Vietnam's fixed retail gasoline prices spur shortages as suppliers buckle under losses

Vietnam's fixed retail gasoline prices in a rallying international market are leaving importers and producers to shoulder increasing losses, sparking supply shortages and retail pump station closures in major cities amid strong consumer demand.

The government fixes domestic retail fuel prices to manage inflation without providing subsidies to domestic importers, suppliers and wholesalers, who profit when global prices are low but rake up losses when import and production costs surge.

Import and production costs exceeding pump prices have triggered severe retail gasoline shortages in Hanoi and Ho Chi Minh City, where many pump stations have closed and long queues of vehicles have formed outside those that remain open.

To address the crunch, the Industry and Trade Ministry has issued a notice directing importers, major oil companies and distributors under their systems to make a written commitment to supply oil products to retail stations by Nov. 16.

State-run oil companies can also tap into commercial reserves and increase oil product imports in the fourth quarter to offset the shortfall and fulfill their import quotas, which they have struggled to do to date in 2022, constricting supply to their retail outlets.

Fund shortfall

Vietnam maintains an oil stabilization fund to steady retail prices, which receives contributions only from end-user retail payments and not from the state. Each oil company has its own bank account to manage the fund and sustains losses when the ministry adjusts retail prices lower than the cost of supplying the fuel at pump stations.

The ministry does not increase prices promptly when international prices rise, and occasionally directs oil companies to increase withdrawals from the oil stabilization fund to avoid retail price hikes.

The RON 95 gasoline retail price was raised by Dong 1,111/liter to Dong 23,867/liter and the E5 RON 92 gasoline price by Dong 838/liter to Dong 22,777/liter on Nov. 11, but both remain far lower than on June 21, when they were Dong 32,870/liter and Dong 31,300/liter, respectively, Ministry of Industry and Trade data showed.

The Nov. 11 retail price hike came the same day as the Ministry of Finance raised the import cost of RON 965 gasoline by Dong 560/liter to Dong 1,280/liter and E5 RON 92 gasoline by Dong 290/liter to Dong 640/liter.

The import cost is one factor used in a formula to calculate retail prices, which are adjusted by the two ministries every 10 days. The finance ministry made a prior adjustment Oct. 7 and aims to make the next one on Jan. 10, the government said in a statement Nov. 11.

The Platts FOB Singapore 92 RON gasoline cargo price hit a record high $155.72/b June 10 and was assessed at $93.76/b Nov. 15. The price has averaged $114.56/b in 2022 to date to Nov. 14, $77.27/b higher than over the same period of 2021, S&P Global Commodity Insights data showed.

"I believe the high market price of gasoline makes it unattractive for Vietnamese importers to import gasoline now, only to sell at unattractive retail prices," one trader said.

However, other traders said Vietnamese importers would have no choice but to import gasoline to meet local demand despite high prices.

"The government orders companies to import at all costs because stations are running dry and people are queueing 30-60 minutes," a source closely following the matter said. "There is no choice; if they don't increase the price there is no profit to sell at stations, but price control is also important, if not people cannot pay."

Hybrid hurdle

Vandana Hari, founder of Vanda Insights, a provider of oil market macro analysis, said consuming countries either need a fully regulated market or a fully deregulated one.

"A hybrid model, especially one in which the supply, transportation and retailing of fuels are not in a vertically integrated system, is doomed to fail in times of market stress caused by volatility and high prices," she said.

"Government-regulated prices work if the state is willing to subsidize fuel retailers if they are forced to sell below cost. In some countries, those costs are borne by the national or state-owned oil companies, but this system is not really sustainable. It blows a hole in the government or the national oil companies' budget, and fuel subsidies prevent price signals from passing through to the consumer, which makes the supply-demand balancing difficult."

Global challenge

The International Energy Agency said fossil fuel prices and energy consumption fell in 2020, slashing the value of global fossil fuel consumption subsidies to record lows around $80 billion, down 40% on the year. But subsidies resurged in 2021 to $440 billion, almost back to 2018 levels, as energy prices and usage rebounded, while policy makers were hesitant to continue reforming subsidy schemes during a tentative economic recovery, the agency said in its World Energy Outlook.

The IEA has long advocated removing, or at least reducing fossil fuel subsidies, which it says distort markets, send wrong price signals to consumers, widen fiscal deficits in developing economies and reduce governments' capacity to promote clean energy policies.

Pricing reform is politically difficult but economically and environmentally necessary, though without major reforms, subsidies are set to rise as oil prices escalate, the agency said.

However, oil market sources said that with Vietnam's inflation rising to 4.3% in October from 3.94% in September, the highest since March 2020, it would be difficult for the government to consider fuel pricing reform in the near term.