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Government pushes for more discount gas stations despite doubts

Public discontent escalates as sky-high crude prices eclipse markdown effects



The government is stepping up its push for discount gas stations to help lighten household utility bills despite continuing skepticism over its efficacy and state intervention in petrol prices.

State-backed self-serves are a showpiece of the government’s battle against skyrocketing oil costs and a supply oligopoly by major refiners. It aims to set up some 1,300 outlets by 2015, of which about 430 are in operation now.

With pump prices nudging toward 2,200 won ($1.93) per liter on average, however, a surging number of Koreans are casting doubt on the ambitious campaign’s effectiveness, calling instead for a fuel tax break.

The nation’s first discount gas station in Yongin, Gyeonggi Province. (Yonhap News)
The nation’s first discount gas station in Yongin, Gyeonggi Province. (Yonhap News)


The nationwide campaign precipitated a split even among vendors, who are already teetering in the face of cutthroat competition and tapering profit margins. While some have urged the government to scrap the project, others are rushing to switch to discount stations to grab state subsidies.

Experts say any policy should bring about little impact on gas prices given the ongoing upward spiral, while voicing concerns about fruitless market interference and the potential bankruptcies of small stores.

“The government sought to diversify supply channels and customer options through discount gas stations but the plan’s marginal effect gave rise to a campaign for fuel tax cuts,” says Kim Hwa-nyeon, a senior researcher at Samsung Economic Research Institute in Seoul.

Unveiled last year, discount gas stations aim to slash retail prices by up to 100 won per liter compared to franchises by buying petrol in bulk from refiners through two state-run resources firms. The Ministry of Knowledge Economy then provides financial aid to help them sustain low price tags and razor-thin margins.

Korea is the world’s fifth-biggest oil importer. Four refiners -- SK Energy, GS Caltex, S-Oil and Hyundai Oilbank -- take up more than 90 percent of the nation’s petrol supplies.

While Dubai crude inched down a bit to below $120 a barrel, the average pump price in Korea has climbed for 13 straight weeks to a record 2,050.6 won a liter, according to the Korean National Oil Corp. At some stations in Seoul, the figure nears 2,400 won.

Driven by growing energy spending, everyday drivers, low-income earners and taxi operators are joining forces to demand a reduction in taxes, which account for almost half of what they pay at the pump.

“I drive 80 kilometers every day to and from work. Spiking gas prices forced me to try carpooling but it didn’t work out well,” a user surnamed Park wrote on the website of the Korea Taxpayers Association, which is trying to collect 1 million signatures online.

If crude hits $150, fuel and electricity costs here could jump 36.5 percent and 13.6 percent each on a yearly basis, according to SERI.

“We regret that high fuel prices heap pressure on rank-and-file citizens,” Vice Finance Minister Shin Je-yoon told reporters last month.

“More discount stations in Seoul will help lift some burden given the city’s high oil consumption and large population.”

Yet the much-touted stores seldom meet the 100-won cut target. KNOC’s website shows neither of the two discount outlets in Seoul made to the top five cheapest stores on Wednesday.

Further, as crude costs increase, their prices shoot up more dramatically than franchise stations, customers say.

“There were lots of hubbubs in our neighborhood about how much the thrifty gas station would sell at. But it turns out the price difference was 20-30 won at best, plus there were only a few branches nationwide,” says Chang Se-hoon, a 33-year-old engineer living in Yongin, Gyeonggi Province.

The first discount outlet in Yongin, run by mining firm Kyung Dong Industrial, sold one liter of regular gasoline at 2,015 won on Wednesday. That is up 172 won from its opening day on Dec. 29, compared with a 129 won rise in the province’s average during the same period.

The government can exert virtually no influence in setting oil prices determined by international market swings, experts note. That lets policymakers push for more discount stations, leaving tax breaks as a last resort, SERI’s Kim says.

“The government is right to take a cautious approach because there are a multitude of risks but no one really knows where oil prices are heading,” the researcher adds.

To fix the “distorted” supply system, the government should press harder refiners who are keeping a tight grip on the domestic distribution structure, argues Lee Sang-dong, an adviser to the government-affiliated Korean Labor Institute.

“The policy is said to be designed to induce price markdowns by intensifying competition among stations but it’s rather likely to push small vendors and local entrepreneurs to the brink of bankruptcy,” he says.

The Korea Oil Station Association, which represents vendors, has been protesting the plans, lambasting the government for trying to “wield control over the market.”

Refiners, for their part, claim their profits have already shriveled and margins reached infeasible levels. The four firms lowered retail prices by 100 won a liter between April and June 2011 under public and political pressure.

Chung Yoon-sun of the state-run Korea Institute for Industrial Economics and Trade says the expanding network of discount stores will boost their negotiating power and thus help dismantle the dominance of the industry giants.

“We’ve already seen major retailers effectively push down petrol prices taking advantage of their national distribution chain,” Chung says.

Self-serves launched by E-Mart, Lotte Mart and others have garnered popularity for their low prices since last year, prompting smaller competitors to adopt similar models.

“The Korea Expressway Corp.’s ongoing plans to gradually convert gas stations along highways into self-serves may invoke desirable effects.”

By Shin Hyon-hee (heeshin@heraldcorp.com)
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