Rising petrol price severely affects the economy

Thursday, Oct 28, 2021 08:35

Nguyen Bich Lam, former General Director of the General Statistics Office. — VNA/VNS Photo Tran Viet

As the COVID-19 pandemic is gradually put under control, the world continues to suffer inflationary pressure and as the economy picks up, so does the demand for fuel. Nguyen Bich Lam, former General Director of the General Statistics Office, talks to Viet Nam News Agency about how surging petrol price will affect Viet Nam's economy.

Why are petrol prices in Viet Nam currently rising?

The price of crude oil has gone up 60 per cent this year, yet oil producers do not increase output. The key factor driving up oil prices is that the Organisation of the Petroleum Exporting Countries (OPEC) has announced it would keep to an initial output plan instead of producing more as called for by major oil consumers like US and India.

Additionally, the world is suffering an energy crisis and this year winter is forecast to be bitterly cold, countries have to raise their fuel reserves as well, consequently pushing up petrol prices.

In the international oil market, crude oil continued to soar in the morning session on October 21, 2021, after US crude oil reserve suddenly dropped and oil at the country’s largest storage warehouse fell to a record three-year low.

US WTI light sweet crude oil rose 0.32 per cent to US$83.67 per barrel on the morning of October 21, 2021. Meanwhile, Brent oil delivered in December 2021 was at US$85.89 per barrel, up US$3.5 per barrel, a 0.42 per cent rise compared to October 9, 2021.

Fuel prices are expected to continue to rise in the future. What has caused this?

Now more people are vaccinated worldwide, economies are gradually recovering, countries are ramping up business activities, travel and transportation are reviving thanks to COVID-19 green cards.

Goldman Sachs believes crude oil prices will continues to spike in the next few years due to rising demand and tight supply. The crude oil market will undergo the longest period of supply shortage in recent decades and demand will keep rising, outpacing output this winter. The absence of upstream investment in oil production amid growing demand is a sign that high oil prices will continue for at least another year.

In the future, the global fuel market is likely to fluctuate. Gasoline prices will probably continue to go up. OPEC, International Energy Organisation and US Energy Information all forecast that crude oil prices could reach US$100 per barrel in the summer of 2022.

In Viet Nam, average gasoline prices in the first nine months of 2021 increased by 24.1 per cent compared to the same period last year. How would the rising gasoline prices impact production and business activities in Viet Nam?

Viet Nam's economy is highly dependent on imported materials with the cost of imported materials accounting for 37 per cent of the total cost of economy-wide raw materials. Rising global gasoline prices would push up the cost of imported and domestic raw materials.

Most industries consume gasoline, more or less. Petrol costs take up around 3.52 per cent of the economy-wide total production cost. This means that petrol makes up a relatively large portion of production costs and has a profound impact on it. Notably, fuel-intensive industries like fishing and transporting will be hard hit by rising fuel prices.

Gasoline prices rising also drives up the price of goods in circulation, generates inflationary pressure, reduces competitiveness of domestic goods and adversely affects economic growth.

In Viet Nam, a 10 per cent rise in gasoline price would pull GDP down by around 0.7 per cent, presenting a huge impact of fuel price on economic growth.

How does rising fuel prices affect consumer price index?

Rising petrol prices not only pushes up the price of goods and services, but also fuels consumer price index (CPI), taking a toll on people’s income and spending. A 10 per cent surge in petrol price would lift CPI by 0.36 per cent.

Gasoline accounts for 1.5 per cent of household final consumption expenditure. When gasoline prices climb, households will reallocate income and cut spending, reducing aggregate demand as a result.

Fuel is one of the strategic commodities in Viet Nam. What measures would be needed to cope with the rising price in order to mitigate its impacts on economic growth and inflation in 2021 and 2022?

The fourth wave of COVID-19 is the key factor that brought Viet Nam’s growth forecast in 2021 to a level much lower than expected so the year 2022 will be a cornerstone of 2021-2025 Five-Year Plan.

At the second session of the 15th National Assembly, the government put forward the 2022 Social-Economic Development Plan with GDP growth expected to reach 6-6.5 per cent, and average CPI growth 4 per cent.

We have to spare no effort to achieve social-economic goals of 2022 amid challenges and opportunities in international and domestic context. Challenges and opportunities are intertwined, but there are more challenges than opportunities ahead. Global economic growth is not stable and estimated to be lower than in 2021. Risks are increasing, resources of the State, businesses and people are drained, and inflation pressure is high.

In the development of a GDP scenario with an inflation target of 4 per cent quarterly and yearly, not only public investment capital, fiscal policy and monetary policy should be taken into account but also the rising petrol price.

Currently, petrol is one of the strategic commodities whose price is under State management in a manner that safeguards the interests of the State, businesses and individuals.

The government has assigned Ministry of Industry and Trade the task to monitor petrol prices around the world and work with Ministry of Finance to analyse price and tax factors in order to manage petrol-related taxes. At the same time, the two ministries, along with businesses, also have to cooperate to properly use Petrol Price Stabilisation Fund to ensure selling price be set in line with world price.

Managing petrol price in this manner would dampen any negative impact of rising petrol price on inflation and economic growth.

Given the importance of petrol to consumption and production, and petrol price expected to rise in the remaining months of 2021 and first half of 2022, the Ministry of Industry and Trade, Ministry of Finance and businesses need to keep a close watch on the petrol market and the world political situation in order to cope with rising petrol prices and alleviate its impacts on inflation and economic growth in the late 2021 and early 2022. — VNS

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