An experiment full of hot air

The Ministry of Knowledge Economy has decided to create approximately 1,300 public gas stations around the country to control rampant gasoline price hikes. It plans to use government-owned land for the sites and will ask big companies interested in social causes to pay for the construction.

Under the initiative, the gas will be supplied by the Korea National Oil Corporation and the stations will be run by local governments or public corporations affiliated with them. The gas will be sold for 70 won less per liter ($0.25 less per gallon) than at private stations. The ministry said that it can, if necessary, provide subsidies to participants for the successful operation of what are essentially nationalized gas stations.

This is a ludicrous approach to addressing skyrocketing gas prices. We wonder if such an idea came from head of the ministry, Choi Joong-kyung, an elite bureaucrat who received a Ph.D. in economics in the United States. Apart from the feasibility of the plan, the idea totally betrays the principle of a market economy. If a public contractor receives special favors from the government, for example, who should take responsibility for the expected damage to existing stations?

All of the fuss originated with a comment made by President Lee Myung-bak earlier this year: “Oil prices look strange.” After that, the Knowledge Economy Ministry and the Fair Trade Commission forcefully lowered gas prices for three months by leaning on four major oil refinery companies. Despite the government’s resolution, the policy was ineffective. We have warned against the fallacy of government-led price controls, but Choi didn’t listen to our advice. Now, he is a political liability to the president.

Given that there are more than 13,000 gas stations in Korea - whereas 8,000 to 9,000 stations is the optimum level - adding over 1,000 stations does not make any sense. The ministry says that the “gas stations run by major discount stores now sell gas at prices 60 to 70 won lower per liter than at ordinary stations.” These super-sized retail chains started opening gas stations three years ago to attract more customers. Today, however, there are only 10 such gas stations in the nation.

The government levies a tax of 1,000 won on every 1,000 won worth of gasoline, which fattens its coffers by over 18 trillion won a year. It should immediately scrap the idea of establishing additional public gas stations and instead figure out how to lower the gasoline tax first.