The Impact of Increasing Gasoline Prices on Vietnamese Economy

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For the Vietnamese economy, when gasoline prices increase by 10%, GDP decreases by about 0.5%, this is quite a significant decrease, reflecting the strong impact of gasoline price fluctuations on economic growth.

After basically controlling the COVID-19 pandemic, the world economy is facing commodity prices, input material prices, especially gasoline prices, which are increasing due to the flourishing global economic activities. Enormously from the bottom of the pandemic, along with the rapidly growing demand for gasoline, but oil production did not increase correspondingly, leading to tight supply. For the Vietnamese economy, when the price of gasoline increase by 10% reduces GDP by about 0.5%. This amount is a considerable reduction, reflecting the strong impact of gasoline price fluctuations on economic growth.

To better understand how petrol prices will affect Vietnam’s economy, the Vietnam News Agency reporter interviewed Dr. Phong Cao, former Director of the Masteri Thao Dien for rent, around this content.

Reporter: Sir, over the past time, domestic gasoline prices have continuously escalated. Could you please tell me what factors cause the price of gasoline to rise to the current level?

Expert Phong Cao: Although crude oil prices have increased by 60% this year, operators will not increase output. An essential factor pushing up the oil price is the Alliance between the Organization of the Petroleum Exporting Countries and its allies (OPEC +). The organization announced that it would keep its plan to increase production instead of higher production, as the significant oil-consuming countries such as the US and India.

In addition, the world is suffering from an energy crisis and facing the winter of 2021, which is forecasted to be severe, early, and deep cold, so countries are increasing their petroleum reserves, causing oil prices to rise.

Along with that, in the world market, crude oil prices continued to increase in the morning session of October 21, 2021, after the US crude oil inventories suddenly decreased and the reserve at the nation’s most giant storage warehouse.

US WTI light sweet crude oil price rose 0.32% to $83.67/barrel on the morning of October 21, 2021. At the same time, the cost of Brent oil for December delivery was $85.89/barrel, an increase of 3 $0.5/barrel, up 0.42% compared to the price level as of October 9, 2021.

Reporter: According to international organizations, gasoline prices will continue to rise shortly. So, what are the reasons?

Expert Phong Cao: Currently, the number of people vaccinated is increasing, economies are gradually recovering, opening up, restarting production and business activities, exchange, and travel. Transport and tourism will prosper due to the use of the COVID-19 green card.

Goldman Sachs believes that crude oil prices will continue to rise in the next few years due to solid demand while limited supply and the natural oil market will experience the most extended supply shortage in decades. Over time and order will increase, outstripping production this winter. The lack of upstream investment in oil extraction amid growing demand indicates high oil prices persist for at least the following year.

Therefore, in the coming time, the world petroleum market may still fluctuate, the possibility of gasoline prices will still increase. The world’s important energy forecasting organizations, including OPEC, the International Energy Organization, and the US Energy Information Administration, all forecast crude oil prices could reach $100/barrel in the summer of 2022.

Reporter: Sir, along with the trend of world gasoline price fluctuations, the domestic average petrol price in 9 months of 2021 increased by 24.1% over the same period last year. How does the rising petrol price affect production and business activities in Vietnam?

Expert Phong Cao from Estella Heights for rent: Vietnam’s economy is heavily dependent on imported raw materials, with the ratio of imported materials in the total cost of raw materials of the whole economy at 37%. When the world gasoline price increases, it will increase the price of imported and domestic raw materials.

In the production of goods and services, depending on the production process of each industry, it can be seen that most enterprises, more or less, use petroleum. Petrol costs account for about 3.52% of the total production costs of the whole economy. This trend shows that oil accounts for a relatively high proportion and strongly impacts the cost of manufactured products.

In particular, the increase in petrol prices has had a powerful impact on industries that use a lot of petroleum, such as fishing, transporting goods and passengers by road, waterway, and aviation.

In addition to the direct impact of increasing product costs, the increase in gasoline prices also increases the prices of goods in circulation, puts pressure on inflation, reduces the competitiveness of domestically produced goods, and negatively impacts economic growth.

Reporter: Could you tell me how the increase in petrol prices affects the consumer price index of the economy?

Expert Phong Cao: The increase in petrol prices increases the cost of goods and services and directly increases the consumer price index (CPI), affecting the income and expenditure of consumers. A 10% increase in petrol price makes the CPI increase by 0.36 percentage points. Besides, spending on petroleum accounts for 1.5% of total final household consumption. When gasoline prices rise, households will restructure and partially cut spending, which reduces aggregate demand in the economy.

Reporter: For Vietnam’s economy, petroleum is one of the strategic commodities. Can you suggest solutions to cope with high gasoline prices to minimize growth and inflation in 2021 and 2022?

Expert Phong Cao: The fourth wave of the COVID-19 pandemic is the fundamental reason why Vietnam’s economic growth in 2021 is forecast to reach a much lower level than planned. 2022 is an important year, creating the foundation for implementing the goals of the Five-Year Plan 2021-2025.

At the opening session of the 2nd session of the 15th National Assembly, the Government proposed the 2022 socio-economic development plan. The growth rate of gross domestic product reached about 6-6.5%; The average growth rate of the consumer price index is about 4%.

There are advantages and disadvantages to successfully implementing the socio-economic development goals in 2022, and challenges are intertwined, but difficulties and challenges are more. ; world economic growth is not stable and lower than 2021, risks continue to increase; Domestically, the resilience and resources of the State, businesses, and people have decreased, and inflation pressure has been high.

When developing a scenario of GDP growth and controlling inflation target of 4% quarterly and for the whole year of 2022, a basis for providing appropriate and flexible management solutions, besides factors such as: is implementing flexibly fiscal and monetary policies. The fluctuation of gasoline prices should be paid special attention to minimize adverse impacts on growth and inflation.

For the Vietnamese economy, petroleum is currently one of the strategic commodities whose prices are managed by the State. Ministry of Industry and Trade to grasp petrol and oil prices on the world market. Besides the Ministry of Finance in analyzing price and tax factors to adjust taxes related to petrol and oil; At the same time, the two ministries and enterprises have assessed, evaluated, and coordinated smoothly to use the Petroleum Price Stabilization Fund. From there, decide the selling price to match the world price, ensuring the interests of businesses and people. Implementing this method in managing petrol prices will partly reduce the negative impact of rising petrol prices on inflation and economic growth.

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