Greenspan: Energy prices to drag economy - East Valley Tribune: Nation / World

Greenspan: Energy prices to drag economy

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Posted: Monday, October 17, 2005 6:26 pm | Updated: 9:00 am, Fri Oct 7, 2011.

WASHINGTON - The sharp spike in energy prices that occurred after the Gulf Coast hurricanes will act as a drag on the economy although the impact on growth and inflation will not be as severe as the oil shocks of the 1970s, Federal Reserve Chairman Alan Greenspan said.

Greenspan said that with world oil markets exceptionally tight because of rising global demand, the likelihood of a sizable spike in prices due to the loss of Gulf Coast production was "an accident waiting to happen."

"Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on," he said in a speech to Japanese business executives in Tokyo on Tuesday.

A copy of his remarks were made available in Washington late Monday.

Greenspan said the hurricanes' impact on the economy would have been far more serious had it not been for the strides made by the United States and other countries in becoming more energy efficient. He predicted greater progress in this area in coming years as well as a movement toward alternative sources of energy.

The growing global demand for oil had eliminated the slack in world oil markets that had helped to keep crude oil prices relatively well contained from 1985 through 2000, Greenspan said. Oil markets this year "had been subject to a degree of strain not experienced for a generation," he said.

But since the first oil shock of 1973, the amount of oil consumed per unit of economic output has fallen by one-third worldwide and has been cut in half in the United States, developments that make the U.S. and global economies less susceptible to oil price shocks, Greenspan said.

"The current surge in oil prices, though noticeable, is likely to prove significantly less consequential to economic growth and inflation than the surge in the 1970s," Greenspan said.

He predicted that if high energy prices persist, energy use relative to economic output will decline further as companies strive for more energy efficiency as a way to cut production costs.

"With real energy prices on the rise, more rapid decreases in the intensity of energy use in the years ahead seem virtually inevitable," Greenspan said.

He noted that gasoline demand had declined "markedly" in the United States in recent weeks, "presumably partly as consequence of higher prices."

Price signals sent by free markets would spur research and development into new approaches to the production and use of energy "that we can now only barely envision," Greenspan said.

"If history is any guide, oil will eventually be overtaken by less-costly alternatives well before conventional oil reserves run out," he said. "Indeed, oil displaced coal despite still vast untapped reserves of coal and coal displaced wood without denuding our forest lands."

Greenspan said that innovation was already altering the power source for motor vehicles and he said the transition to the next major sources of energy would likely begin before mid-century, the point when production from conventional oil reservoirs is expected to peak.

But the Fed chairman cautioned that the transition will still take time. "We and the rest of the world doubtless will have to live with the geopolitical and other uncertainties of the oil markets for some time to come," he said.

In his speech, Greenspan made no reference to how the recent runup in energy prices will affect Federal Reserve interest rate policies.

Various Fed officials in recent speeches have expressed growing concerns that the spike in energy prices could increase the pressure on overall inflation. The government said on Friday that consumer prices shot up in September by the biggest amount in a quarter-century, led by a record increase in gasoline prices.

Many analysts believe the Fed, which raised a key interest rate for an 11th time in September, will keep raising rates at its last two meetings of this year in November and December in an effort to keep the jump in energy prices from pushing overall inflation higher.

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