US Fed chief tries to stem oil worries

Alan Greenspan, the chairman of the US Federal Reserve, has sought to stem worries over spiralling energy prices, saying difficulties associated with inadequate domestic supplies will eventually be resolved.

    Greenspan said shortages in domestic supplies would ease

    Greenspan was addressing, via satellite, the National Petrochemical and Refiners Association Conference in Texas.

    "Difficulties associated with inadequate domestic supplies will eventually be resolved, as consumers and producers react to the signals provided by market prices. Indeed, the process is already under way," Greenspan said, setting out his basic view.

    "Markets for oil and natural gas have been subject to a degree of strain over the past year not experienced for a generation," said Greenspan.

    "Increased demand and lagging additions to productive capacity have combined to absorb a significant amount of the slack in energy markets that was essential in containing energy prices."

    Escalating price

    He emphasised prices were genuinely high, inflation adjusted or not. No longer were energy costs something that the American business community could afford to ignore.

    "Altering the magnitude and manner of US energy consumption will significantly affect the path of the US economy over the long term," he said.

    "Difficulties associated with inadequate domestic supplies will eventually be resolved, as consumers and producers react to the signals provided by market prices. Indeed, the process is already under way"

    Alan Greenspan,
    US Federal Reserve chairman

    "For years … businesses … could mostly look through short-run fluctuations in oil and natural gas prices. The recent shift in expectations, however, has been substantial enough and persistent enough to bias business investment decisions in favour of energy-cost reduction."

    In other words, American businesses need to factor in energy as a more unpredictable and expensive costing. He also attempted to point out these kinds of economic considerations were not just a short-term blip, but something more structural.

    One of the most pressing situations regarding the rise in oil prices is the global transport fleet, notably cars, vans and lorries. While electricity can be generated from other sources, at the moment transport is almost entirely dependent on oil.

    Greenspan used his address to point out the vulnerability of the US road user - private and commercial.

    "Of critical importance will be the extent to which the more than 200 million light vehicles on US highways, which consume 11% of total world oil production, become more fuel efficient," he said.

    Foreign investment

    Greenspan also said investment was needed to boost production, hinting that both Iran and Saudi Arabia, which prohibit foreign investment in energy resources, needed to open up to investors.

    "Much of the investments in … productive capacity will need to be made in countries where foreign investment is prohibited or restricted. Unless those policies are changed, a greater proportion of the cash flow of producing countries will be needed for oil reinvestment if capacity is to keep up with projected world demand.

    "Energy issues present policymakers and citizens with difficult decisions and tradeoffs to make. But those concerns, one hopes, will be addressed in a manner that, to the greatest extent possible, does not distort or stifle the meaningful functioning of our markets."

    SOURCE: Aljazeera


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