High oil prices - so what?
Turkey's skating on the shifting sands of oil
It could have been so different. The doubling, almost trebling, of oil prices could have revived inflation in Turkey and recession in the world. The country's trade deficit could have soared as exports fell and import bills rose. And the economic clock in Turkey could have turned back four year.
1 Average petroleum spot price of West Texas Intermediate, U.K. Brent, and Dubai Fateh crude.
2 Five-day weighted average of NYMEX Light Sweet Crude, IPE Dated Brent, and implied Dubai Fateh.
So far none of this has happened. On the contrary, the annual rate of increase in consumer prices was 8% in year to September 2005. Indeed, the year when inflation began to recede in Turkey - 2002 - was the year when oil prices rose 50%. In 2003, oil prices and inflation rates remained steady. In 2004, when oil prices again rose by 50%, inflation tumbled in Turkey, from 18.4% at end-2003 to 9.3% at end-2004. And a further jump in oil prices this year has been accompanied by a further fall in inflation.
All the indications are that high oil prices are here to stay. The World Economic Outlook published by the International Monetary Fund in September 2005 writes: "Despite the recent OPEC quota increase, markets remain concerned that the current very low spare production capacity will be insufficient to meet demand growth next winter, while short-term supply uncertainties have persisted, most recently as the result of the extensive damage to oil production and refining facilities in the Gulf Coast of the United States caused by Hurricane Katrina."
The chart below shows how in inflation-adjusted terms oil prices are now almost as high as during the second petrol shock of 1979 - and how remote the "high oil price" scenarios of 2002 are from those (in red) now used by international economists and oil companies.
In a move reminiscent of when former President Carter donned a sweater, sat by a fire and asked Americans to save energy by turning down thermostats during the natural gas shortages of the late 1970s, US President Bush has asked all Americans to be "better conservers of energy" by skipping non-essential driving. By contrast, in 2002, when asked whether people should change lifestyles to alleviate an energy crisis, former Bush spokesman Ari Fleischer said, "That's a big no," adding, "The president believes that it's an American way of life, and it should be the goal of policy-makers to protect the American way of life."
Australian Treasurer Peter Costello has described the situation graphically: "I think the oil price is the biggest threat to the economy at the moment for two reasons - one is that high petrol prices mean that people have reduced consumption elsewhere in the economy and the second is high oil prices could cause growth to turn down in the world and affect us through our trading partners. So you've got basically a double whammy coming at you."
Turkey is particularly vulnerable to this double whammy. Driving its growth in recent years have been buoyant exports. But, as the International Energy Agency wrote in May 2004: "World GDP would be at least half of one percent lower - equivalent to $255 billion - in the year following a $10 oil price increase." And the increase has been three times that. The latest survey of the U.S. services sector showed that it grew at its slowest pace for two and a half years in September, hampered by high oil prices and concern over the aftermath of Hurricane Katrina.
Such changes are critical for Turkey. In 2004, exports rose $15.8 billion to $63 billion, with this increase being one of the major contributors to the 5% growth in GNP last year. Slippage in export demand is perhaps even more threatening to Turkey than the additional cost of oil and natural gas imports. The doubling of oil prices from $30 to $60 per barrel adds around $4.2 billion to Turkey's annual import bill, and the parallel increase of gas prices by about one-third adds a further $1.3 billion. However, this $5.5 billion is equivalent to only 5.6% of Turkey's 2004 imports of $97 billion - and to only one-eighth of Turkey's international reserves of $43.5 billion at end-September. Nor does growth - with GNP rising 9.9% in 2004 and expected to rise nearly 5% this year. Indeed, the unexpected experience of Turkey is that the dramatic jumps in oil prices have been calmly weathered and, if anything, have only underlined the improved management and health of the Turkish economy.