VZCZCXRO4233
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHAK #6380/01 3130834
ZNR UUUUU ZZH
R 090834Z NOV 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 9882
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/DEPARTMENT OF ENERGY WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNCIS/CIS COLLECTIVE
RUEHGB/AMEMBASSY BAGHDAD 0799
RUEHDA/AMCONSUL ADANA 1322
RUEHIT/AMCONSUL ISTANBUL 1606
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 ANKARA 006380 
 
SIPDIS 
 
USDOE FOR CHARLES WASHINGTON 
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK 
EXIM FOR PAMELA ROSS AND MARGARET KOSTIC 
OPIC FOR R CORR AND C CHIS 
TREASURY FOR INTERNATIONAL AFFAIRS - JROSE 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ENRG EPET TU
SUBJECT: Turkey's Energy Bill Adds to Current Account Deficit 
 
 
ANKARA 00006380  001.2 OF 002 
 
 
¶1.  (SBU)  Summary:  Turkey imports well over 90% of the crude oil 
and natural gas it consumes, and imported natural gas -- from Russia 
and Iran -- accounts for 45% of electricity production.  In addition 
to the concern this raises about supply security, high energy prices 
are a main factor adding to Turkey's sizeable and problematic 
current account deficit and sustaining inflationary pressures.  The 
recent fall-back in oil prices brought welcome relief, but Turkey 
remains very exposed to exogenous factors, and is taking a number of 
steps to reduce reliance on high-cost imported energy.  These 
include adding nuclear and renewable energy to diversify its energy 
mix, switching to lower cost suppliers, and increasing energy 
efficiency.  End Summary. 
 
--------------------------------------------- 
High Energy Prices Drive Current Account Woes 
--------------------------------------------- 
 
¶2.  (SBU)  Dramatic price increases over the last two years have 
fueled an increase in Turkey's net imports of energy and gold from 
5.5% of GDP in 2003 to 7.4% in 2006.  According to a recent Morgan 
Stanley report, net fuel imports alone are estimated at 5.7% of GDP 
this year.  Primarily due to increases in energy costs, Turkey's 
current account deficit ballooned from 4.4% of GDP in 2003 to over 
7.5% in 2006.  If energy costs had remained unchanged, the country's 
current account deficit would have narrowed -- not widened -- from 
the price-adjusted peak of 5.8% of GDP in 2004 to 4.2% in 2005 and 
3.4% this year. 
 
¶3.  (SBU)  Turkey's exposure as a significant net importer of energy 
and as a passive price taker reduces its control over its economy. 
The recent drop back in prices from the $79 peak to below $60 will 
clearly be fortuitous for Turkey's current account deficit, but the 
impact depends on how long prices stay at today's levels or lower. 
Moreover, if oil prices fall because of slowdown in global GDP 
growth, the impact on Turkey's exports could more than offset the 
windfall from lower energy prices. 
 
----------------------------------- 
...and is a Key Factor in Inflation 
----------------------------------- 
 
¶4.  (SBU)  The surge in energy prices is also a key factor in 
Turkey's other big macroeconomic headache -- stubbornly high 
inflation.  Analysts estimate that every $10 per barrel change in 
world oil prices cause a one percentage point increase or decrease 
in Turkey's consumer price index, albeit with about a two-month lag. 
 This means that high oil prices before the early August peak 
exacerbated the jump in inflation brought on by the May-June fall in 
the exchange rate.  Now that prices have fallen by about $20 per 
barrel, the fall should help the Central Bank resume the 
disinflationary trend that prevailed from 2002 through the first 
quarter of 2006. 
 
--------------------------------------------- ------- 
Reducing Import Addiction - Changes in Energy Policy 
--------------------------------------------- ------- 
 
¶5.  (SBU)  According to the IEA's 2005 review of Turkey's energy 
policies, Turkey's use of energy per unit GDP (energy intensity) is 
low compared to OECD countries, but like developing countries in 
general, energy intensity continues to rise.  This indicates that 
Turkey is using the energy it imports less efficiently than do other 
countries.  Recent statistics indicate that energy intensity may be 
turning the corner and starting to decline, but this differs from 
the most current IEA projections that forecast continued increase in 
intensity through 2010. 
 
¶6.  (SBU)  Turkey has made significant policy changes on both the 
supply and demand sides to improve the efficiency of energy use. 
The Minister of Energy announced the Government's intent to maximize 
use of indigenous energy for electricity production, targeting 
increased use of domestic coal (lignite) and hydropower.  Unlike its 
neighbors, Turkey has limited hydrocarbon reserves and production. 
The GOT held out high hopes for BP/Chevron exploration in Turkey's 
eastern deep water Black Sea, but the results of drilling are 
uncertain.  U.S. firm Toreador will soon start production of natural 
gas in a shallow off-shore area east of Istanbul.  Turkey is in the 
process of passing a new Petroleum Law that would increase 
 
ANKARA 00006380  002.2 OF 002 
 
 
incentives for foreign investment in oil and gas exploration and 
production in Turkey. 
 
¶7.  (SBU)  The Turkish government has announced its decision to add 
nuclear power to its energy mix, but this is a long-term prospect at 
best given the large amounts of private investment that are 
required.  Turkey has passed both new Renewable Energy and Energy 
Efficiency Laws, but incentives are still ambiguous or uncertain in 
time frame and application.  Turkey recently opened its first 
commercial electricity wind farm near Bandirma in Western Turkey, 
but wind and other renewables remain a small part of its energy mix. 
 Many of the changes in legislation and policy aim to move Turkey's 
approach more in line with that of the EU, which has identified 
specific targets for electricity generated from renewable energy. 
 
¶8.  (SBU) In addition to policies aimed to improve both demand and 
supply side aspects of its energy balance, Turkey aims to improve 
its energy security by augmenting supply source diversification. 
Turkey is highly dependent on Russia (67% for natural gas) and Iran 
(16% for natural gas), but these are high priced gas suppliers with 
reliability risk.  Turkey's ample trade deficit with Russia (over 
$10 billion in 2005) is driven by purchases of $4.6 billion for oil 
and $3.6 billion for natural gas.  Therefore, in order to seek lower 
cost supplies, Turkey is committed to gaining natural gas from 
Azerbaijan, Iraq, and Turkmenistan.  Turkey is strongly interested 
in developing these sources for its own consumption, as well as 
transit to Europe. 
 
------- 
Comment 
------- 
 
¶9.  (SBU) While the recent down-turn in oil prices is welcome 
(Economy Minister Ali Babacan announced that Turkey's projected 
energy imports for this year - $28-29 billion -- are now projected 
to fall back to $13.5 billion.), it underscores that Turkey as 
significant net energy importer will retain a significant 
vulnerability to exogenous factors until it can improve its energy 
balance through both supply and demand policies. 
 
Wilson