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Greenspan: Energy Prices Will 'Be a Drag From Now On'

Posted on: Tuesday, 18 October 2005, 06:00 CDT

By Sue Kirchhoff

The recent surge in energy prices will be a drag on global growth, Federal Reserve Chairman Alan Greenspan said early today in Tokyo, calling the recent hurricane-induced disruptions "an accident waiting to happen" given tight oil markets.

In the prepared text of a speech to the Japan Business Federation, Greenspan said the balance of world energy supply and demand has become so fragile that weather, sabotage or local conflicts could have a significant impact on economic growth.

The blow from higher prices will be "significantly less consequential" to growth and inflation than it was during the oil spike of the 1970s, due to the fact that oil is less important as an economic component for many nations today, Greenspan said. But it will be felt.

"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," Greenspan said.

That appears more downbeat than the Fed's Sept. 20 statement, after raising interest rates to 3.75%, that Katrina did not pose a more persistent economic threat.

Greenspan said that even hurricanes as large as Katrina and Rita, had they occurred in past decades when there was ample oil capacity, would have had "hardly noticeable effects" if producers placed extra supplies on the market or idle refinery capacity were activated.

Oil and natural gas prices spiked in September after Hurricanes Katrina and Rita knocked out oil drilling and refining in the Gulf of Mexico. Gasoline prices soared to more than $3 a gallon.

While oil prices had been declining in recent weeks, crude oil futures jumped more than $1 a barrel Monday as traders worried that a tropical storm in the Caribbean could develop into a hurricane. Light, sweet crude for November delivery rose $1.73 to $64.36 a barrel in New York trading.

Markets clearly expect the tight supply situation to continue, given the fact that long-term energy futures prices are elevated. While Greenspan predicted that market forces would eventually spur more conservation or new sources of supply, he added that the transition would be far from immediate.

"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," Greenspan said.

Greenspan said crude oil production has been rising faster than refining capacity, a development that may already be limiting growth in oil use. He said higher energy prices should prompt more rapid cuts in energy use, noting that U.S. gasoline use has been falling.

(c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.

Source: USA TODAY

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