Greenspan Delivers Alert on Energy

Former Federal Reserve Chairman Alan Greenspan said Wednesday that although the U.S. had been able to absorb sharp increases in oil prices, high energy costs were beginning to stunt economic growth.

But he also said sharply higher oil prices had not produced any serious erosion of world economic activity.

“The United States, especially, has been able to absorb the huge implicit tax of rising oil prices so far” because the nation has become “far more flexible” over the last three decades because of globalization and less regulation, Greenspan told a Senate hearing. It was his first appearance before Congress since leaving the Federal Reserve in January.

However, he added, “Recent data indicate we may finally be experiencing some impact.”

Greenspan said high oil prices, exceeding $70 a barrel and pushing gasoline costs beyond $3 a gallon in many areas, were caused by a decline in spare global oil production capacity, refinery shortages and, to some extent, market speculation.

But he said market speculators also had been able “to hasten the adjustment” to higher prices and eased the shock to the economy.

He warned against import or price restrictions or other interference in the market, saying, “Growing protectionism would undermine that flexibility and make our nation increasingly vulnerable to the vagaries of the oil market.”

American business “to date has largely succeeded in finding productivity improvements that have contained energy costs,” although he conceded that motorists “are struggling with rising gasoline prices.”

Greenspan said that with limits on U.S. oil reserves, “we are not going to be a price setter in oil anywhere in the foreseeable future” unless there was a significant reduction in demand.

“We’re out of the market essentially as a very critical player with respect to price,” Greenspan told the Senate Foreign Relations Committee.

But he said, “Current oil prices over time should lower to some extent our worrisome dependence on petroleum” with the development of alternative fuels and broader use of hybrid cars.

“We are gradually ... weaning ourselves off petroleum. It is slow and in many ways like watching grass grow,” Greenspan said, adding that if the shift “happens smoothly, that is the best of all contingencies.... But what happens if it doesn’t go smoothly?”

Greenspan said that ethanol could become a significant alternative to gasoline, but that the answer in the long run was not in corn, now the primary commercial source of the fuel in the U.S., because of limited supplies. He urged rapid expansion of research into the development of cellulosic ethanol, which is made from wood chips, sawgrass or other material.

“Find out if [it] really is a practical alternative,” he said, adding that only cellulosic ethanol will create enough to replace large amounts of gasoline.