The bombing over the weekend in Iran is likely to disrupt world oil supplies. In Vietnam, where fuel supplies are regulated, this could have wide-reaching implications.
On Friday, Vietnam’s Ministry of Industry and Trade (MoIT) was urging fuel retailers to prepare for possible disruptions to fuel supplies on the back of heightened tensions in the Middle East.
This included ensuring minimal levels of fuel stocks and preparing alternative supply sources.
By Sunday, however, tensions in the Middle East boiled over with the United States and Israel launching airstrikes on Iran.
This raises the risk of disruption to fuel supplies through the Strait of Hormuz, through which about 20 percent of the world’s oil supply flows.
This is expected to extend shipping times and increase insurance risk premiums, pushing up crude oil prices, which could have a wide range of implications for Vietnam.
For one, Vietnam gets about 85 percent of its crude oil imports from Kuwait, which would generally come through the Strait of Hormuz.
The Nghi Son refinery, which accounts for about 35 percent of Vietnam’s domestic petrol consumption, is also designed to process primarily Kuwaiti crude oil.
Finding a way to ship around the Strait of Hormuz or taking on a new supplier, in this context, is likely to come with significant costs.
Of course, importing already refined products might help, but these are generally more expensive.
Last year, Vietnam paid US$576 a tonne for crude oil, whereas it paid US$654 a tonne for refined petroleum products, according to Vietnam Customs data.
Moreover, increased wholesale and raw material costs are not always easily passed on to consumers.
Retail petrol prices do not float freely in Vietnam but instead are regulated by the MoIT, which sets a ceiling price for petrol once a week on Thursdays.
If the import price spikes significantly between price adjustments, on a Monday, for example, this can lead to a petrol retail price that is below the cost price of the crude oil used to make it.
In 2022, after Russia invaded Ukraine, this is what happened with retailers losing money with each litre of petrol sold.
This then extended into broad petrol shortages, with retailers temporarily closing for extended periods, going out of business, or being forced to sell petrol at a loss. Moreover, consumers had to line up for prolonged periods to buy fuel, sometimes missing out altogether.
Prices aside, there will likely be broader macro implications.
Fuel imports are generally settled in US dollars and therefore, as prices rise, there will likely be more demand pressure for the US dollars, and by extension, a weaker dong.
It also means inflationary pressure as the cost of just about everything that relies on fuel, which is almost everything, rises with it.
Back in 2022, it was a similar situation that the State Bank of Vietnam mitigated by dipping into its foreign currency reserves, alongside two 100 basis point interest rate rises in September and October of that year.
Notably, Vietnam’s foreign currency reserves are now at uncomfortably low levels, around two months’ worth of import coverage as opposed to the IMF-recommended three.
This strengthens the case for an interest rate hike in the event that inflation is significant this time around, which could have marked knock-on effects.
In particular, private credit in the economy last year increased by almost 20 percent year on year. With the total private sector debt to GDP now sitting around 140 percent, an interest rate hike could increase financial costs substantially for Vietnamese businesses.
By extension, this would slow economic growth, which has been central to policy objectives in recent years.
This could see a more measured approach to economic development, with a lowering of expectations. It could, however, also result in more credit pumped into the economy to try to counter any decline.
There are, of course, other options.
The environmental protection tax, for example, was reduced back in 2022 to help reduce fuel costs. An extension of these cuts, however, was approved last year to the end of 2026, leaving little room to cut further.
The Government of Vietnam’s aggressive development agenda will also require capital, which will make it difficult to pursue other fiscal responses.
The point being that Vietnam’s economy has a lot of moving parts that are intricately connected, vestiges of its command economy, that are pushing up against its integration into the global economy.
This has created a stress point in Vietnam’s fuel industry that rising oil prices on the back of the military action in Iran are likely to exacerbate.