Cost distortions cause reduced gasoline imports, shortages

By Nguyen Hang   November 15, 2022 | 08:49 pm PT
Cost distortions cause reduced gasoline imports, shortages
Long queues form at a fuel station on Xuan Thuy Street, Hanoi's Cau Giay District, at midnight on November 10, 2022. Photo by VnExpress/Quynh Nguyen
The gasoline shortage is caused by improper price management mechanisms that have dried up imports, Nguyen Khac Quoc Bao, vice rector of the University of Economics HCMC’s College of Technology and Design, tells VnExpress.

In recent months the gasoline shortage has been severe in the south and also spread to the north. What are the reasons?

For more than a month the gasoline shortage has been severe due to the escalating conflict between Russia and Ukraine, and Russia’s refusal to sell to Europe, which has made oil products, especially diesel, extremely scarce.

Winter is approaching, and so European countries are forced to buy a lot of diesel to replace gas for heating. The scarcity of diesel in the world plus the conflict have affected imports, world shipping, insurance costs, etc...

These have increased the cost for transporting oil to Vietnam. As far as I know, the transport surcharge, excluding other surcharges, has doubled. Meanwhile, in Vietnam, the dollar has increased against the dong, lending interest rates have gone up, and bank credit has become scarce. As we can see, all businesses, not just petroleum ones, face this situation. But importers face more difficulties, especially related to transport costs.

Besides, price management by the Ministry of Industry and Trade and Ministry of Finance has not kept up with the developments in the world market, making the sale of imported gasoline and diesel unprofitable at current [retail] prices.

The retail prices are pegged to the base price, surcharge and freight charge. Selling is no longer profitable, and so some traders have limited the import of gasoline and diesel. If they import and sell the fuels, they will lose money.

According to customs data, the imports of gasoline and diesel in the third quarter of 2022 decreased by 40% and 30%, from the same period last year. This clearly demonstrates there has been a certain shortfall in gasoline and diesel imports.

We know that Vietnam’s petrochemical refineries, like Binh Son and Dung Quat, can only meet 70% of domestic demand. So we have to import nearly 30%, and we have to rely on importers. When they reduce imports, there will certainly be a gasoline shortage in the market.

So we have to admit there has been a gasoline shortage. The phenomenon of people queuing up at gasoline stations in the past month, starting in HCMC, spreading to neighboring provinces and then to some northern localities including Hanoi, is a typical example of this problem.

Frankly speaking, the petroleum market is suffering from a shortage of supply, and there must be a more fundamental and synchronous solution to address the root of the problem. Only by opening up the flow of gasoline will the current shortage be basically solved.

There is some concern that businesses are not really losing money but are hoarding fuels and waiting for higher retail prices. What do you think?

If you want to prove that these businesses are loss-making, you must look into a whole period, a month, a quarter, a fiscal period, after all transactions and accounting are made. When the timeframe between retail price adjustments is reduced from 10 days to 5-7 days, the hoarding will end. If the prices are constantly amended, hoarding will not make sense anymore.

What are the shortcomings in the management of the petroleum market?

The petroleum price management as well as the operation of the petroleum market have had two main shortcomings for years. Firstly, there are inadequacies in the pricing mechanism. Gasoline prices high taxes and fees, leading to very high domestic prices compared to the world price.

The public has complained about this for a long time, and the government has acknowledged it. Some taxes such as excise duty and environmental protection tax have recently been lowered. That is a positive move. But the second shortcoming is still causing difficulties for petroleum businesses, and it has lasted for a long time.

That is the mechanism of price management through meetings and through very rigid formulas, and not keeping up with world price fluctuations, creating inadequacies in both wholesale and retail prices in the domestic market, causing difficulties for importers, distributors and the general public.

Selling prices are calculated on the base price and surcharges. The surcharges include transport costs and other costs for bringing gasoline and diesel from other countries to Vietnam, or from the central region (where Vietnam’s refineries are situated) to HCMC, Hanoi and other localities.

These costs are regulated in Decree 95 and have been adjusted tardily. The costs are calculated based on the average of the previous six months. But when the global market has unusual fluctuations, the average costs of the previous six months do not reflect current levels.

Now the costs are increasing very suddenly. That is why the retail selling prices have caused losses to petroleum distributors. One more thing is that the retail price adjustment process is too slow, with prices being adjusted only once in 10 days. With the current situation, gasoline prices sometimes change daily like the prices of gold, the dollar and stocks. But we wait 10 days to adjust them, which creates difficulties for businesses.

Gasoline is an essential item, and the recent instability in the fuel market has greatly affected people’s lives. Where should we start in trying to solve this problem?

Firstly, we need to criticize and ask agencies, including the Ministry of Finance and the Ministry of Industry and Trade to draw lesson from this issue.

If the agencies had been more responsible, proactive and flexible, they would have altered the legal bases such as the calculation of the base price and surcharges, and the price management timeframe to proactively deal with the market instability. Fuel enterprises are not public services. So they will enter the market if there is profit and exit if they lose. The mechanism has pushed them into a difficult situation.

I think we should reduce the price adjustment timeframe to five or seven days from 10 days.

Instead of relying on the average cost of the previous six months, with better projections, we should have a better mechanism that allows quicker price adjustments each time world prices surpass certain levels. Then, domestic price regulators will have larger room to adjust prices more flexibly and no longer have to manage the gasoline and diesel market rigidly. I think such radical solutions can help overcome the current shortages.

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