Dependence is not usually a source of contentment, especially in the case of nations. Turkey, with one of the most oil-dependent economies on the face of the earth, has bitter experience of how surging energy prices, for one reason or another, can depress economic growth and even lead to a balance-of-payments crisis. In the aftermath of the first oil shock in the 1970s, the Turkish economy was in such a state of destitution, even lacking, in the words of a former president, ‘70 cents’.
Well, the country has come a long way since then and lately put in an impressive performance in terms of macroeconomic normalisation. And we believe that as long as prudent policies and structural reforms remain on track, Turkey will not, once again, live through such an economically devastating and socially exhausting period.
That said, relying on imported fossil fuel as the main source of energy is not a wise strategy, particularly considering the country’s geography. Such a dependency makes Turkey defenceless not only against fluctuations in global energy prices but also against geo-political supply risks.
The global energy market may not enter a ‘super-spike’ period, but short-term pains arising from higher oil and natural gas prices still have detrimental effects on energy-importing countries. Morgan Stanley’s own estimates suggest that the price of crude oil (Brent) will increase, on average, from $38.2 per barrel in 2004 to $58.6 per barrel this year and then to $63.7 in 2006.
Although the main drivers of today’s oil shock are fundamentally different from those in the 1970s, our economics team expects the normalisation of supply and demand on the back of over a 200% real increase in oil quotes and eventually a price correction towards an annual average of $46.5 per barrel in 2007.
However, even without a ‘super-spike’, the projected trajectory of energy prices is elevated enough to keep the global economy under considerable stress and put pressure on Turkish exporters — one of the leading contributors to sustained output growth in the last four years.
Turkey’s real GDP growth has been — and, on our estimates, will remain — well above the OECD average. This outperformance is great news, but the engines of growth struggle, from time to time, with costly bottlenecks stemming from a high degree of energy intensity and dependence on foreign oil and natural gas. As indicated by our calculations, the amount of fossil fuel consumption per unit of output in the Turkish economy increased by a staggering 32.9% since 1990.
And the outlook is not getting better. According to OECD projections, Turkey’s oil demand (even excluding faster growing natural gas component) will rise from 24 million tonnes to 49 million tonnes in 2010 and to 69 million tonnes by 2020. Since domestic oil production accounts for just about a mere 5% of total consumption, the country’s dependence on imported fossil fuel will continue to get worse and make it increasingly vulnerable to market oscillations and political event risks.
Charting the direction of oil prices is not a simple task. For example, the extrapolation of today’s demand and supply factors may suggest a catastrophic spike in prices. Alternatively, as some commentators argue, oil demand may decline and supply may go higher, leading to a collapse in energy quotes. Long-term forecasts may not be reliable, but we know for sure that oil is not a renewable energy resource. Indeed, whether the price of crude oil moves back to its ‘natural’ range of $20-25 per barrel would not alter, in our view, the obvious reality of Turkey’s high degree of energy intensity and dependency on imported fossil fuel as the main sources of energy. This is why we try to make a case for developing a new energy strategy designed to improve conservation and efficiency in domestic consumption and to reduce the country’s dependence on foreign oil.
Turkey is becoming a distribution centre for oil and natural gas flowing from Central Asia, Russia and producers in the Middle East. Functioning as an important ‘bridge’ between the energy-exporting East and the energy-dependent West will no doubt add considerable clout to Turkey’s role in Europe and to its stance in the global arena. It will also ensure, to a certain degree, the security of energy supplies for the Turkish economy.
However, a single-focus approach is definitely not optimal in the post-Cold War era and, despite the improving diplomatic relations in the region, exposes Turkey to geo-political risks. In our view, importing 94.5% of its oil from six neighbouring countries that are also Turkey’s direct competitors on regional and global stages is a source of potential conflict of interests. Of course, complete energy independence is not a practical policy option for Turkey in the foreseeable future. Nevertheless, the authorities are responsible for achieving energy security as well as economic efficiency and environmental protection.
Turkey’s alternative energy resources are not enough to meet the growing demand. As a share of total energy consumption, oil and natural gas account for 60.8%, while coal-powered and hydraulic generators produce 27.0% and 12.2%, respectively. Although Turkey has abundant reserves of alternative energy resources, neither renewables (such as wind, solar and geothermal) nor more hydraulic and thermal plants would be enough to meet the increasing demand. Moreover, reaching a meaningful threshold with alternative energy resources is not economically feasible, at least not in today’s conditions.
However, that does not mean that Turkey cannot entertain other possibilities. Biofuel, for example, has become a cost-effective alternative to fossil fuel. Indeed, one important reason why Brazil has a current account surplus when other oil-importing countries suffer from a worsening in their external accounts is that it has achieved reasonable energy independence by investing in biofuel. After the first oil shock, Brazil developed a sugar-based ethanol industry that, halving oil imports in the last 30 years, now insulates it from energy shocks. European countries and China, building the world’s largest biofuel plant, are following Brazil’s pioneering footsteps. Still, Turkey has one more option — nuclear energy.
In our view, Turkey should aim to build a network of nuclear power stations. Nuclear energy is one of the most promising solutions for clean power and reduced foreign dependence. Despite the high cost of capital, waste disposal and decommissioning, innovation and lately the secular rise in fossil-fuel prices change the economics of nuclear power, which already generates as much as 78% of electricity production in France, 57% in Slovakia, 50% in Sweden, and 40% in South Korea. Indeed, if we consider the health and environmental costs of fossil fuels, nuclear power stations, producing no greenhouse gas emission, offer exceptional value.
Turkey needs diversified energy options, including nuclear power, to reduce its vulnerability to ‘shocks’ arising from price fluctuations and geo-political supply disruptions. In the shorter term, of course, policymakers need to develop measures encouraging better efficiency and conservation in energy consumption and to deal with a 30% ‘loss’ ratio in electricity distribution that costs as much as building a new nuclear power plant every year.
By Serhan Cevik, Morgan Stanley economist, as published on the Global Economic Foru