Analyzing the effects of import liberalization in the Turkish natural gas market

ABSTRACT

In this paper, we analyze the economic consequences of full import liberalization of the Turkish natural gas market. For this purpose, we build a simple game-theoretic model where exporters of natural gas may face supply constraints. We first derive equilibrium quantity and market price analytically with and without capacity constraints of the exporters. Then, we compute estimates of equilibrium quantity and prices using calibrated demand functions. Our results suggest that full market liberalization will bring huge economic gains to the Turkish consumers.

KEYWORDS:

• Capacity constraints
• import liberalization
• Turkish natural gas market

Acknowledgment

We would like to thank two anonymous referees and the editor of this journal for their insightful suggestions. The usual disclaimer applies.

Notes

¹ In fact, gas used in power plants accounts 48.12% of domestic gas consumption in 2014. See, EMRA (2015, p. 45).

² See Erdoğu (2011) for a thorough discussion on the reforms in and regulation of natural gas market in Turkey.

³ Computed from financial statements of BOTAŞ for the year 2014.

⁴ In order to save space, we only report solution of the model under certain assumptions. Derivations and details of the solution are available upon request.

⁵ Average import price of natural gas was around USD 444.35/ mcm, whereas the average domestic sale price was around USD 429.59/mcm. Calculated from financial statements of BOTAŞ for the financial year ending on 31 December 2014. Average exchange rate of USD per Turkish Lira for the year 2014 is taken from the Central Bank of Republic of Turkey.

⁶ Hasanov (forthcoming) also uses these values of price elasticity.

⁷ The results obtained using cost estimates provided in Lochner and Bothe (2009) are available upon request.