The US Federal Reserve chairman Mr Alan Greenspan yesterday said surging oil prices had been a drag on US growth this year, but dismissed comparisons with the oil shocks of the 1970s.
"The impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s," Mr Greenspan said in a speech to the National Italian American Foundation in Washington.
Despite his comments, US crude futures hit a record $55 (€44) a barrel in late trading last night amid worries about heating oil supplies before the winter. November crude futures last traded up 14 cents at $54.90 a barrel after hitting $55.
The Fed chairman said that, in spite of the recent surge in the oil price, average crude prices adjusted for inflation were only 60 per cent of the 1981 peak.
Mr Greenspan compared the rise in oil prices with a tax on US residents which, based on this year's rise in imported oil, amounted to about 0.75 per cent of gross domestic product, well below the level of the 1970s. The crude price has risen by about 65 per cent since the start of the year and by about 75 per cent since the start of 2003.
In 1973-1974, the increase in the nominal oil price was about 250 per cent and the 1978-1980 increase was 180 per cent, according to the International Monetary Fund.
"The effects were far larger in the crises of the 1970s. But, obviously, the risk of more serious negative consequences would intensify if oil prices were to move materially higher," Mr Greenspan said.
The recent increase in oil prices compares with nominal increases of about 60 per cent in 1989-1990 and in 1999-2000.
Mr Greenspan did not discuss the impact of the rise in the oil price this year on inflation. The Fed noted in its statement when it raised interest rates last month that inflation expectations have eased in recent months, in spite of the oil price jump.
This has contributed to the decline in long-term interest rates, which acts as a buffer against the drag on growth from the high energy price.
In a wide-ranging speech on energy markets, Mr Greenspan acknowledged that the recent surge in energy prices reflected geopolitical concerns.
In the longer term, while there are concerns about an inadequate level of investment to meet global energy demand, Mr Greenspan said that advances in technology meant that oil producers should be able to meet demand.
More than 250 billion barrels of oil have been extracted over the past decade, but net world proved reserves have increased by more than 100 billion barrels.
Mr Greenspan said it was likely that improving technology will lead to less energy-intensive production techniques.
"If history is any guide, oil will eventually be overtaken by less costly alternatives well before conventional oil reserves run out. Indeed, oil displaced coal despite still vast untapped reserves of coal, and coal displaced wood without denuding our forest lands," he concluded. - (Financial Times Service)
