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Gov’t, dealers fumble with oil prices
Amid unexpected volatility of petroleum prices in the world market, the Government and fuel importers have been wracking their brains to work out how to mitigate risks from fluctuating prices, but have yet to apply the options presented.
While hedge deals or a stabilising fund could help mitigate losses, both of those options are risky given the current economic and development situation.
At present, the State only subsidises losses for oil and diesel whenever prices of these items skyrocket on the global market. The State does not compensate for gasoline, kerosene, and mazut oil.
According to statistics from the Ministry of Finance, in the first half of this year fuel importers recorded a total loss of around VND14.5 trillion (US$879 million). Last year, that figures came in at VND21.9 trillion.
The compensation cost the State a total of over VND25 trillion, because it had to both compensate the VND21.9-trillion loss, and lose out on oil import tariffs.
"Fuel price volatility basically has to comply with market rules," affirmed Tran Xuan Ha, deputy minister of finance.
Oil prices depend on a wide range of factors, including the health of the global economy, political situations, disasters, foreign exchange rates, fuel reserves, and speculation.
Foreign economists all admit that it’s difficult for them to forecast oil prices.
In this context, it is not easy for the Government to guarantee any fixed petroleum price under the market mechanism. When prices are low, fuel enterprises make a profit, but when they’re high, the State loses out.
The Ministry of Finance and the Ministry of Industry and Trade have suggested that enterprises set up a fund to stabilise petroleum prices – a measure being applied in many other countries.
The fund depends on importers extracting money from profits when world prices are down to use when prices are up.
"We are still researching the fund, but the most thorny problem is capital resources to establish the fund," said deputy minister of Industry and Trade Nguyen Cam Tu.
Currently, Tu said that the State Budget has been strained and importers had not received enough compensation from the State, making it impossible to launch the fund.
The alternative would be to extract VND1,000-2,000 per litre from retail prices to start the fund, but this was also unfeasible because people are already struggling with the price hikes.
Importers also have the option to implement hedging solutions, forward contracts and derivative deals that are applied by some other nations. These deals require importers to forecast future prices to try and gain profits. With the risk of high gains, however, comes the risk of high losses.
"Such deals are legal and not prohibited by the Government, although they’re also not encouraged," said Tu. "If importers recognised that these deals generated higher profits against spot contracts they would apply them."
Spot deals are the most common contracts, where prices are based on immediate purchase and sales based on the current market price.
To take advantage of the longer-term deals, however, Tu stressed it required world-class market analysts to track market performance, and be able to forecast the future outlook of the market.
"Vietnam has just integrated into the global market. Importers have less experience entering into the trade market," Tu warned. "They would end up paying a high cost for inaccurate forecasts about market volatility because this is a kind of speculation market.
"Tapping into the speculation market of oil, gold, securities, real estate, and others, an investor can become a millionaire after only a night and vice versa – a millionaire also can become penniless after a night."
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