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Subsidising petroleum prices: the flip side of the coin 25th July 2008                

Many experts believe that the currently applied mechanism on subsidising petroleum prices is not the best: it neither creates a driving force for competition nor encourages people to practice thrift.

The more losses, the bigger compensation sums

Every month, petrol importers receive compensation for 95% of the losses they incur in return for selling petrol at the prices fixed by the state. The other 5% they receive at the year’s end.

An enterprise imports a consignment of DO oil at $170/barrel. After counting all expenses (transport, insurance, storage and losses in transit), the enterprise determines the real cost of every litre of DO oil. Though the cost may be VND19,900/litre, the enterprise still sells oil at VND15,900/litre as per request of the government. After checking the enterprise’s documents and finding them in order, the state pays out VND4,000/litre to the enterprise.

With such a mechanism, enterprises which have higher costs will get larger compensation sums. This is ironic because it inspires waste. For example, instead of using old depots to save money, enterprises build new depots because the expenses for the building will be considered business expenses. In other words, with the compensation mechanism, the state does not encourage enterprises to cut expenses, which means that it is throwing away state budget money.

Subsidising oil and floating petrol price?

Dang Vinh Sang, General Director of Saigon Petro, said that with the currently applied mechanism, the state is subsidising 100% foreign-invested enterprises as well, which helps them get fatter profit and transfer profit abroad. The subsidisation also makes people think that they can use as much as they want, while they do not think that they need to economise fuel.

Sang thinks that the petrol price needs to be decided by the supply and demand of the market, while the state needs to subsidise oil prices.

He said that there should be two separate price schemes for petrol and oil, since the influences of the petrol price and oil price on the national economy are different. High petrol prices directly affect taxi motorbike drivers, taxi firms and people who use motorbikes or cars for transportation.

Meanwhile, high oil prices directly affect the national economy, because oil is the key fuel in commodity production and transport.

Sharing the same view as Sang, an economist said that this was the reason why the petrol price increased by 30%, while the oil price increased by 14% only in the latest price adjustment. The state now continues to subsidise 70-80% of diesel, while individuals and enterprises pay 20-30% of the actual prices.

Meanwhile, Vuong Dinh Dung, Director of Military Petroleum Company, does not share the same view as Sang, saying that it is now not the right time to float the petrol price. The overly high price of petrol will cause chaos in the national economy.

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