Wednesday, June 07, 2006


Oil Prices Are Starting to Affect Economy, Greenspan Tells Senators

Oil Prices Are Starting to Affect Economy, Greenspan Tells Senators

June 7, 2006 10:52 a.m.

WASHINGTON -- Sharply higher oil prices have yet to seriously erode global economic activity, but recent data indicate the U.S. "may finally be experiencing some impact," former Federal Reserve Chairman Alan Greenspan told the Senate Foreign Relations Committee on Wednesday.
The former Fed chief didn't elaborate on this impact at his first appearance before Congress since leaving the Fed earlier this year. Ben Bernanke, Mr. Greenspan's successor at the central bank, said earlier this week that the U.S. economy is slowing down as American pocketbooks are being hit by high gasoline prices.

Mr. Bernanke's recent warnings about inflation, which has been led by higher energy prices, have sent stocks lower over two sessions, with investors expecting another interest-rate increase later this month.
Mr. Greenspan said the U.S. was able to withstand the high oil prices over the past year because of a flexible economy as a result of deregulation. "The U.S. economy has been able to absorb the huge impact of rising oil prices with little consequence to date because it has become far more flexible over the past three decades, owing to deregulation and globalization," Mr. Greenspan said in prepared testimony.
He warned, however, that "growing protectionism" could undermine flexibility and make the U.S. more vulnerable to swings in the oil market. Mr. Greenspan suggested that high oil prices may be here to stay given low investment in new production by oil-producing nations and their state-owned companies. Unless those policies change, "it is difficult to envision a rate of re-investment by these economies adequate to meet" demand, he said.
Mr. Greenspan noted a sharp rise in over-the-counter trading of oil futures and other commodity futures derivatives. The net long futures contracts constituted a bet that oil prices would rise, he said. These market signals have been useful, he said.

The participation of investors and speculators has hastened the oil market adjustment process, and oil prices have moved up sooner than they would have otherwise. But as a result, producers have increased production dramatically and some consumption has been scaled back, Mr. Greenspan said.
"Even though inventories of oil have risen significantly in recent years, persistent upward price movements have made it apparent that the rise in investors ownership claims to the world's oil inventories had likely exceeded the inventory increase," Mr. Greenspan said.

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