The Rationale Behind Turkey's High Gasoline Prices

Abstract

As oil prices increase, companies experience rising costs and falling profits, leaving governments to deal with the increasing interest rate, inflation and unemployment. However, on the consumer side, the key concern of increasing oil prices is their direct impact on the gasoline pump prices. Consequently, oil price rises have always been an important part of the public debate, especially in countries experiencing high prices for gasoline, such as Turkey. After decades of high prices, Turkey has the most expensive gasoline in the world, at 2.64 $/litre as of Quarter 2 of 2013. The aim of this paper is to reveal which factors are most important in determining gasoline pump prices in Turkey. In addition, a comparison of the periods with different pricing regimes is presented in order to demonstrate the actual effects of policy changes imposed by the government. The results show that, rather than the market variables, retail pump prices are primarily determined by variables that are more of a macroeconomic nature. This conclusion suggests that these market variables are utilized by companies in the market as tools for regulating prices that can be perceived an informal automatic price regulation mechanism.