Energy Resources and Economies

Energy resources should not be a goal in economic growth but a tool.

Recent developments in the Eastern Mediterranean and the Black Sea regions once again showed how important energy and natural resources were for the interests of countries. Energy resources have strategic importance for countries and affect many areas from international relationships to national security, from foreign trade balances to social policies.

In countries that lack the energy resources, the share allocated to resources such as oil, natural gas and coal is quite high, and they take up a significantly large place in the import bills of countries. Especially for underdeveloped and developing countries whose economies rely heavily on production, energy resources are important inputs. These countries need to increase their production volumes to achieve economic growth. And this causes them to enter a vicious circle by increasing their need for energy. Great amounts of foreign currency allocated for energy import, directly and indirectly, lead to many economic outcomes such as the depreciation of local currencies, an increase in the current deficit, and disruption in trade balances. Fragile economic structures dependent on energy import in developing countries adversely affect many social issues such as unemployment, education, social aids in cash and kind, crime rates, and the healthcare sector.

And have countries with rich energy resources always shown high economic growth performance throughout history? This is a subject that has been occupying the minds of researchers for a long time. The general opinion is that economies cannot show a strong economic performance only with their rich underground resources. As a matter of fact, discovering new energy resources can even adversely affect their economies. The discovery of natural gas reserves in Groningen, the Netherlands in 1959 is an example of that. Entrepreneurs in the country made investments in the energy markets instead of the real sector, and natural gas extraction activities accelerated. The country started exporting the natural gas, and the local currency (the Dutch guilder) gained great value. This excessive appreciation of the currency decreased the competitive power of local companies in international markets, and the manufacturing industry shrunk. This effect of underground resources on the economy entered into the literature as the “Dutch Disease.”

If we consider the proven oil and natural gas reserves in the world, we can make a better inference on the relationship between the underground treasures of countries and their economic development levels. The top five countries in the world with the largest proven oil reserves are Venezuela, Saudi Arabia, Canada, Iran, and Iraq. Venezuela, Iran, and Iraq in particular are going through difficult times economically. For proven natural gas reserves, on the other hand, Russia, Iran, Qatar, and Turkmenistan stand out. And we can say that these countries do not have strong economic structures either even with their rich natural gas reserves.

So, can we say that natural resource wealth will always have a negative or a limited impact on the economic performances of countries? Of course not. Countries with rich energy resources should effectively use their energy resources to build a strong economic structure, increase their energy efficiency and use their energy income as an important instrument in their transition from the industrial (or pre-industrial) sector to the service sector. And if they support this economic growth with factors such as human rights, democracy, the superiority of law, and quality institutions, they can achieve sustainable economic performance.

Countries without rich underground resources turn towards renewable energy resources instead of fossil fuels to meet their energy needs. Many countries provide much of their power generation with renewable energy resources such as solar, wind, geothermal, hydraulic, and biomass energy.

To sum it up, we can say that energy has an undeniable impact on the economic performances of countries. However, it would be difficult to sustain an economy depending only on underground resources. When energy resources are used as a tool rather than a goal in economic growth, energy will have a more positive outcome on the economic performance of countries.

Prof. Dr. Erdal Tanas Karagöl, Lecturer at Ankara Yıldırım Beyazıt University and Yeni Şafak Columnist