attack the oil and telecommunication companies? You shook your head when you said that you could not understand why domestic oil prices were 13.2 percent above the average rates in 22 Organization of Economic Cooperation and Development member countries.

You said oil prices remain high despite improved productivity, raising questions about transparency in price-setting. You more or less accused the industry of profiteering.

Such comments, which have been coming from the Fair Trade Commission chairman or the Knowledge Economy minister, are understandable. But I believed you to be different - not someone who wields a strong hand over the industry to score points with the boss.

However, you ended up joining the chorus. You said domestic oil prices rose more and fell less than price movements in the international market, claiming the industry is fattening its profits at the expense of consumers.

Your accusation is not entirely wrong because domestic prices often do not reflect global price movements. But a finance minister in charge of national economic affairs should present more palpable logic and facts when attacking a certain industry.

There was a time when domestic oil prices were higher than international prices. During the first eight months of 2005, Dubai crude prices jumped 38 percent per barrel over the same period a year earlier. But domestic prices rose just 2 percent. The government then boasted that it absorbed more than 90 percent of the increase in global prices through a stronger currency and tax cuts.

If that was true, the government should have used the same weapon to counter today’s price surge. The government loses the argument if it credits price curbs to its own policy moves while blaming the industry when the prices do not go down.

The allegations of profiteering also looks silly considering the financial accounts of oil refiners. SK Innovation, the best performer of four local oil refining players, reported an operating profit ratio of 2.8 percent against revenue for the third quarter of last year, less than half of the 6.15 percent industry average in 2009.

Companies like Samsung Electronics and Posco posted an operating profit ratio of over 10 percent during the same period. It is a poor argument that oil refiners rigged prices in order boost profits.

Prices are the results of movements in supply and demand. For example, a price increase is a sign to consumers that they reduce spending and companies to boost supplies.

Companies cannot arbitrarily set prices because such a move can hurt their profits. We have learned from past experience and economic textbooks that arm-twisting can only backfire by creating greater price surges later. As an expert in economic affairs, you should know better.

The only explanation for your recent behavior would then be that you, too, have fallen victim to the populist fever. The sweet temptation of populism has been intoxicating policymakers and politicians these days. Populist moves on consumer prices are as dangerous as policies on welfare.

Your words may force oil prices to go down temporarily. But this would mean a distortion in the market function, which would mean that even if prices go up again, oil usage would not decrease as revealed by recent data. The result would only be excess consumption and a surge in imports.

We must be more farsighted and introduce increased competition in the market. Oil prices fell when large hypermarket franchises were allowed to sell gasoline.

The minister also said the market structure should be improved. It appears that you know the solution to the problem. But your knowledge and actions have been different. Citing “unfairness,” the hypermarket franchises were later restricted from oil business, and oil importers were forced to close down by new regulations on storage.

It is the government that encouraged and strengthened the monopoly among the oil and telecommunications industries. The president is said to have promoted you for your endeavors in fighting inflation. You should then have mustered the courage to respond to the president that the economy would be at risk if the authorities try to contain prices for short-term results - that is, if you really cared for the country and the people.

*The writer is an editorial writer of the JoongAng Ilbo.

By Kim Yeong-ook