Energy prices threaten to aggravate Turkey’s economic woes

Turks woke up to a huge hike in natural gas prices Nov. 1, the latest in a series of energy price increases that threaten to further stoke inflation and popular frustration with Ankara’s economic management. 

The price of natural gas used by power plants was raised by 46.8% and the price of gas used by industrial enterprises by 48.4%. Consumer prices remained unchanged, but consumers can hardly escape the inflationary impact the hikes will have across an economy that is already grappling with a nearly 20% inflation and a nosediving currency.

The gas price hikes follow a series of price increases on fuel. The price of gasoline was raised four times in October alone, leading to protests by taxi drivers and long queues at filling stations before the hikes took effect at midnight.

Turkey’s heavy reliance on foreign energy sources — it imports more than 93% of its oil needs and 98% of its gas — lies at the core of the problem. Unlike other countries, however, Turkey’s price hikes have been driven not only by the uptick in global energy prices but also the dramatic depreciation of the Turkish lira. The currency lost nearly 7% of its value against the dollar in October alone, according to Central Bank data. 

On the global oil and gas market, the supply has failed to meet the increase in energy demand amid energy transitions and economic recovery from the COVID-19 pandemic. The bottleneck on the natural gas market has prompted a switch to oil. In an October report, the International Energy Agency estimates an increase of 500,000 barrels per day in the global demand for oil. Yet, OPEC+ members agreed to increase production by only 400,000 barrels per day at their meeting in early October. Responding to pressure on oil producers to accelerate output increases, Saudi Arabia’s energy minister told Bloomberg Oct. 23 that the pandemic was not over yet and could still hit demand, thus oil producers should be careful in raising output. The minister argued that more barrels from OPEC+ would do little to curb costs of gas in Europe and Asia or gasoline in the United States, signaling that OPEC+ would stick to its existing strategy in November.

Oil prices climbed to multi-year highs Oct. 24, with Brent crude futures hitting $86.7 a barrel and West Texas Intermediate crude futures reaching $85.4 a barrel. Both benchmarks have increased by around 20% since the start of September. According to US investment bank Goldman Sachs, Brent crude prices could exceed $90 per barrel by the end of the year.

Turkey’s energy imports cost $41 billion in 2019, accounting for almost 20% of its $210 billion total imports, foreign trade statistics show. The bill of gas importation stood at $12 billion. In the first nine months of 2021, energy imports reached $21.5 billion, including $6.3 billion worth of gas, as overall imports totaled $193 billion.

According to the Turkish Gas Distributors Union, households accounted for 32.3% of the gas utilized last year, followed by gas-powered power plants with 28.6% and the industry with 26.7%. Energy Ministry data from September show that 25.6% of Turkey’s installed power capacity relies on natural gas to produce electricity. In other words, natural gas is vital not only for heating but also for industrial production and power generation.

A harsh winter would push up residential gas and electricity needs and thus gas consumption. Turkey has been trying to secure adequate gas supplies, with its gas consumption estimated to reach 60 billion cubic meters this year. According to official figures, Turkey’s gas consumption stood at 48.2 billion cubic meters in 2020, meaning that the country needs additional supplies of about $12 billion cubic meters.

The bulk of Turkey’s gas imports comes via pipelines from Russia, Azerbaijan and Iran, in addition to smaller purchases of liquefied natural gas from other suppliers. Russia’s gas giant Gazprom said in late October that its supplies to Turkey would total up to 25 billion cubic meters by the end of the year. The price is estimated to average $270 per 1,000 cubic meters. Meanwhile, Turkey’s contract with Gazprom for supplies through the so-called Western Line conduit via Bulgaria expires at the end of this year. The two sides have launched talks to extend the deal but have yet to make a statement on the issue. Given the global gas crisis, Gazprom is widely expected to push for a price increase.

As for Azerbaijan, its gas flows to Turkey through two pipelines — one that connects Baku and the eastern Turkish province of Erzurum via Georgia’s capital Tbilisi and another called the Trans-Anatolian Natural Gas Pipeline (TANAP) that runs to Europe via Turkey. Under a deal renewed for 20 years in September, Azerbaijan will pump at least 6 billion cubic meters of gas to Turkey per year through the Baku-Tbilisi-Erzurum pipeline. Turkey’s energy minister announced in mid-October a deal for an additional 11 billion cubic meters through the same conduit over the next three years. It means that Turkey could rely on at least 9 billion cubic meters of gas from that pipeline next year, in addition to 6.6 billion cubic meters from the TANAP. 

Turkey’s gas imports from Iran, Algeria and Nigeria totaled 12.3 billion cubic meters last year, and that amount is not expected to change.

Yet Gazprom’s 25 billion cubic meters, the extra amount agreed with Azerbaijan and the supplies under other long-term contracts would total some 50 billion cubic meters at most. Turkey is likely to turn to Gazprom to request an additional amount, and the company’s price policy would be harder to predict. An extension of the Blue Line contract on a reasonable price could allow Turkey to meet its additional needs from that conduit. 

In light of all those parameters, the worst-case scenario for Turkey would be to turn to the spot market again to bridge the gaps. To alleviate its energy bill, Turkey has sought to reduce purchases from the spot market, where prices are volatile and have increased four times this year. Yet given the limits to pipeline supplies, spot purchases are hard to avoid altogether, even if their amounts are reduced. 

In sum, the global energy woes coupled with the meltdown of the Turkish lira pose a major financial predicament to Turkey. The soaring energy prices bode not only higher inflation and further economic trouble for the country but also harder negotiations with energy suppliers.