WASHINGTON -- Former Federal Reserve Chairman Alan Greenspan said Wednesday that while the country has been able to absorb sharp increases in oil prices, high energy costs are beginning to stunt economic growth.
But 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, Greenspan told a Senate hearing, according to the Associated Press. It was his first appearance before Congress [image-nocss] since leaving the Federal Reserve in January. He added, however, that 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, are due to a sharp decline in spare global oil production capacity, refinery shortages and, to some extent, market speculation. But he said market speculators also 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. But he said consumers are struggling with rising gasoline prices.
Greenspan said 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, 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 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, Greenspan 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.
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, sawgrass or other material. Find out if [it] really is a practical alternative, he said, adding that only cellulosic ethanol will create the volumes adequate to replace large amounts of gasoline.
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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