Greenspan Says Oil Unlikely to Trigger Inflation (Update3) Listen Oct. 15 (Bloomberg) -- Oil prices aren't high enough to trigger inflation and slow growth like the U.S. experienced in prior oil shocks, Federal Reserve Chairman Alan Greenspan said.
``The impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s,'' Greenspan said in the text of remarks to the National Italian American Foundation in Washington. ``The risk of more serious negative consequences would intensify if oil prices were to move materially higher.''
Futures trading through 2010 shows that ``part of the recent rise in spot prices is expected to wash out over the longer run,'' Greenspan said. Crude oil prices reached a record $54.88 a barrel in New York yesterday after rising about 70 percent in 12 months. Greenspan said he was confident technology will help reduce energy dependence in coming years.
Demand for fixed-income assets weakened as investors viewed Greenspan's comments as a sign the Fed will continue on a path of what it calls ``measured'' increases in its benchmark interest rate. The Fed raised interest rates three times this year, to 1.75 percent from 1 percent in June.
``The chairman has consistently told us that the rise in oil is a depressing force on the economy,'' said Mark Spindel, who manages $13 billion in debt securities as chief investment officer at International Finance Corp., an arm of the World Bank in Washington. ``He mentioned inflation once in 13 pages. He's been very sanguine.''
Market Reaction
The benchmark U.S. 10-year Treasury note fell, 11/16 point, pushing its yield up 4 basis points to 4.07 percent at 1:44 p.m. in New York. Crude oil futures fell 11 cents to $54.65 a barrel on the New York Mercantile Exchange, after hitting a record $54.88 yesterday. Prices rose every week since Sept. 13 when Hurricane Ivan crossed the Gulf of Mexico.
``The Federal Reserve seems to be looking at oil prices as a greater threat to growth than inflation at this point,'' said Lynn Reaser, chief economist at Banc of America Capital Markets.
Federal Reserve Governor Edward Gramlich was the last Fed official who gave a formal speech on oil. On Sept. 16, he said the Fed may need to raise rates to limit inflation effects from oil, even at the cost of a temporary rise in unemployment. Higher inflation is the ``worst possible outcome,'' Gramlich said.
Prior Oil Shocks
Greenspan said oil prices at their current level aren't hitting the economy as hard as in previous oil shocks. The 78-year- old central banker was chairman of the President's Council of Economic Advisers from 1974 through 1977.
Prices surged in 1974, after an oil embargo that followed the Arab-Israeli war. The average cost of oil used by U.S. refiners was $35.24 a barrel in 1981, according to the Energy Department, or $73.39 in today's dollars.
``We're getting to the point where you can no longer say we're nowhere near those peaks,'' said Nigel Gault, research director at Global Insight Inc., an economic forecasting firm in Lexington, Massachusetts. ``If we keep going, then this is getting serious.''
U.S. gross domestic product shrank 0.5 percent in 1974 and 0.2 percent in 1975 while the consumer price index rose 12 percent and 6.9 percent, respectively. The economy grew at a 3.3 percent annual rate in the second quarter of this year and may have expanded at a 4 percent rate last quarter, according to a Bloomberg News survey of economists.
The Fed's preferred inflation indicator, the personal consumption expenditures price index, minus food and energy, rose 1.4 percent for the 12 months ending in August, matching the average annual rate of change the annual rate of change for the past six months.
Supply Constraints
Oil prices are moving up on long-term security concerns and on what are likely to be short-term constraints in refining and drilling, Greenspan said.
``Growing uncertainties about the long-term security of world oil production, especially in the Middle East, have been pressing oil prices sharply higher,'' the chairman said. ``Strained capacity has limited the ability of oil producers to quickly satisfy this markedly increased demand for inventory.''
While gasoline prices had fallen over the past few months, Greenspan said he expects gas and heating oil prices will now ``mirror changes in costs of light crude oil.''
Futures prices are also moving up as speculators bet that refineries will not be able to meet existing demand, or that supplies could be disrupted by political tensions, Greenspan said. The prospect is ``worrisome,'' he said.
Speculators
Even so, the price of oil for deliver in December 2010 did not rise as much as oil for November delivery this year, which Greenspan said suggests ``part of the recent rise in spot prices is expected to wash out over the longer run.''
Continued high oil prices will encourage producers to find new ways to obtain oil, just as the shortages of the 1970s encouraged improvements in drilling and exploration, he said.
``While there are concerns of seeming inadequate levels of investment to meet expected rising world demand for oil over coming decades, technology, given a more supportive environment, is likely to ensure needed supplies, at least for a very long while,'' he said.
The International Monetary Fund last month said world economic growth will be hurt by oil prices, slowing to a lower- than-expected 4.3 percent next year after an expected 5 percent this year that was the highest rate in almost three decades.
Global Growth
European Central Bank President Jean-Claude Trichet said today the surge in oil costs increased risks to economic growth in the 12 countries sharing the euro, in an interview in Berlin.
``It is true that uncertainties are augmenting with the increase in the price of oil and the uncertainty on the future rice of oil,'' said Trichet, 61. Growth in the euro region averaged an annual 2.1 percent over past four quarters and ``will continue at that pace,'' he said.
The ECB last week kept its main lending rate at a six decade low of 2 percent. ``Risks, in fact, have increased with the uncertainty that is governing oil prices,'' Trichet said.
