Petroleum prices should be determined by the market forces of supply and demand

In VCCI's view, petroleum prices should be determined by the market forces of supply and demand

>> How to operate petroleum prices in line with market mechanisms?

This proposal was made following the direction of the Deputy Prime Minister, Le Minh Khai, as outlined in Official Letter No. 488/VPCP-KTTH dated January 30, 2023, regarding the formulation of the Decree on petroleum trading.

VCCI believes that the disruption in the petroleum supply chain over the past few years was caused by the inadequacy of the current price management method, especially during times of global crisis.

There were instances of hoarding and limit ed imports of gasoline ahead of each price adjustment period, leading to long-lasting petrolimex shortages. When global gasoline prices were stable, the domestic gasoline shortage was rare. However, with the sharp fluctuations in world oil prices in the second half of 2022, this problem has become more persistent and detrimental to society.

Furthermore, despite the attempts to control gasoline prices, the shortage of gasoline continues to persist. This is largely due to the increase in petroleum business costs (premium, transportation costs, insurance costs, interest expenses, and other incidentals) in 2022.

To prevent the shortage of retail gasoline, the Ministry of Industry and Trade imposed penalties on gasoline stations that ceased to sell. However, this temporary solution only worked in the short term and resulted in losses for the units as the import price was higher or equal to the retail price, forcing them to operate with small inventories to avoid fines. This resulted in long lines and inconvenience for consumers.

VCCI believes that without timely gasoline adjustments, petrolimex businesses will not invest or even exit the market, leading to the degradation of the nation's energy infrastructure and negatively impacting manufacturing, business activities, people's lives, and national energy security. The Ministry of Industry and Trade suggested two options for gasoline price management. Option 1 involves the Government  setting gasoline prices and amending the gasoline price formula to ensure the accurate, complete, and timely calculation of costs in the base price, as proposed by the Ministry of Finance. Option 2 involves the Government not engaging in gasoline valuation and allowing supply and demand to determine the price of gasoline.

The Ministry of Industry and Trade prioritized Option 1 in Official Letter No. 288/BCT-TTTN dated January 18, 2023. However, VCCI expressed concerns about the reasonableness and feasibility of this option. The calculation of costs is complex with vague and misreported input parameters, making it challenging to determine the actual costs. Enterprises can manipulate their reporting, and auditors may not be able to detect these fraudulent activities. Additionally, these costs are usually recorded in the fiscal year, meaning that the exact figures are only visible at the end of the year, while the actual costs can vary widely at any time.

VCCI also highlighted that the problem of costs will demotivate half of the businesses (in terms of market share) as they are larger than their selling prices. This increases the risk of a supply disruption, which can only be prevented by increasing the profit for businesses to secure their motivation. However, keeping prices high will hurt the economy and society.

With regards to Option 2, the VCCI indicated that the selling price of petroleum products would be influenced by the principles of supply and demand, as well as the level of market competitiveness. When the market is highly competitive, the selling price is expected to closely approximate the cost of the product. However, if the market is dominated by a few suppliers or there are instances of collusive behavior aimed at limit ing competition and driving up prices, the selling price may exceed the cost.

To mitigate such a scenario, the VCCI recommended various measures aimed at fostering market competitiveness, such as permitting the establishment of gasoline stations near each other, allowing for greater import diversification, and reducing barriers to the petroleum market. Further analysis of these considerations will be presented in the subsequent section of the proposal, and the VCCI emphasized the importance of investigating any indications of anticompetitive behavior.

VCCI has recommended Option 2 as the preferred choice for managing the price of gasoline. Option 1 was deemed insufficient due to the lack of effective measures to address the current shortcomings. VCCI stated that a roadmap towards option 2 is necessary if option 1 were to be selected, as energy security is at risk if the energy infrastructure is not invested in and developed.

In a document released by the Ministry of Industry and Trade, it was stated that some contents would be amended to address the limit ations in the implementation of Decrees 95/2021/ND-CP and 83/2014/ND-CP. In the long term, the Ministry stated that they would consider modifying the pricing mechanism under market forces and increasing the initiative of enterprises in determining retail prices. However, no specific date has been given for these changes to take place.

VCCI proposed that the Ministry of Industry and Trade consult with the Government to determine the time and roadmap for change in the gasoline price management method. In regards to the minimum discount for retail gasoline, VCCI reported that retailers have been experiencing zero or negative discounts, causing reluctance to sell. This will result in a burden for retailers if the retail price is lower than the cost of goods.

>> Finding solutions to stabilize petrol prices

VCCI has stated that many businesses have requested the Government and the Ministry of Industry and Trade set a minimum discount rate for retail stores. The Ministry has offered two options, in which option 1 gives no specification of the discount rate and option 2 stipulates a minimum discount rate. The Ministry has chosen Option 1, stating that it is a civil relationship and businesses should be proactive.

However, VCCI has stated that this decision is an inconsistent intervention in the market by the Government. On the one hand, the government respects civil relationships by not imposing a minimum or maximum wholesale price and by not penalizing wholesalers.On the other hand, the Government interferes with the freedom of business by setting maximum retail prices and sanctioning retailers who cease sales. VCCI has suggested that the relevant authorities adjust the regulations so that if the Government does not intervene in gasoline prices, the minimum retail discount rate should not be regulated. If the Government continues to intervene in retail gasoline prices, it is necessary to administer the minimum discount and maximum wholesale price to ensure consistency in the management mechanism.