Greenspan says world will have to live with high oil prices
Forbes / AFX | October 18, 2005
TOKYO - US Federal Reserve chairman Alan Greenspan said that the world would have to learn to live with high oil prices and their negative impact on economic growth 'for some time to come'.
He said the recent shutdown of US oil production and refinery facilities battered by hurricanes was 'an accident waiting to happen'.
'Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on,' Greenspan told business leaders here.
'In the United States, Japan and elsewhere, the effect on growth would have been greater had oil not declined in importance as an input to world economic activity since the 1970s,' he said in a speech devoted to energy issues.
'We and the rest of the world doubtless will have to live with the geopolitical and other uncertainties of the oil markets for some time to come.'
Greenspan also said the impact of high oil prices on economic growth and inflation was likely to be less severe than during the 1970s oil price spikes.
Taking into account inflation, the average price of crude oil was still below the peak of February 1981 in the wake of the Iranian Revolution, when oil hit the equivalent of 75 usd a barrel in today's prices.
Oil is also only two-thirds as important as an input in world gross domestic product now as it was three decades ago, he noted.
This meant the recent surge in prices 'is likely to prove significantly less consequential to economic growth and inflation than the surge in the 1970s.'
There would be increases in oil efficiency in the rapidly growing economies of East Asia along the lines of those seen in Japan, the United States and Europe, he said.
But as China's economy grows, its rising oil consumption would offset energy efficiency savings elsewhere in the world, Greenspan said, noting China uses roughly twice as much oil per dollar of output as the United States.
The price of crude hit an all-time record of 70.85 usd at the end of August after Hurricane Katrina devastated production and refining capacity in the Gulf of Mexico.
Greenspan said that even before this year's hurricanes, world oil markets had been subject to a degree of strain not experienced for a generation.
Rising demand and production constraints had wiped out significant slack in supply that had contained oil prices between 1985 and 2000.
'In such tight markets, the shutdown of oil platforms and refineries last month by Hurricanes Katrina and Rita was an accident waiting to happen,' he said.
Oil prices shot up again yesterday as Tropical Storm Wilma formed in the Caribbean, raising new concern over hurricane-battered production in the US Gulf of Mexico.
Greenspan also met Bank of Japan Governor Toshihiko Fukui on Monday to discuss monetary issues as part of his two-day visit here.
During the 50-minute meeting, the pair also discussed the US and Japanese economies.
It was the first visit by Greenspan to Japan since January 2000. The Fed chairman, who is to step down when his term expires in January next year, arrived in Japan after attending a G20 meeting in China.
Last modified October 18, 2005