PULSE of TURKEY No.16.................. SATURDAY, June 20th, 1998
AUTOMATIC PRICING FOR FUEL – DEREGULATION WITH DIPLOMATIC CONSEQUENCES
Six-month price check to curb inflation is ending with a basic change in oil price system. Will it result in unleashed price increases? What structural measure has been taken to prevent this possibility? Does it involve a major policy change in oil and energy? Can foreign policy remain aloof to it? How effective is it for the economy and foreign policy for that matter?
The Government’s 6-month period for putting the reins on public sector price increases, especially the suspension of monthly increases in oil prices, is coming to an end. Even before the 6-month period ended the Government began to put up the prices of certain commodities and services of the public sector, such as THY’s (Turkish Airlines) fares and postage services to avoid shock increases at the end of the period. The inflation rate for June is critically important in that it will be an indicator for the achievement or failure of the psychological impact expected of this move. By all indications, the inflation figures to be announced on July 3rd will not shock the Government. “Wait for the third quarter to see our achievement in our fight against inflation”, says the Treasury Chief, Yener Dinçmen.
Even more important than the anti-inflationary performance in the first half is the validity of the structural measures taken for the rest of the year and thereafter. Will the restoration, as from the beginning of July, of the monthly increases in oil prices undo the good work in checking inflation in the first half, as some have been claiming?
No more monthly price increases
“There will be no more monthly price increases for oil,” is the economy bureaucrats’ answer to this question.
But how can one refrain from increasing oil prices periodically when the dollar appeciates constantly in its TL parity? These bureaucrats come out with explanations of a series of measures taken during the first half, but they knowingly or unknowingly skip the key issue which is of vital importance, not only for the economy, but also for foreign policy. The key issue is that the TL is replacing the dollar in this trade.
According to these explanations, the Council of Ministers promulgated a decree in the Official Gazette of March 14th to pass onto the “automatic pricing system”, ie a totally free market practice in fuel prices as from May 1st. This rule, however, was postponed for two months a few days before it would have gone into force because certain adjustments had to be made in frontier trade.
When this decision was taken in mid-March world crude oil prices had gone down from $19-20 per barrel to $12-14. As the fuel prices in Turkey had been geared to $17-18 for crude oil, adjusting fuel prices to world prices would not result in rising fuel prices unless crude prices went up above $18.
At the High Planning Council meeting on February 17th when the automatic pricing of fuel was decided upon, the Energy Ministry suggested fixed rates for Fuel Consumption Tax (FCT) instead of the ad valorum system, but Finance Minister Zekeriya Temizel objected, because the FCT revenue would then decline. Stressing the importance of FCT in Turkey’s fiscal system, he pointed out that TL637.5 trillion was obtained from that source in 1997 and TL1,340 trillion was expected this year. It was only after alterations to satisfy the Finance Minister were made that the new system was ready to go into force.
In this system, fuel prices will be adjusted every five days on the basis of two publications – “Platt’s European Marketscan” and “Platt’s LP gaswire”. Retail fuel prices will be readjusted only when a difference of 3% is seen between them and Platt’s figures. Refineries and importers will be free to establish their prices within this limit.
TUPRAŞ pleased with the new step for deregulation
The Turkish Refineries Enterprise, TUPRAŞ, welcomed the new system in that it would facilitate its privatisation. TUPRAS owns four refineries in Batman, İzmit, İzmir and Kırıkkale, and with the Shell-Mobil-BP owned ATAŞ refinery in Mersin, they have a total installed capacity of 32 million tons/year. In practice this production capacity is 29-30 m ton/year and last year 4 million tons of oil products were imported, in addition to the full capacity functioning of these refineries. As from the year 2000 Turkey will have to build a new refinery to meet its fuel consumption that increases by 1.5 million tons a year.
Partially due to this rising consumption, partially to promote its trade with neighbouring countries, Turkey has begun to import oil products, particularly diesel oil from its neighbours.
It started with Iraq shortly before the Gulf war, but was interrupted for a few years due to the UN embargo in the first half of the nineties. As from 1995 trucks began to bring along 2 tons of diesel oil and TIR trailers 4 tons each from Iraq and Syria. In October 1996, the Erbakan Government doubled these quotas to 4 and 8 tons, respectively. The refinery exit price of diesel oil is TL30,000 per ton in Iraq and Syria. By allowing this frontier trade without any tariffs, the Government aimed at enlivening economic life in the southeast. These trucks were selling diesel oil at TL78,000 and would make a profit of 100% after the transport cost and other expenses.
Frontier trade rules for strategic oil industry
While this trade was going on within the unregistered economy system of Turkey and constantly gaining ground as a kind of subsidy to the people of the underdeveloped east and southeast, the Government took a new step in January 1997 to enlarge and legalize it. With a decree published in the Official Gazette, importing diesel oil was brought within the frontier trade system to benefit from free trade area facilities legally. It meant that these diesel oil imports would henceforth be made in big parties of $50,000, instead of individual trucks smuggling it with the Government’s turning a blind eye for certain practical reasons. Furthermore, this trade started with Iraq and Syria was extended to all the 18 frontier gates of Turkey. Massive duty-free diesel oil imports began to pour into Turkey from Iran and Nakhichevan, in addition to the other two southern neighbours.
The consumption area of this diesel oil was also enlarged. It is now sold freely throughout Turkey at a price ranging between TL78,000 and TL114,000 a litre, depending on the distance from the frontier. In addition to this imported diesel oil, indigenous diesel oil is sold at TL115,000 or more because the exit price of diesel oil from Turkish refineries is TL110-115 thousand.
Now 20% of Turkey’s 8 million ton/year diesel oil consumption is imported diesel oil - about 2-2.5 million ton/year. It is claimed that Turkey is losing $1 billion a year from this importation because customs duties (3.5%), Fuel Consumption Tax (80%), Fuel Price Stability Fund (15%) and VAT (15%) are not levied from this frontier trade. The claim of $1 billion loss may be rather exaggerated, but it was sizable enough a sum that set in motion the big foreign oil companies and their spokesmen against this trade
While oil multinationals announced that they would discontinue their investments in Turkey, because they had lost 30% of their diesel oil sales to this “illegal oil”, a small association, the “Petrolcüler Derneği” (Oil Industrialists’ Association) brought it up with Turkey’s top security organisation, the National Security Organisation, with claims that the “smuggled money from this trade is financing the PKK.” The report presented to the NSC by the Chairman of the Association, Kaya Baban, of a small oil distribution company, “Turquoise Petrol”, claimed that $1-1.5 billion tax evasion a year from these diesel oil imports meant $600 million income for the State of Emergency provinces of the east and the southeast, but only a few smugglers and the PKK were benefitting from it. There was no improvement in the lifestyle of large masses of people of this poverty stricken region.
The claim was not totally true because tens of thousands of people were living off this trade in the southeast, but the claim of the PKK’s involvement in this trade had to be examined carefully. The implementation of the new system was, therefore, postponed for two months and a retired general was assigned to the Habur frontier gate security system to keep a watch on the whole affair.
Also, the construction of big fuel storage depots started in Habur to take this expanding trade under control. Two depots of 5000-ton capacity each will go into operation before the new system starts in July and handle the 4000 ton/day diesel oil sales in the region. They were built by the Petrol Office (POAŞ) which is now being privatised, but at PM Mesut Yılmaz’s instructions POAŞ turned these depots over to the TPAO (Turkish Petroleum Corporation). This imported diesel oil trade will be run from two centres, Malatya and Iskenderun by the TPAO, with the assistance of POAŞ.
All these arrangements will put an end to all sorts of subsidies to the fuel industry, terminates the inventory declarations and enables using oil products for electricy generation. In other words, the scope of the new arrangements is much deeper and long-term than a simple arrangement.
As expected, the petroleum multinationals reacted to these modifications. Shell declared that it was going to suspend a $30 million investment to enlarge its oil distribution and sales network. Roy Waight, the general manager of Shell in Turkey, complained of “unfair competition” to the multinationals because of this “smuggled diesel oil”.
Deregulation in oil will also terminate privileges to foreign companies
Yet much more radical arrangements were in the pipeline for foreign oil companies. With this important step for deregulation of oil prices, a privileged system, the “exchange rate guarantee” to oil multinationals will discontinue. This guarantee cost Turkey $630 million between 1974 and 1996 and caused complaints by certain State organs. Sayıştay (the Court of Accounts) which is called the Auditing Council in the British system, has always objected to the exchange rate guarantee to foreign oil companies which received oil prospecting licences in Turkey. This guarantee to eight foreign companies was brought up with Parliament by Sayıştay and amendments to this law were demanded. The Treasury maintained that Sayıstay had not objected to this system until 1996, but brought it up with the Legislature that year. Nevertheless, it agreed with the Auditing Council that such a guarantee was not necessary now because since 1983 Turkey has a free exchange system. The Treasury is now preparing a bill to stop this practice, as the new automatic pricing system will be another important step on the path of deregulation.
The Foreign Trade Department has recently revealed that, thanks to declining oil prices, Turkey paid 6.5% less for imported oil last year even though it was 2.4% more in quantity. As against $3,415.9 million paid for 22,766,600 tons of oil imports in 1996, Turkey paid $3,194.1 million for 23,324,300 tons last year.
With this stroke of luck the Government is now trying to establish a totally liberal system in the oil trade of Turkey, but finds itself up against certain economic giants of the world - the oil multinationals. The steps taken have not yet reached the point of their all-out fight against Turkey, but they are certainly gazing at Ankara’s moves with the utmost attention. It is hoped that the two parties of this budding dispute will be able to work out a golden middle course to satisfy all.
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