Retail petrol prices in Vietnam were reduced for the third consecutive time on 13 March 2025, sliding to the lowest levels recorded since June 2021. The joint decision by the Ministry of Finance and the Ministry of Industry and Trade aims to ensure that domestic fuel price fluctuations are consistent with global price fluctuations.

With the rising global fuel prices over the past few days, an upward price adjustment by the Vietnamese regulators can be expected this week. However, historically, Vietnam’s petrol prices have been well below the world average. As of 10 March 2025, they were about two-fifths of those in Singapore – which has ASEAN’s highest prices, about three-quarters of those in China and India, and eight US cents lower than prices in the US.

At USD0.82/litre on 10 March 2025, Vietnam’s petrol prices were around two-thirds of the global average, with individual countries’ prices varying from a highly subsidised USD 0.03/litre in Iran and Libya to a heavily taxed USD2.11/litre in Israel and USD2.27/litre in Iceland.

 “Although consumers and businesses looking to cut costs in the short term might welcome lower petrol prices, the long-term consequences of Vietnam’s cheap petrol prices are very worrying,” says RMIT University Vietnam Professor of Economics Bob Baulch.

Most alarmingly, they lead to an overuse of fossil fuels for transportation and back-up electricity generation. Cheap petrol and electricity mean continued undersupply of renewable energy, and a disincentive for consumers to switch to electric vehicles and other types of ‘green’ transportation. Low petrol prices also caused the running-up of balances of the Fuel Price Stabilisation Fund to over VND6 trillion, or approximately 0.05% of Vietnam’s GDP, in 2024.

In 2021, the Government of Vietnam committed itself to achieving net zero emissions by the year 2050. Among the various measures being implemented to achieve this commendable goal are more wind and solar electricity generation, the phasing-out of coal power stations, and the promotion of electric vehicles. However, Professor Baulch says there has been relatively little discussion of one crucial variable: the domestic price of petrol.

“To bring Vietnam’s petrol price closer to the world average, which is probably still too low from an environmental perspective, will not be easy. The reduction of fossil fuel subsidies hurts low-income and high-income consumers together with established manufacturing firms and other businesses in the short term,” says Professor Baulch.

However, as research by The Policy Practice, a UK-based think tank, has shown, it is feasible to reduce costly fossil fuel subsidies, but that doing so requires a clear political “offer” of something more palatable instead.

In recent years, petroleum producing developing countries (such as Indonesia and Nigeria) as well as large consumers (like Germany, Ghana and India) have taken bold, and often politically controversial, steps to cut their fossil fuel subsidies ─ often driven by budgetary constraints while protecting their poorest consumers through social cash transfers.

For example, in late 2014, the Indonesian government increased the price of petrol at the same time as introducing health and education cards which allowed poor Indonesians to access free health services and education for their children. This saved the Indonesian government some USD15.6 billion and was followed by addition fuel pricing reforms.

Research by The Policy Practice also found that between January 2013 and October 2014, the Government of India increased the price of diesel thirteen times but only by a rupee (about VND300) each time while leaving LPG and kerosene prices (which are consumed more by the poor) unchanged.

“Again, this had a big impact on the government’s finances, which were so favourable that even after the Indian government changed in 2014, the Indian government continue the gradual raising of diesel price until its price was in line with international prices,” Professor Baulch points out.

Reforming fossil fuels subsidy is difficult because it means price rises for most consumers, which has knock-on impacts on jobs and livelihoods across the economy. However, there are ways to manage it.

“As in Indonesia and India, the Vietnamese government can phase out subsidies gradually, while investing in measures to protect the poor and in fuel-efficient alternatives and affordable public transport, such as metros and mass rapid transit buses,” RMIT Lecturer in Finance Dr Dao Le Trang Anh proposes.

“Support for affected industries, tax reductions, and training programs can also help businesses and workers adopt and adapt to more environment-friendly energy and technology,” she adds.

Adjusting environmental taxes to encourage greener energy use while maintaining stable revenue for public services is also crucial, especially since IMF data from 2021-2022 indicates that Vietnam’s retail prices for natural gas and petrol only covered supply expenses, without factoring in the broader costs of global warming and local pollution.

“Higher environmental taxes on fossil fuels can reflect their true social and environmental impact, while the revenue can be reinvested in renewable energy, public transportation, and pollution control, thus aligning with Vietnam’s long-term energy and environmental goals,” Dr Trang Anh says.

Professor Baulch notes that reforms to fossil fuel subsides are often opposed by politically well-connected groups who benefit from these subsidies. Also, reforms can undermine the political consensus – or social contract – that has built-up over time between politicians and citizens.

“However, for the sake of both our planet and the Government budget, reforming Vietnam’s petroleum pricing system should receive much greater policy attention,” he concludes.