Price modeling of imported natural gas in Turkey: Fid-Bau Portal

Price modeling of imported natural gas in Turkey

Yorucu, Vedat

The Turkish manufacturing sector has become the dynamo of the economy, driven by imported natural gas. However, the country's dependency on imported energy has also increased vulnerability of the country to the specter of unexpected supply shocks, and hence the long-term sustainability of industrialization. Thanks to long-term contracts which provide relatively cheap imports of natural gas, Turkey has sufficient “breathing space” to develop alternative energy sources. In the meantime, the country must adopt a rational pricing policy for imported natural gas to ensure allocative efficiency. Accordingly, this paper offers an econometric “gas-price-growth” model which reveals that long-run equilibrium relationship exists between each pair of variables such as natural gas prices, crude oil prices, taxes on gas and real exchange rates. Rapid changes in capital markets and possible risks associated with high inflation may increase future prices of natural gas in Turkey. Furthermore, this study revealed the existence of a unidirectional causalities running from real exchange rates and taxes towards real gas prices for household and industry. The study estimated the magnitude of how the exchange rate and the crude oil price could affect the natural gas prices in Turkey. The results reveal that when there is a 1% increase in real exchange rate of Turkey, it causes 0.144% increase in industry gas prices. The estimated results for household demand also indicate that when there is a 1% increase in taxes, the household prices increase by more than 0.65%. When industry demand is concerned, a 1% increase in taxes causes more than 0.77% increase on industry gas prices in Turkey. The fiscal decisions of government in Turkey may have a great impact on natural gas prices.