Declining oil prices will make 2007 ‘the year of Turkey’
Posted by meb at January 22nd, 2007
Analysis by İbrahim Öztürk / www.todayszaman.com
Oil prices rose to $75 per barrel in 2006 from $25 coinciding with the rapid growth of the global and Turkish economy. However, recently there has been pressure caused by inflation. Under these circumstances, countries should either halt growth or decrease the prices of goods and input costs that cause inflation.
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The irony here is that the decline of total demand or in other words global recession is the most crucial issue that capitalism keeps away from. Luckily, the most enjoying alternative, temporarily, happened among the others. We started 2007 with a huge decrease in the prices of oil and goods. Oil prices shrunk to $45 price-band. What was it that trigged this decline in price?
In my opinion the decline of oil prices to $45 dollar range, has no serious reasoning but ones which are as ridiculous as the $75 dollar range. The best paradigm that explains the situation is a struggle of global powers. The increase of oil prices made American oil companies richer and brought additional wealth to Russia and Iran,whereas oil dependent China received a serious blow. However, as both Iran and Russia use oil and natural gas as a strategic weapon, they incur the anger of the U.S. who is trying to exert the new world order.
The US- Iran conflict proved to play an important role in the increase of oil prices. Then how can we correlate the drop of prices with the deepening of such conflicts? The oil price decrease put Iran and Russia under pressure while weakening the oil-exporting Arab countries against the U.S. It must be noted that the oil market is vulnerable to being manipulated by the U.S. at this time. Everyone must consider this factor. This is not the only point we would like to bring forth while addressing this topic. We will analyze the effects of the declining oil prices for the Turkish economy in 2007. First we must know the oil economy in Turkey.
A relatively high growth rate of 4-5 percent has occurred in the global economy in recent years. Developing countries are engines of this growth. Asia at large and China in particular are leaders among DCs’. In figure-1, it is we see that oil prices went up rapidly while prices of non-petroleum products and manufactured goods rose rather slowly. They even decrease after 2004. The reason behind the decline of the prices of goods in contrast with oil prices, can be explained with the increasing global competition involving China. This is why global inflationary pressure did not occur despite high growth tendencies. However, in 2005, inflationary pressures began to threaten the economies especially the economy of the US.
The propensity of Turkey to import oil and petroleum products is really high. Crude oil imports of Turkey reach 23 million tons on average annually (Figure 2). Despite the growth rate of 7 percent annually and 36 percent cumulatively for the last four years, oil imports remain constant at around 23 million tons. This shows the illegal oil traffic and the level it has reached.
Oil and oil products did not seem to increase quantitatively but the fee paid increased rapidly every year going over $10 billion in 2005. Starting from 2006, Turkey was faced with pressure to import energy and oil. Energy imports between January- November 2006 increased 38 percent and ran over $26 billion. Energy imports went up to $30 billion including the import of oil products. (Table-1).
Turkey’s foreign trade deficit was approximately $53 billion. More than half of it was spent on energy imports. Dependency to goods and energy importation of Turkey is an area of concern in its net account balance and inflation. Inverse proportion of growth and current account deficit is shown in figure-3. Difference increasingly growing.
The increase in commodity, oil and energy prices played a negative role this growing difference. Despite all this, Turkey reduced its inflation to 10 percent from 70 percent. There were two main reasons behind this success. The first is the significant increase in the efficiency of labor and total factors, the other one is the appreciation of YTL because of huge capital inflow into the Turkish economy.
In 2006, a certain level of structural rigidity occurred in the economy. Inflation began to rise because of increases in the consumption of final goods and oil prices. The risk aversion of global capital also increased and a capital outflow occurred. This effected the situation negatively. Turkey was the most effected country among other developing countries during the process. The reasons behind this was a deviation from the inflation target, high current account deficits and continuation of political tensions.
The current account deficit exceeds eight percent of GDP in 2006 and inflation has been kept at single-digits: 9.66 percent. The result of this was a 22 percent increase in financing costs because of interest rates in public borrowings. We will face the negative effects of the last category in 2007. Because of this reason the economy is expected to worsen and the budget deficit is estimated to be 2.5 percent in 2007 while it was 1.5 percent in 2006.
Consequently, we can say that 2006 witnessed “controlled damage”. 2007, on the other hand, seemed to start with positive signals to achieve the macro-economic targets for net account balance, budget deficit and public borrowings. Economy administrations estimate the cost of oil per barrel as $58 in 2007 and are basing their calculations on this level. Improvements are signaling a more optimistic period. Actually, decreases in oil and commodity prices bring a big chance for Turkish economy as well. The New Turkish Lira will keep its value because of capital inflows and if the oil prices remain under $50 dollars per barrel, the inflation target of 4 percent will most probably be achieved in 2007. A 2.5 percent budget deficit may expected to be less and declines in interest rates may expected as well.
Off course while talking about all these possibilities we have to keep in mind the fragilities in domestic politics and the probable effects of regions with conflict. We will monitor the economy behind the politics in 2007. Welcome to the year of politics, not of economy.
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