October 18, 2005
Oil hurts, but not like 70s: Greenspan
TOKYO (Reuters) - Skyrocketing energy prices will weigh on
global growth but will likely exact a much smaller toll than
surging oil prices did in the 1970s, U.S. Federal Reserve
Chairman Alan Greenspan said on Tuesday.
Despite an inevitable near-term impact on growth, oil
prices remain below their inflation-adjusted peak of 1981 and
the world's economy has grown more energy-efficient in recent
decades, Greenspan said in a speech to Japanese business
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.
"The effect of 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, making his first visit to Tokyo in five years
and probably the last before his term is due to end in January,
did not address the outlook for U.S. monetary policy and did
not take any questions.
Greenspan's remarks, the text of which had been made
available to the media in advance, were accidentally released
ahead of time by a news organization, surprising the market.
U.S. crude oil prices hit a record high of $70.85 a barrel
in the immediate aftermath of Hurricane Katrina, which slammed
into the U.S. Gulf Coast on August 29, shuttering much of the
region's oil-producing and refining capacity. Prices have eased
since, trading at $63.72 a barrel at 0800 GMT on Tuesday.
However, Greenspan noted oil futures for distant months had
moved up close to current spot prices, and he said that
suggested the market did not expect oil production outside of
OPEC countries to be adequate to meet rising world demand.
The Fed chief said OPEC members and other developing
countries appeared to see little benefit from investing in
additional production capacity, citing as evidence the
"significant proportion" of oil revenue invested in financial
He also issued a warning on refining capacity.
"Besides feared shortfalls in crude oil capacity, the
status of world refining capacity has become worrisome as
well," Greenspan said, saying oil production had risen faster
than refining capacity for a decade.
"A continuing of this trend would soon make lack of
refining capacity the binding constraint on growth in oil use,"
But, as he has done in the past, Greenspan said market
prices were providing the signals that could shift economic
behavior in a way that would bring better balance to supply and
"The incentives to alter oil consumption provided by market
prices eventually resolved even the most seemingly
insurmountable difficulties posed by inadequate supply outside
the OPEC cartel," he said.
Greenspan said the ratio of U.S. oil consumption to its
gross domestic product had fallen by half since 1973, although
the pace at which it was dropping had slowed with the
relatively lower oil prices after 1985.
"With real energy prices again on the rise, more-rapid
decreases in the intensity of energy use in the years ahead
seem virtually inevitable," he said.
He said the U.S. trend toward a less oil-intensive
industrial sector and greater energy conservation in recent
decades has "likely intensified of late with the sharp, recent
increases in oil prices," and a drop in U.S. gasoline
consumption in recent weeks was likely due to higher prices.
Japanese Finance Minister Sadakazu Tanigaki, in a meeting
with Greenspan on Tuesday, noted a similar trend in Japan.
"Japan has been making efforts to use its energy more
efficiently, so I expect the impact of high oil prices on the
economy to be limited," Tanigaki was quoted by a finance
ministry official as telling Greenspan.