u.s. luck on oil prices may be running out: greens

U.S. luck on oil prices may be running out: Greenspan


By Greg Robb & William L. Watts, MarketWatch
Last Update: 10:59 AM ET Jun 7, 2006


WASHINGTON (MarketWatch) -- Sharply higher oil prices have yet to seriously erode global economic activity, but recent data indicates the United States "may finally be experiencing some impact," former Federal Reserve chairman Alan Greenspan told the Senate Foreign Relations panel on Wednesday.
The former Fed chief did not elaborate on this impact. Ben Bernanke, Greenspan's replacement at the central bank, said earlier this week that the U.S. economy is slowing down as American pocketbooks are being hit by high gasoline prices.
Greenspan said the U.S. was able to withstand the high oil prices over the past year because of a flexible economy as a result of deregulation.
"The U.S. economy has been able to absorb the huge impact of rising oil prices with little consequence to date because it has become far more flexible over the past three decades, owing to deregulation and globalization," Greenspan said in prepared testimony.
He warned, however, that "growing protectionism" could undermine flexibility and make the U.S. more vulnerable to swings in the oil market.
Greenspan suggested that high oil prices may be here to stay given low investment in new production by oil-producing nations and their state-owned companies.
Unless those policies change, "it is difficult to envision a rate of re-investment by these economies adequate to meet" demand, he said.
Greenspan noted a sharp rise in over-the counter trading of oil futures and other commodity futures derivatives. The net long futures contracts constituted a bet that oil prices would rise, he said.
These market signals have been useful.
"Even though inventories of oil have risen significantly in recent years, persistent upward price movements have made it apparent that the rise in investor's ownership claims to the world's oil inventories had likely exceeded the inventory increase," Greenspan said.
The participation of investors and speculators has hastened the oil market adjustment process, and oil prices have moved up sooner than they would have otherwise.
But as a result, producers have increased production dramatically and some consumption has been scaled back, Greenspan said.
Ethanol's role
Greenspan said ethanol would play a part in reducing dependence on petroleum.
But he warned that corn-based ethanol, the most popular version of the fuel supplement, can play only a limited role "because its ability to displace gasoline is modest at best."
Cellulosic ethanol, which is derived from a wide variety of plant sources, could play a bigger role, he said. "Cellulosic ethanol, should it fulfill its promise, would help to wean us of our petroleum dependence, as could coal and nuclear power," Greenspan said.
Greenspan warned the committee that a terrorist attack on the Middle East oil producing facilities would hurt the U.S. and global economy.
"There is no scenario where we get off scot-free. It is going to be a real serious problem," Greenspan said.