Spiralling oil prices challenge Vietnam’s economy

15/12/2014


World oil prices have dropped by about 30 percent since June. the Organization of Petroleum Exporting Countries decided to keep production at current levels. Representatives of the 12-nation group met in Vienna, Austria. They were unable to reach agreement on changing OPEC’s production targets. Lower oil prices are causing economic hardship in some OPEC members.  But that has helped many economies around the world. The global economy would benefit from the oil price decrease because this would help cut production costs. When people spend less on fuel, they can spend more on other goods. But lower oil prices also mean reduced profits for national oil companies. Privately-owned oil producers and companies that provide services to the oil industry are also affected.
Russia is a major oil exporter, but does not belong to OPEC. This week, Russia’s economic development ministry predicted that the Russian economy will shrink by eight-tenths of a percent in 2015. Oil exports are important to Russia. The value of Russian money has lost about 40 percent of its value this year compared to the American dollar. Observers have blamed the drop on falling profits from oil exports, and Western sanctions to punish Russian actions in Ukraine.
The oil price has dropped by $30 per barrel, but economists say the fall in oil prices is helping economies in Asia. Andrew Colquhoun is with Hong Kong-based Fitch Ratings.
"Most Asia-Pacific economies are oil importers and therefore the decline in oil prices is equivalent to a kind of income gain for them and the impact depends on whether they save or spend the income gain.", but not for Vietnam. Economists, who believe the oil prices will continue to fall, have said the price fluctuations would affect Vietnam’s economy. It is estimated that every one dollar price decrease would lead to a loss of VND1 trillion in revenue. As such, the state budget would lose VND20 trillion in 2015 if the price were around $80 per barrel.
The oil price decrease has resulted in a sharp fall of VND5,390 per liter, or 20 percent, in petrol prices in the domestic market. This has benefited consumers, who can use the money they save from buying petrol to buy other products. However, analysts say the benefit is too small and far below expectations.
In principle, the fuel price decreases lead to goods price decreases. Especially in Vietnam, petrol prices account for 40-50 percent of the production cost and 10-15 percent of the product selling prices. However, the prices of goods and services remain unchanged. The transport fee stays high, while manufacturers, taking into account the high transportation costs, try to keep the same selling prices.
“This can be explained by the fact that the rules of the market economy have not been respected, while the market competition is weak, which is a favourable condition for businesses to sway the market,” said Bui Ngoc Son, a renowned economist.
A report from the Ministry of Finance (MOF) shows that revenue from oil exports and imports make up 26 percent of the state budget revenue in 2000 and 19 percent in 2012. MOF every year projects revenue from oil and its contribution to the state budget. If the world price is higher than expected, the revenue would be higher, and vice versa.
Meanwhile, in order to obtain projected revenue in the context of oil price fluctuations, Vietnam would have to adjust the targeted exploitation and export volume.
One of the factors influencing the state budget revenue is oil exploitation costs in Vietnam. The Vietnam Oil and Gas Group (PetroVietnam) has never publicized the figures. Some sources said the average cost is $40-50 per barrel. However, the figure has never been verified. As such, when production costs remain unchanged and the selling prices decrease, the revenue from oil exports will fall. Vietnam exports crude oil, but it has to import finished petroleum products. The government gains a great deal of revenue from imposing different kinds of taxes on the imports. It is estimated that taxes alone account for a high percentage of petrol prices. As the crude oil prices fall in the world market, Vietnam will have to slash retail petrol selling prices.
It is consumers who will be the biggest beneficiaries from the oil and petrol price decreases. The national economy would also benefit because businesses can cut transport fees and production costs. In turn, they can then sell products at lower prices, which could help stimulate domestic demand.
However, Minister of Industry and Trade Vu Huy Hoang has said that the prices of goods and services have been “standing still” despite the sharp drop in petrol price. The oil price plunge has affected the prices of oil exploitation and distribution companies worldwide. Vietnamese oil and gas firms will also suffer, both in the short and long term.
To limit the impact, at the meeting, Prime Minister Nguyen Tan Dung asked the Ministry of Finance to review sources of revenues to ensure that the budget would not be in deficit. In the press conference the same day, Chair of the Government Office– Mr. Nguyen Van Nen - said the 2015 budget estimation was built on the basis of the predicted oil price at $100 a barrel. If the price falls to $1/barrel, the budget revenue would drop about VND1 trillion ($47.6 million).
"Experts predicted that the oil prices could rise again in mid-2015, but it is just a forecast. If the price declines to $85/barrel, the budget will lose about VND20 trillion (nearly $100 million)," Nen said.
Nen said the Ministry of Finance was considering plans for dealing with this problem, including the exploitation of oil fields with low cost. Major financial institutions in the world have forecasted that crude oil prices in 2015 will be around $85-$90 dollars a barrel. Accordingly, the expected budget revenue will fall VND10 to VND14.5 trillion compared to the estimations./.
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