Vietnam’s economy and petrol problems

Rising petrol costs have put the Vietnamese government’s fuel price policies under scrutiny. In an effort to limit pressure on fuel costs, authorities recently sought to increase domestic supplies by introducing new minimum quotas for petrol imports. However, this policy has put the country’s fuel retailers, which are still required to sell at prices fixed by the government, under increased financial pressure. A planned expansion of domestic refining capacity would help ease the pinch caused by Vietnam’s fuel price controls, but this new capacity still remains several years away.
Domestic fuel prices in Vietnam continue to rise, despite a small decrease in late August 2013 for the most commonly used grade of petrol, 92 RON. The decrease follows the record high of USD1.18 per liter reached in July. Fuel prices in Vietnam are still set by the central government and have been increased four times so far this year. The increases have been relatively small, but they come at a time when the administration is working to ensure that inflation remains under control. Consumer inflation reached its highest level in August, at 7.5% over 2012, although it fell back to 6.3% in September.
In early September, the Ministry of Industry and Trade announced new minimum petrol import requirements for two newly formed wholesale petrol distributors which will import petrol and resell it domestically. In contrast to some sectors of the economy that are gradually being liberalized and in which firms freely set prices, the ruling Communist Party of Vietnam (CPV) maintains a tight grip on the domestic supply of petroleum products.
Data published by the General Department of Customs show that Vietnam imported around 8.8 million tons of fuel last year, valued at USD8.6 billion. This was nearly USD1 billion less than in 2011, due to an ongoing decrease in demand and sluggish GDP growth. During the first eight months of 2013, fuel imports declined by nearly 30% compared with last year.
There are just 13 retailers nationally, nine of which are state-owned, so the government has been able to monitor and enforce a quota system. The minimum purchase requirement, however, will prevent these high-volume importers from reacting to changes in international prices. Although Vietnam exported USD8.2 billion of crude oil in 2012, a lack of domestic refining capacity means that the country remains a price-taker in international markets for petrol, jet fuel, and related downstream products.
The government’s long-term objective is to encourage the creation of a competitive petrol retail sector in order to feed a larger production base and growing consumer demand. However, new firms or foreign investors are unlikely to work with a sector that remains squeezed between two regulators, the Ministry of Industry and Trade with its quotas, and the Ministry of Finance with its price controls.
The largest retailer in Vietnam, state-owned Vietnam National Petroleum Corporation (Petrolimex), demonstrates these competing pressures. The firm imported 4.1 million tons of fuel in the first half of 2013 and was expected to earn profits of nearly USD60 million based on per-liter profit levels mandated by the finance ministry. In reality, taxes and money paid into a state-managed price stabilization fund meant that Petrolimex earned less than USD19 million, which was earned based on a minimum-import quota.
As in several other state-run sectors, some firms have reacted by simply trying to skirt these price controls. In most rural areas in Vietnam, fuel is sold informally out of glass or plastic bottles on the side of the road. The government reacted by publishing legislation on August 27, that imposes heavy fines on resellers who sell petrol at “unapproved” prices or, in an effort to avoid official scrutiny, do not publish their prices.
Although crude oil remains a major contributor to the public coffers, for the most part Vietnam has remained at the bottom of the petroleum value chain, selling licenses to foreign drilling and extraction firms and selling crude oil to other countries with refinery capacity. These funds have given the country’s central government a welcome cushion between falling tax revenue and increasing public spending. However, in the face of increased pressure on public finances, the government is hoping to capture a larger share of natural-resource income by investing in a larger domestic refinery sector.
The Dung Quat refinery, which is currently the country’s only one, produces enough to meet an average of only 30% of annual demand in Vietnam. A new project, the USD6.2 billion Nghi Son refinery in the northern province of Thanh Hoa, is currently under construction and is expected to begin operating in 2017. It will process more than 200,000 barrels of crude oil per day, bringing total domestic refinery capacity up to 70% of anticipated demand.
What all this means is that Vietnam will continue to struggle with keeping petrol retailers going, while keeping prices under control so damaging inflation does not result. There is little indication that the government is willing to increase private-sector involvement in the petroleum industry. There will likely be continual gradual increases in prices per liter, and maintaining cost controls will require continued state involvement in the retail sector.
(September 26, 2013)