World Oil Crisis and its Impacts on the Petroleum Market and the Economy of Vietnam

Nội dung text: World Oil Crisis and its Impacts on the Petroleum Market and the Economy of Vietnam

1. International Journal of Energy Economics and Policy ISSN: 2146-4553 available at http: www.econjournals.com International Journal of Energy Economics and Policy, 2021, 11(2), 40-48. World Oil Crisis and its Impacts on the Petroleum Market and the Economy of Vietnam Xuan Hoi Bui* Hanoi University of Science and Technology, Vietnam. *Email: hoi.buixuan@hust.edu.vn Received: 05 September 2020 Accepted: 18 December 2020 DOI: ABSTRACT On April 21st 2020, for the 1st time in the word’s history, the price of oil contracts for May delivery in the US dropped sharply to below 0 USD and stopped at a negative price as of 37.63 USD/barrel. The world oil market really fell into crisis, which had a significant impact on the oil industry of Vietnam. This article focuses on analyzing and clarifying the essence of “negative oil price” as well as the world oil market crisis and its impacts on the petroleum market in Vietnam. The findings indicate that the negative oil price was simply the result of a trading session in futures market, but its nature was the interaction between oil futures market and the physical market characterized by the disequilibrium in short-term. A scenario of low oil price dynamics is analyzed and predicted for the coming time. Thereby, the paper provides recommendations to the oil industry and macro governance of Vietnam in order to appropriate countermeasures in this difficult period. Keyword: Oil Price, International Oil Market Dynamics, Vietnam’s Oil Industry and Economy JEL Classifications: D4, Q31, Q41, Q43. Q48 1. INTRODUCTION global oil market shock and determine its impacts on the petroleum market in Vietnam as crude oil plays an important role in the Fluctuations of international oil price always attract a special economic development of emerging market like Vietnam. From that, interest from scientists as well as policy makers. In 2019, oil the last part of this paper gives conclusions and recommendations prices edged a little lower, with dated Brent averaging $64.21/ for the Vietnam’s oil industry and macro-policy of government, bbl compared with $71.31/bbl in 2018. For that, in early 2020, oil thereby carrying out appropriate policies during this difficult period. transactions around $65/bbl forecasted a promising year for the world oil industry. However, competitive strategies of important 2. LITERATURE REVIEW actors in the international oil market and especially the reduction in global oil demand due to negative effects of the Covid-19 Crude oil has been established as one of the important commodities pandemic has made the oil price back to “the price war,” and even in the world and crude oil prices, like many other commodity oil transactions in the futures market has also created a milestone prices, have not only been volatile but have also been characterized in the global oil scene: a negative oil price. by unprecedented severity and frequency according to Bui (2018) and Mehrara and Oskoui (2007). In fact, the research papers On the basis of the theory of fundamental economics, the written by Regnier (2007) and Frankel (2010) have shown that characteristics of oil futures markets and the interaction between the oil price swings have been larger than those of other mineral global oil market and the domestic ones, this paper aims to analyze resources, their dynamics especially in the short-term is an and clarify the essence of “negative oil price” as well as to evaluate outcome of exogenous shocks. This Journal is licensed under a Creative Commons Attribution 4.0 International License 40 International Journal of Energy Economics and Policy | Vol 11 • Issue 2 • 2021
2. Bui: World Oil Crisis and its Impacts on the Petroleum Market and the Economy of Vietnam Historically, there were “producer prices, set unilaterally by a group physical market. For that, any short-term adjustment from oil of major actors on the petroleum scene. This “producer’s role fell supply and demand or geopolitical issues can quickly influence oil first to “Seven Sisters,” which set posted prices between 1928 and trading on futures market and lead to fluctuations in oil physical 1973, and then to OPEC, which imposed official prices from 1973 market. However, these factors in oil price volatility in the short to 1986. From 1986 till now, we can observe the cyclic dynamic of term will not explain the oil price movements in the medium term crude oil prices in the long term (see for exemple Plourde and Watkins because in a long enough time, the actors of the market will make (1998), Bui (2015), and Cosnard (2018)) but the sharp volatilities of adjustments to their strategies and then the oil price as a result of these prices in the short-term. It has left many observers perplexed as these strategic adjustments will be different. to the underlying mechanisms involved (Loungani, 1986). In other words, the factors that explain short-term oil price fluctuations are The brief literature review above allows us to draw the conclusion very different from those determining the dynamics of oil prices in that the factors in oil price determination need to be studied over mid-term and long-term. In fact, the explanation for this increased the different time horizons: short-term, medium-term and long- variance is not so much that the determinants of oil price have term. Indeed, three basic processes that collectively determine changed, but that conditions which feed into these mechanisms are prices continue to be a central part of the functioning of the global now different because the world oil market is a very different thing oil industry. In the short-term, oil prices are determined by the today from what it was in just the decades ago. In our opinion, three equilibrium between current supply and demand, and oil price are essential parameters reflect the evolution of the petroleum sector. deeply influenced by the dynamics of oil futures market. In the medium-term, the structure of the industry determines how closely The first parameter is the composition of the energy balance. At prices conform to the competitive price because the structure of the time of the first oil crisis in 1973, oil occupied about 60% of industry may allow a dominant group of actors to implement a the world energy balance, coal took 20%, natural gas accounted strategy aimed at insulating the market from competitive forces, for 10% and the remaining 10% were divided between nuclear leading to a rise in oil price. And finally, over the long-term, prices power, hydroelectricity and the rest. Today, according to the tend to reflect the real cost of producing enough oil to satisfy data of B.P Statistical Review, oil occupies 33% of the total with demand. 24% of natural gas, 27% of coal and 15% of the rest (Table 1). The obvious conclusion from reading these figures is that even The next section of this paper will describe these three mechanisms if oil remains the main source of world energy balance, and its that collectively determine crude oil prices and their time consumption at the world level has increased continually in horizons. Using this analytical framework, we will analyze and absolute value, its share between 1973 and 2019 found almost clarify the current state of global oil market and especially the divided by 2. recent and special fluctuations of oil price proceeding from the assumption that prices are determined by the interaction of the The second parameter is the reserves/production ratio (R/P): if three mechanisms described earlier. Finally, we will evaluate we take the same reference period of 1973-2019, we will see and determine the impacts of international oil dynamics on the that the R/P ratio in 1973 was 31 years (that means at the time, petroleum market in Vietnam before providing conclusions and the proved reserves were sufficient for 31 years of production at recommendations for Vietnam. the same level as 1973), but this ratio was 42 years in 2007 and today it is 49.9 years, which, all other things being equal, means an improvement and not a deterioration of oil reserves (Table 2). 3. AN OVERVIEW OF THE ANALYTICAL According to Ayoub (2010), the dynamics of oil prices in the FRAMEWORK international scene therefore reflects the context of these physical and economic depletion of world oil resources. 3.1. Oil Price Fluctuation in Short-term: Interaction of Oil Supply and Demand and Influence of Oil Future The last parameter is the explosive growth of oil derivatives Markets Dynamics markets. The oil transactions in these markets, the speculations, The time horizon so-called “short-term” may be defined as a etc. have a significant effect on the fluctuation of oil price in the period that is short enough to preclude any significant modification in either oil supply or demand capacities. So, during this time Table 1: Fuel shares of primary energy and contributions horizon, the oil demand is inelastic with respect to price and a to growth in 2019 change in oil price will produce a less than proportional change Energy Consumption Annual change Share of in demand. According to Angelier (1990) and Bacon et al. (1990), source (exajoules) (exajoules) primary energy the economic and technical characteristics of the oil industry Oil 193.0 1.6 33.1% and of petroleum products are reasons why this is so. In fact, the Gas 141.5 2.8 24.2% inelasticity of oil demand is confirmed by several empirical studies. Coal 157.9 −0.9 27% Since 1975, Kalymon (1975) has concluded that world oil demand Renewables* 29.0 3.2 5.0% in short term was price-inelastic. The price-elasticity coefficient Hydro 37.6 0.3 6.4% Nuclear 24.9 0.8 4.3% of oil demand fluctuates only from –0.6 to –0.2. Crooper (2003), Total 583.9 7.7 for example, used a multiple regression model derived from an Source: B.P. Statistical Review of world Energy 2020. *Renewable power (excluding adaptation of Nerlove’s partial adjustment model to estimate both hydro) plus biofuels the short–run and long–run elasticities of demand for crude oil in International Journal of Energy Economics and Policy | Vol 11 • Issue 2 • 2021 41
3. Bui: World Oil Crisis and its Impacts on the Petroleum Market and the Economy of Vietnam Table 2: Total proved reserves (thousand million barrels) and R/P ration Proved reserves At end 1999 At end 2009 At end 2019 Share of total R/P ratio Total world 1277.1 1531.8 1733.9 100.0% 49.9 Of WHICH: OECD 256.4 234.7 260.1 15.0% 25.1 Non-OECD 1020.9 1297.1 1473.7 85.0% 60.4 OPEC 821.8 1040.8 1214.7 70.1% 93.6 Non-OPEC 455.3 491.0 519.2 29.9% 23.9 EU 8.8 6.0 5.0 0.3% 9.0 Source: B.P. Statistical Review of world Energy 2020 23 countries. The obtained estimations confirmed that the demand 3.2. Oil Price Dynamics in Medium-term: The Role of for crude oil internationally is highly insensitive to changes in Structure of Oil Industry price especially in short run. This price-elasticity coefficient The medium-term is a time period during which significant is very small, which fluctuates in interval between −0.109 and adjustments in production and consumption capacity are possible −0.023. Recently, the research of Dario Caldara et al. (2019) has and the structure of oil industry may remain stable in this time also confirmed the inelasticity of oil demand. horizon. That means, the medium term is a period of time that is long enough for the actors of the market to adjust their behavior From the other side, oil supply is also inelastic in short time in a way that is most beneficial for them and that affects price because the volume availability depends largely on the decisions fluctuations in the medium-term. If a group of dominant actors of oil producing countries. The principal revenue sources of emerges and that is capable of insulating itself from or muting these countries are from oil industry (oil exportation value, the industry’s characteristic competitive forces, so the dynamics tax, oil rents etc ). Therefore, the decisions of supply depend of oil price in medium-term will be close to monopoly prices, as, on the national expenditure rather than on the world oil price. for example, the “Majors” which were able to do between 1928 Moreover, the variable costs represent only a small fraction in and 1950, or OPEC in the 1970s. the structure of oil production costs. Consequently, supplying oil is profitable as long as its variable costs are covered by the Originally, micro-economics theory proposed that the structure market price. Similarly, the insensible supply with respect to of an industry could be understood in terms of number of firms price is important. in it. According to these fundamentals, an industry with a large number of vendors is typically highly competitive, with little Because of this price-inelasticity, crude oil price is an ineffectual likelihood that one or more vendors could exercise market power, market adjustment tool, a large price shift is required to elicit any we observe the competitive price in this case. On the other hand, change in oil supply and demand. This is the first fundamental with fewer firms, the structure more closely resembles an oligopoly mechanism to explain the high fluctuations of international oil or monopoly and a handful of firms are able to exercise some price in the short-term. degree of market power by increasing prices relative to what they would be in a competitive market structure. There are many models The second factor of unprecedented severity and frequency in developed by economists (Nash, Cournot, Strakelberg, Bertrand oil price evolution is the influence of commercial mechanisms in etc ) that can be applied to oil market structure and dynamics of international oil scene. Formula contracts, oil spot markets and oil price in medium-term analysis. especially the oil derivative markets (forward market, futures market etc ) strongly influenced the oil price dynamics in short- The concept of structure, particularly, in the theory of industrial term. Since 1987, the increasingly widespread use formula organization, is used to describe the nature and intensity of the contracts led to wider price swings. Firstly, formula contracts competitive forces within a given industry. According to this are based on oil stable quantities over long-term. Because the school, the structure of an industry is largely determined by the exchange quantities are stable, any instant change of oil demand basic conditions in which the industry operates – the nature of or supply is adjusted from narrow spot market (about 10% of supply and demand relations for the product involved and the global trading volumes). With price-inelastic characteristics of institutional, legal and socio-political environment. Enterprises physical oil demand and supply, price fluctuations can be quite select their strategies according to the current structural situation substantial. Moreover, formula contracts are based on prices and these strategies in turn affect the industry’s performance, tied to the benchmarking price of spot market, so oil prices especially the prices and product volumes delivered to the fluctuate due to all instantaneous adjustments on this small spot marketplace. These are the fundamental tenets of industrial market. Research in the short-run cannot ignore the influences economics presented in the study of Tirole (1988). Analysis of of international oil dealings on derivative market dynamics. Oil industrial structure has a number of important developments during derivative markets are strictly financial markets, and today every the 1980s with contribution from Baumol (1982) or another of expert has recognized that the transactions on derivative markets Porter (1985). Baumol, argued that the competition is common have tended to influence the oil price swings and the dynamics in markets with only a few firms, and that it is rather the presence of international oil market although it is very difficult to measure or absence of potential competitors that determines whether or these influences. not market power can be exercised and price can be set above the 42 International Journal of Energy Economics and Policy | Vol 11 • Issue 2 • 2021
4. Bui: World Oil Crisis and its Impacts on the Petroleum Market and the Economy of Vietnam competitive price. Porter, with famous five forces model confirmed Figure 1: Crude oil front-month futures price in international markets that when competitive pressures are strong, existing firms cannot ($/barrel) exercise market power, no matter how few their number. In each case, applying these different theoretical frameworks to the oil industry’s structure analysis allows an explanation of oil prices dynamics in medium-term. 3.3. Oil Price Evolution in Long-term: Reflecting the Real Production Cost of Crude Oil The long-term is a time period during which changes may occur in production technologies, petroleum consumption patterns, and production zone and in this time horizon the real cost of production is a critical variable because the market price cannot deviate from it very much for very long due to responses from both supply Source: EIA-US Energy Information Administration (2020) and demand sides. If market price drops below the real cost of production for a long period, producers having the highest costs negative price of an oil futures contract phenomenon needs to be will drop out of the sector, that drives down supply and pushes explained satisfactorily, it reflects the true dynamics of the world upward pressure on price. On the other hand, if the market price is oil market in the current period. higher than the real cost of production for any appreciable length of time, so the investment effect on the supply side (increasing 4.1.1. Nature of negative oil prices supply) and the substitution and saving effects on the demand side First of all, it is necessary to clarify that the crude oil futures (reducing demand) causes the market price to drop and gravitate price at −$37.63/bbl results from a trading session of oil futures around the real cost of production at highest cost production sites, contract for May delivery, not the spot price on the physical oil the output of which remains necessary to satisfy demand. markets. It is easy to find that the same oil futures contracts for June delivery still stay at between $17 and 20 $/bbl at the This analytical framework will be used to explain the phenomenon same trading time, thereby we can see the difference between of “negative” oil price and/or the oil price war by studying the true the physical oil trading and the derivative oil trading. The dynamics of the current international oil market. After that we will breakdown of “negative oil prices” can be seen as an incident evaluate its impact on the oil market in Vietnam because oil trading for speculators in American futures market because for the oil is strongly associated with domestic and international market. future markets, the process of buying and selling these contracts goes on continuously in the trading sessions and on due date, it is usually traded close to the oil price on the physical spot 4. ANALYTICAL RESULTS AND market. However, what happened indicates that there are no DISCUSSION buyers for the contract of May trading that expire on April 21st to carry out physical transactions, resulting in the fact that the 4.1. Negative Oil Price and Dynamics of International speculators continually reduce the price and even down to below Oil Markets $0/bbl, meaning that they have to pay extra for the buyers to At the end of 2019, the global oil market passed a “normal year” accept the release of the oil barrels delivered in May. Essentially, in which international oil prices fluctuated around $65/bbl. the phenomenon in short-term that there are no buyers on due From statistic data of actual oil supply, stock, and demand, most date even though the prices have been reduced to floor level experts of oil economics forecasted that although some possible is the consequence of what happened in the physical market high fluctuations caused by season effects (climate conditions), fundamentals. It was such an oversupply that never happened international oil price in 2020 will be stable and fluctuate around in which no buyer had reserve capacity any more to buy more the price level of $60-65/bbl. However, the scenario of the 1st oil barrels delivered in May even for free. months of 2020 took place in an unexpected way with oil prices at times falling below $0/bbl (Figure 1). In other words, it was Negative oil prices are actually just the result of a trading session negative oil price. Although they are transactions of future of futures contracts, but the oil price of physical trading, in fact, contracts and their implications are not as great as reported by also dropped deeply at only 18 USD/barrel. The developed media, no matter you want it or not, April 20th 2020 would be one of analytical framework allows us to fully explain the current the worst days in the history of the world oil industry as the crude dynamics of the market and the fluctuations of oil prices. Indeed, oil transactions occurred at a negative price for the 1st time, which as mentioned above, the short-term oil price results from the means the seller had to pay extra for the buyers of these contracts immediate equilibrium of supply and demand characterized by to release the oil barrels for May delivery–a historic milestone price-inelasticity and so small instant adjustments can also make of the oil industry in America in particular and in the world in oil prices strongly fluctuate. The current price on physical oil general because from its inception in 1983 to now, the WTI oil market like “price war” is the result of both supply and demand trading never dropped below $10/bbl and in early 2020, a crude fluctuations in short-term and the interaction between financial oil barrel in New York remained open trading at $60/bbl or evenly and physical oil transactions leads to the historic mark of the oil 3 days earlier (April 17th) it remained at $1827/bbl. However, the industry that is negative oil prices. International Journal of Energy Economics and Policy | Vol 11 • Issue 2 • 2021 43
5. Bui: World Oil Crisis and its Impacts on the Petroleum Market and the Economy of Vietnam 4.1.2. Oil price war: result of disequilibrium’s Strackelberg and Figure 2: OPEC and world oil supply demand crises from the Covid 19 pandemic Oil price war on physical market has the first reason for the supply side. Indeed, the current structure of global oil market is exactly a model of imperfect competition based on a non-cooperative game developed by Strackelberg. This is also the analysis of many international studies on oil prices in the current period especially the contribution of Percebois (1998). It can be considered that the world oil market is structured by OPEC and Non-OPEC producers, in which OPEC is a leader and non-OPEC producers are followers but also important producers like Russia or other non-OPEC. In this kind of structure their behavior affects the dynamics of price and market. In this case, their non-cooperative strategy has led to market disequilibrium characterized by a large supply excess and that pushes the price of crude oil down very low. Source: Monthly oil market report May 2020 Indeed, as a result of the COVID-19 pandemic has just appeared in China, factory output and transportation demand fell, bringing Table 3: World Oil demand in 2020 overall demand for oil down as well, and causing oil prices to fall. 2019 1Q20 2Q20 OPEC agreed to cut oil production by an additional 1.5 million World oil demand bbl/d through the second quarter of the year (a total production Americas 25.62 24.47 18.95 cut of 3.6 bbl/d from the original 2016 agreement), with the of which US 20.85 20.26 15.22 group expected to review the policy on 9 June during their next Europe 14.34 12.95 9.67 Asia Pacific 7.96 7.88 6.25 meeting. OPEC called on Russia and other non-OPEC members Total OECD 47.91 45.30 34.87 of OPEC+to abide by the OPEC decision but, Russia rejected the Other Asia 13.86 13.15 12.20 demand, marking the end of the unofficial partnership. Therefore, of which India 4.87 4.74 3.90 neither OPEC nor the followers but large producers such as Russia Latin America 6.58 6.25 6.00 haven’t acted in cooperation to control international oil price. On Middle East 8.20 7.81 7.01 the contrary, both of them increased their production, leading to Africa 4.43 4.41 4.25 Total DCs 33.08 31.62 29.46 an excessive supply. Saudi Arabia actively initiate the crude oil FSU 4.84 4.50 3.88 war with Russia by increasing output by 1.5 million barrels/day Other Europe 0.76 0.71 0.54 and that pushes OPEC production up to 30.4 mb/d in April of China 13.07 10.27 12.55 2020 (Figure 2, the previous month’s production of OPEC was Total “Other regions” 18.68 15.47 16.97 28.9 mb/d). Of course, Russian shows its non-cooperation by Total World 99.67 92.40 81.30 claiming to take full advantage of capacity in order to boost output Source: Monthly Oil market report May 2020 sold in the crude oil market. Since February 2020, oil production of America has also reached its highest level ever with 13.2 million 81 mb/d compared to the 2019 average of 99 mb/d, which is a barrels/day. It is the oligopoly market structure in which the large 19% reduction). producers such as OPEC, Russia and America did not cooperate with each other (i.e. decrease of output), instead, they choose a Thus, the international oil market is simultaneously impacted by competitive strategy by increasing output supply, which makes two factors: the sudden and sharp decrease in demand due to Covid oil prices even more plummeted due to large supply excess in pandemic and large oversupply from the market-share competition comparison with demand at that time. strategy while both supply and demand are inelastic with respect to price, then the international crude price will definitely decrease and However, when launching a non-cooperative strategy to dispute fall deeply is inevitable (Figure 3). To sum up, the crude oil price market share, it is certain that OPEC, Russia and even America did war is the consequence of the non-cooperative strategic choice of not take full consideration of rapid spread of the pandemic and its majors in global oil market in the context of a severe decline in immediate and large impact to oil demand, as well. From China oil demand caused by the pandemic. The price war is one of the to Europe and America, a series of blockades and social distance major causes and effects of the currently ongoing global stock- were enforced, leading to world economy paralysis, resulting in market crash in general, and of oil futures market in particularly. a rapid collapse of oil demand at a global scale - the biggest drop ever seen in history. According to the calculations by the IEA and Moreover, the physical oil supply excess is so large that almost OPEC, oil consumption in March and April decreased at record all stockpiles run out of capacity and it is very difficult to increase level and was the lowest level in the past 25 years. The reduction their immediate storage ability, which are the main reasons that can be up to 19 million barrels/day (according to data of OPEC) no one wants to buy the oil contracts for May 2020 delivery on or more than 25 million barrels/day (according to forecast of IEA), the maturity date of these contracts and therefore, international oil equivalent to approximately 25%-30% of total global demand prices have fallen freely to negative prices in the end of trading (Table 3– data of OPEC, world oil demand in Q2 2020 is only session. That created a historic milestone in the world oil industry. 44 International Journal of Energy Economics and Policy | Vol 11 • Issue 2 • 2021
6. Bui: World Oil Crisis and its Impacts on the Petroleum Market and the Economy of Vietnam Figure 3: Oil supply and demand dynamics and the oil price war Reduced economic activity related to the COVID-19 pandemic has caused changes in energy demand and supply patterns in the $/bbl D’ S S’ D near future. due tonon- cooperative strategy of main actors 4.2. Dynamics of Global Oil Market and their Impacts 60 on Petroleum Market in Vietnam due to the As discussed above, though it is not advisable to exaggerate covid19 negative oil prices because it is simply an immediate result of pandemic trading session on the last time of due futures contract, but we need to admit that the crude oil prices go down too low due to current 18 interaction between oil supply and demand. These movements of global oil market also certainly have a great impact on the Vietnam’s domestic petroleum market due to internationalization Q of oil trading. The oil industry of Vietnam is relatively typical Source: Simulation by author with enterprises in all stages of the oil value chain: crude oil exploitation and export, petrochemical refining and commercial In this current situation, what is the outlook for the market and trading of petroleum products. Therefore, the level of influence is volatility of international oil prices? In fact, after the increase very different for each participant in this value chain. First of all, in oil production in April 2020, both Russia and Saudi Arabia the firms that exploit and export crude oil will suffer the severe encountered a huge drop in demand and as a result, the price war impacts from the international price war. Their turnover decreased happened, OPEC and other countries in the oil alliance had to come dramatically when oil was sold according to international price up with a agreement to cut down output at 9.7 million barrels/ and trading volume decreased. According to our preliminary day from May to June 2020. Showed a positive signal for oil quantitative calculations, it is expected that by 2020, PVN trading, that agreement, however, was not enough to rapidly push (PetroVietnam Group) will exploit 8,8 million tons of crude oil oil prices back compared to large decline in demand. Therefore, and if the average oil price is $40/bbl, its turnover will decrease in the second quarter or even the third and fourth ones of 2020, by about $1,85 billion (if oil price is $30/bbl so this reduction the international oil market is likely to remain in a state of low is $2.4 billion), and national budget remittance decreased about demand and oil price scenario could last long time. According to $600 million in comparing with the calculations in their projections EIA (2020) projection, the consumption of petroleum and liquid in the end of 2019. But more seriously, the cost for exploiting oil in fuels globally will average 93.1 million b/d for all of 2020, down Vietnam is currently higher too much than the world oil price, so 8.3 mbbl/d from 2019, before increasing by 6.5 mbbl/d in 2021, the more oil it exploits, the more loss it suffers. Thus, the damage that’s still 1.8 mbbl/d below the 2019 average consumption. Brent is huge for oil exploitation enterprises of PVN and for the country. crude oil spot prices averaged $43/bbl in July 2020, were down $21/bbl from average price ($64/bbl)in July 2019. By the end of For petrochemical refineries, the difficulties lie the inventories of August, crude oil prices had moved into an increasingly narrow crude oil and the petroleum products as well as the price reduction trading range with some of the lowest levels of price fluctuation of petroleum products. Crude oil contracts at the beginning of the since 2015. Although considerable uncertainty in the global year were still at $60-65/bbl traded for refining activities, but low economy and global oil markets remains, price volatility may have oil prices brought about immediately decrease of the petroleum declined primarily because of the large volume of oil inventories product prices. The lag effect makes refinery activities lose much accumulated during the first half of 2020 and a slowing rate of when the input price is high and selling price of finished product is oil consumption growth. low. According to the Quater 1 report in 2020 of Binh Son Refining and Petrochemical Joint Stock Company – the unit operating Dung The evolution of crude oil price in international scene depends a Quat oil refinery, in the first 3 months of the year, the company lot on recovery of the world economy after the Covid 19 pandemic suffered a loss of 2.300 billion VND (equivalent to $100 million), as well as compliance with the oil production commitments made which was the result of three simultaneous effects, namely high by the “majors”-that is the dynamics of Stackelberg equilibrium of input crude oil price, low selling price of petroleum products in the oil oligopoly market. If the deal breaks down – corresponding domestic market, inventories of crude oil and increase in amount to Stackelberg disequilibrium or non-cooperative strategy of of petroleum products due to a sharp decline in consumption. the monopolists - the low oil prices will last. Despite expected inventory draws in the coming months, EIA expects high inventory For importers and traders of petroleum products, so far petroleum levels and surplus crude oil production capacity will affect on is still strategic products and their prices regulated by the international oil prices. EIA projection monthly Brent spot prices government, the import price of petroleum products is the input in will average $44/b during the fourth quarter of 2020 and rise to an the mechanism for determination of the selling price of petroleum average of $49/b in 2021 as oil markets become more balanced. products for domestic customers. If the international crude oil That means oil prices will approach to the critical variable of long- price dropped deeply, so did the domestic price of petroleum term – real cost of oil production. However, all projections remain products by adjustment cycles every 2 weeks. See for example, subject to heightened levels of uncertainty because mitigation and A95 gasoline price of the adjustment cycle on April 28 was only reopening efforts related to the COVID-19 continue to evolve. 11.631 VND/l (equivalent to $0.47 USD-Figure 4). For units that International Journal of Energy Economics and Policy | Vol 11 • Issue 2 • 2021 45
7. Bui: World Oil Crisis and its Impacts on the Petroleum Market and the Economy of Vietnam trade petroleum in domestic market, the biggest impact for them pandemic is over: developing economy when the oil price is low is the sharp drop in domestic demand, leading to a dramatic drop while keeping security stable in the oil supply. In the framework in sales and turnover, as well. Data indicates that total petroleum of this article, we analyze the positive points from deep fall in oil demand across the country in the first quarter of 2020 is estimated prices according two aspects: input costs and the international to decrease by about 30% and is expected to decrease further in the trade balance related to oil activities. coming time. Sometimes, the gasoline inventories surpass 90%, exceeding allowable level. First of all, petroleum products are an important input for many economic activities. One of the industries that benefit from this However, whether the petroleum products price will continue to is transport when the cost of petroleum accounts for a large decrease further or increase in the upcoming price adjustment proportion, up to 35-40% of the total cost of transport industry, periods? That will depend on decision of the government because so this is an opportunity to reduce costs and prices of transport oil value only accounts for a part in the price structure paid by the services, thereby stimulating the economy by providing low-cost end consumer and the rest are taxes, fees as well as the input/output transport services to community. Apart from transport sector, a of the petroleum stabilization fund. If the government continues number of other industries also benefit such as plastic production, to to increase the stabilization fund and the current tax and fee virgin plastic particles, fertilizer, metallurgy, seafood fishing, rates unchanged, the domestic petroleum price cannot be reduced construction of transport works and oil-fired thermal power further. However, if the State adjusts petroleum prices, balances plants, etc. which petroleum cost accounts for 20-35% of the macro goals, minimizes provision from a stabilization fund and input cost. Therefore, the petroleum products prices fall is also considers to reduce taxes and fees in order to stimulate demand, it a great opportunity to reduce production costs and end-users are is expected that domestic petroleum price will continue to decrease the beneficiaries. Thus, overview on the whole economy, the deep further, then price of petroleum products will be likely to decrease fall of oil prices on the one hand is an opportunity for industries below 10.000 VND/liter if international oil prices remain at the low using petroleum products as an input factor to reduce costs, level. In fact, with the slight rebound in international oil prices, stimulate the economy. The direct price reduction for groups domestic petroleum products prices have been adjusted to increase of essential items such as electricity, water, fuel, construction in the following periods, although prices are still low compared materials (petroleum products accounts for 4% of the package to the prices at the beginning of the year (Figure 4). structure to calculate the CPI items), and indirect reduction for food, etc. (the group with the largest proportion in the CPI: 4.3. Opportunities for Economy from Decrease of 36.12%) will allow to reduce the pressure on the CPI, which Petroleum Price is very effective in controlling inflation when the economy is To sum up, the sharp decrease of the world oil prices due to stagnant due to pandemic. excesses in the global market has a negative impact on the operation of petroleum enterprises in Vietnam as well as the The second positive aspect of the deep petroleum products contribution of the petroleum industry to the national budget. fall relates to international trade balance of Vietnam regarding However, from the aspect of consumption and the whole petroleum activities. In fact, from 2010 until now, Vietnam is Vietnamese economy, this brings many positive signals and even still a trade deficit petroleum importer Table( 4). Therefore, the opportunities for various other sectors to break-out as soon as the oil prices fall will also be a positive factor to reduce trade deficit Figure 4: Adjustment of selling price for petroleum products in Vietnam 2020 (VNĐ/l) 25000 20910 19380 19120 20000 16810 19840 18500 18340 14973 14922 15000 12560 13125 16050 11930 11631 12235 14258 14409 12402 10000 11950 11340 10942 11520 5000 15-Jan 14-Feb 29-Feb 15-Mar 29-Mar 14-Apr 28-Apr19-May01-Jun01-Jul12-Aug RON95 E5RON92 Source: Data announced by the Ministry of Industry, Trade and Ministry of Finance Table 4: Trade balance for Vietnam’s oil, 2010-2019 MTOE/year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Production 15.3 15.4 17.0 16.9 15.9 17.2 15.5 13.9 12.4 11.4 Consumption 15.3 16.7 17.1 18.2 18.7 20.8 21.9 22.6 23.6 24.6 Trade surplus 0.0 −1.3 −0.1 −1.3 −2.7 −3.6 −6.4 −8.7 −11.2 −13.2 Source: BP Statistical Review of World Energy 2020 46 International Journal of Energy Economics and Policy | Vol 11 • Issue 2 • 2021
8. Bui: World Oil Crisis and its Impacts on the Petroleum Market and the Economy of Vietnam as well as reduce import costs, thereby saving a large amount returns to normal, the demand for oil definitely increases again, of foreign currency. This contributes to Vietnam’s international bringing about increase of oil prices or at least it is not too low trade movements become more balanced in this difficult period. like present. Therefore, we miss a great opportunity if we cannot launch a strategy to increase storage capacity for crude oil and Thus, in addition to negative impacts, the deep oil price shock petroleum products. also brings positive effects to the Vietnamese economy in general and for enterprises/organizations/consumers using petroleum For the petroleum prices management policy, the prices applied products in particular. However, whether Vietnamese economy to end-consumers depend a lot on management mechanism can take advantage of this opportunity and overcome the enforced by the government. In current condition, the first “decrease” oil price shock or not, depends on the ability of the priority when the normal conditions returns is to stimulate economy to absorb the price decrease based on increase level the economy. It is necessary to consider carefully whether to in total demand, which is also the direction that the Vietnam’s continue to increase of the stabilization fund and simultaneously government should aim for in the course of operating the post- to accept a reduction of taxes and fees in petroleum prices when pandemic economy. its proportion is still very large (nearly 55-60% for gasoline, 35- 40% for other oil products, in which, environmental protection 5. CONCLUSION AND tax accounts for about 32% for gasoline and 11-20% for other). If petroleum tax and fee reduce, it is a great opportunity for RECOMMENDATIONS consumers to receive the gasoline good prices. The interaction in the economy takes place in the beneficial direction from The results above show that the prospect for prolongation of low stimulus, growth to inflation control and so on. Finally, for oil price is relatively clear. The negative and positive effects for enterprises that depend much on petroleum products, the Vietnam, as well, from the deep oil prices fall have also been record oil prices shock is also a “golden” opportunity for those mentioned. It is also consistent with most other oil economic own strong finance resources to buy cheap fuel inputs, even analysts, even those who have a more extreme analysis, consider accumulate enough for whole-year production, reduce costs, it as a new era of the oil industry as analysis of Blas (2020). Below lower production costs to compensate for the loss caused by are some recommendations towards the subjects of the Vietnamese production stoppage due to pandemic, thereby catch up with economy in order to minimize negative impacts while quickly growth rate in the end of this year 2020– a very special year in taking advantage of opportunities from the positive impact of oil the socio-political economy in the world. shock to quickly stabilize and promote economic development of country. REFERENCES First of all, the enterprises exploiting and exporting crude oil can Angelier, J.P. (1990), Le Pétrole. Paris: Economica. be considered as the economic subjects that suffered the most loss Ayoub, A. (2010), Les réserves pétrolières: entre l’épuissement physique from the deep oil price fall. Our enterprises have no advantage et l’épuissement économique. 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