Vietnam needs two-pronged policy approach to mitigate impact of rising oil prices: RMIT experts

A surge in global oil prices poses a significant threat to Vietnam’s economy and to cushion these impacts, the country needs a two-pronged policy approach, write Dr Vu Hong Nhung and Dr Phan Thanh Chung, lecturers at the economics and finance department, Business School, RMIT University Vietnam.

The recent surge in global oil prices, briefly pushing past $80 per barrel, was largely driven by escalating geopolitical tensions in the Middle East and mounting fears of a potential blockade of the Strait of Hormuz, a strategic chokepoint through which more than 20% of the world's oil supply transits.

Although de-escalation signals from Iran have since brought prices down to the $65-70 range, the earlier shock has already impacted economies worldwide, including Vietnam.

In May 2025, Vietnam's consumer price index (CPI) rose to 3.24% year-on-year, up from 3.12% in April. This upward movement, while still within the parliament's 4.5-5% inflation target, signals persistent cost-push inflationary pressures. Chief among these is the elevated cost of energy, particularly imported fuels, which play a foundational role across Vietnam's supply chains.

Vietnam's exposure to oil price shocks is neither new nor superficial. While the country does export some crude oil, its limited refining capacity and modest domestic reserves mean it remains heavily reliant on imports of refined petroleum products. This structural dependency renders the economy especially sensitive to external oil price volatility. When global oil prices rise, domestic fuel costs are quickly affected, feeding through transportation, logistics, production, and consumer prices more broadly. Roughly 9.67% of the Vietnamese CPI basket comprises fuel and transportation services.

Food and catering services, which account for approximately 33.56% of the basket, are also highly energy-intensive, making its price particularly responsive to shifts in fuel costs. Gasoline and diesel are commonly used fuels in the domestic transportation system and are also widely utilized in sectors such as rice milling, fishing vessels, and irrigation systems. Logistics costs represent 10% to 15% of production costs in many industries, and fertilizer prices are closely tied to global oil and gas trends. These are not abstract linkages but real, measurable, and historically proven.

In 2008, when global oil prices reached a record high of $147 per barrel, Vietnam’s inflation rate for the first eight months rose by 21.65% compared to the same period the previous year, the highest level in over a decade, mainly due to sharp increases in fuel and food prices, combined with the gradual removal of fuel subsidies.

In 2011, the Arab Spring pushed oil prices up to $120 per barrel, and by April 2011, Vietnam’s inflation rate had climbed to 17.51% year-on-year. More recently, in early 2022, oil prices once again approached $120 per barrel in March due to the Russia-Ukraine conflict. As a result, Vietnam’s inflation rate rose by 2.41% year-on-year in March 2022 and continued to rise, reaching 3.37% year-on-year by June 2022.

These past episodes are instructive for understanding current risks. Even though oil prices have come off their recent highs, energy and logistics costs remain elevated. The May CPI figure of 3.24% is a reminder that price stability in Vietnam is highly susceptible to external shocks. Geopolitical tensions could flare up again at any moment, sending oil prices back up and reigniting inflation. Vietnam’s vulnerability to these shocks is structural.

Without stronger policy buffers, the economy remains exposed to abrupt shocks. These price movements impact consumer purchasing power, particularly among lower-income groups, and constrain the State Bank of Vietnam's monetary policy space.

Policy responses to mitigate impact of rising oil prices on Vietnam’s economy

A surge in global oil prices poses a significant threat to Vietnam’s economy, contributing to inflationary pressures and raising the cost of living and production. To cushion these impacts, Vietnam needs a two-pronged policy approach: short-term measures for immediate relief and long-term reforms for energy resilience.

In the short term, the government can provide targeted support to vulnerable groups and key sectors. Temporarily reducing environmental taxes and import duties on fuel can help ease retail prices, while bolstering the Petroleum Price Stabilization Fund would allow authorities to smooth out sudden price hikes.

Direct assistance, such as cash transfers or fuel vouchers, should be directed to low-income households, farmers, and transport workers who are disproportionately affected. Similarly, offering tax breaks to fuel-intensive sectors like logistics and fisheries could help offset rising input costs.

To avoid placing further financial pressure on businesses during volatile times, the government should also consider delaying the implementation of new tax policies or regulatory fees across the wider business community. This would provide firms with breathing space to adapt and manage rising operational expenses without the added burden of policy changes.

On the monetary side, the State Bank of Vietnam should maintain a cautious stance, balancing inflation control with the need to sustain growth. Ensuring access to affordable credit for small businesses grappling with energy costs is crucial. Meanwhile, temporary price controls on essential goods and services, such as public transport and basic food items, could help contain second-round inflationary effects.

In the long run, structural reforms are vital. Diversifying energy sources by accelerating the adoption of renewables, such as solar, wind, and biomass, will reduce Vietnam’s dependence on imported oil. Improving energy efficiency and promoting electric vehicles can also help mitigate demand-side pressures. Expanding domestic oil exploration and building strategic petroleum reserves would strengthen energy security. Finally, investing in public transport systems and urban infrastructure can reduce long-term fuel consumption.