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Greenspan expects high price to lead to more fuel supplies

WASHINGTON, April 5 - Alan Greenspan, chairman of the Federal Reserve, said on Tuesday that oil and natural gas markets were under the heaviest strain in a generation and suggested that prices might remain high for some time.

But Mr. Greenspan was optimistic about the long-run outlook for energy supplies, and he warned against efforts to "distort" or "stifle" prices set in global markets.

Mr. Greenspan was silent about the potential impact of higher oil prices on inflation or economic growth, or on the central bank's monetary policy.

"Markets for oil and natural gas have been subject to a degree of strain over the past year not experienced for a generation," he said in a speech beamed by satellite to petrochemical executives in Texas.

Noting that investment in new production capacity has lagged the growth in demand for oil, particularly from China, Mr. Greenspan said much of the "slack" in world energy markets had disappeared.

"For years, long-term prospects for oil and gas prices appeared benign," Mr. Greenspan said. "The recent shift in expectations, however, has been substantial enough and persistent enough to bias business investment decisions in favor of energy cost reduction."

Though Mr. Greenspan conceded that higher oil prices had caused only a "modest" reduction in demand so far, he predicted that higher prices over the long run would lead to higher investment in extraction technologies, exploration and unconventional sources of energy like methane gas frozen in Arctic ice.

Investors had little reaction to the Fed chairman's remarks, which some analysts interpreted as fairly sanguine.

Prices of crude oil hit a record of $58.28 a barrel on Monday, but receded to $56.04 on Tuesday.

Higher oil prices tend to slow domestic economic growth, because they pinch consumer spending on goods and services produced in the United States. But they also push up inflation.

Mr. Greenspan and other top Fed officials have argued in recent years that higher prices have relatively little effect on the underlying inflation rate and that they pose less threat to growth than in the 1970's and 1980's because energy has become a smaller part of the total economy.

But Fed officials have stepped up their warnings about inflation in the last month. The central bank warned after its last policy meeting, on March 22, that inflation pressures had increased, even though inflation expectations were still "well contained."

The central bank also said it saw little evidence that higher energy prices had led to higher prices in the rest of the economy, but it noted that companies had more "pricing power" than before.

Mr. Greenspan studiously avoided any comment about the macroeconomic implications of current energy prices.

Instead, he focused on the issues that appear to be driving prices at the moment.

He noted that demand for oil had climbed sharply but speculated that prices had also been driven higher by concerns about the shortfalls of investment in both crude oil production and refineries.

Natural gas prices have been kept high in the United States, he said, largely because of the limited infrastructure for importing natural gas from overseas. Gas prices, he said, have been "notably higher" in the United States than in other parts of the world.

In the long run, he said, higher energy prices should lead to higher production of oil and natural gas as well as new sources of energy.

"We must remember that the same price signals that are so critical for balancing energy supply and demand in the short run also signal profit opportunities for long-term supply expansion," he said.

Editorial Notes: Transcript of Greenspan's speech (thanks to khebab on PeakOil.com) Reader SB reports:
I checked the April 5th on-line edition of the Washington Post and it reported the following significant information which was missing from the NY Times article: "Greenspan on Tuesday stressed that `altering the magnitude and manner of U.S. energy consumption will significantly affect the path of the U.S. economy over the long term.' "He said it was critically important that America's 200 million automobiles on the highways -- which he noted consume 11 percent of total world oil production -- become more fuel efficient. " This is the first time I have read of Greenspan advocating conservation as a way to alleviate the shortage of oil.
-BA

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