- The Washington Times - Wednesday, June 7, 2006

12:37 p.m.

Former Federal Reserve Chairman Alan Greenspan said today that though the country has been able to absorb sharp increases in oil prices, high energy costs are beginning to stunt economic growth.

However, he also said sharply higher oil prices have 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,” Mr. 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.”

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

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

American business “to date has largely succeeded in finding productivity improvements that have contained energy costs,” he said, but he added that consumers “are struggling with rising gasoline prices.”

Mr. 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 is a significant reduction in demand.

“We’re out of the market, essentially, as a very critical player with respect to price,” he 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 electric-hybrid cars. This “would help to wean us of our petroleum dependence,” he said.

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

Mr. Greenspan said ethanol can become a significant alternative to gasoline but that the answer in the long run is not in corn, now the sole commercial source of the fuel, because of limited supplies. He urged rapid expansion of research into the development of cellulosic ethanol — made from wood chips, saw grass or other material.

He said the United States has been able to “absorb the huge impact of rising oil prices with little consequences to date because it has become far more flexible” over the past three decades because of less regulation and globalization.

But he warned against import or price restrictions or other interference in the market.

“Growing protectionism would undermine that flexibility and make our nation increasingly vulnerable to the vagaries of the oil market,” he said.

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