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Greenspan Sees Upside to Energy 'Price Frenzy'

By Nell Henderson
Washington Post Staff Writer
Wednesday, April 6, 2005; Page E01

Federal Reserve Chairman Alan Greenspan said yesterday that surging energy prices reflect the tightest oil and gas markets in decades but should stimulate the development of more alternative fuel sources and conservation methods over time.

While Greenspan sounded optimistic about the long-term effects, he said nothing about the probable impact of climbing energy prices this year on U.S. economic growth, inflation or Fed interest rate policy -- all subjects of intense interest in financial markets.

Fed Chairman Alan Greenspan said market conditions should spur development of alternative fuels. (Mannie Garcia -- Reuters)

Growing demand and tight supplies have produced a "current price frenzy" in oil markets, the Fed chairman said in a speech delivered via satellite to the National Petrochemical and Refiners Association meeting in San Antonio.

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

U.S. benchmark crude, for example, has traded above $56 a barrel in recent days on the New York Mercantile Exchange, up from about $31 a year ago. Prices, however, remain well below the inflation-adjusted records hit in the early 1980s.

Greenspan expressed hope that market forces will prompt exploration and investment that increase energy supplies and spur the development of new technologies that make the U.S. economy less energy-intensive.

"If history is any guide, should higher prices persist, energy use will over time continue to decline, relative to" total economic output, or gross domestic product, he said.

The economy uses about half as much energy per dollar of GDP today as it did in the early 1970s. Much of that decline was achieved by 1985, Greenspan observed in a footnote to his speech.

"With real energy prices again on the rise, more rapid decreases in the intensity of use in the years ahead seem virtually inevitable," he said.

New technologies also will spur production of more natural gas from sources such as tight sands, shale and coal-bed methane, he said. "In the more distant future, perhaps a generation or more, lies the potential to develop productive capacity from natural gas hydrates. Located in marine sediments and the Arctic, these ice-like structures store immense quantities of methane."

While Greenspan typically took the long view, other economists have warned that higher energy prices are likely to slow the growth of consumer spending on other items this year. That, in turn, will cool overall economic growth, easing inflation pressures and making it easier for the Fed to stick to its path of raising interest rates slowly and gradually, economists at Bank of America Corp. said last week.

The Fed noted rising price pressures last month when it raised its benchmark overnight rate to 2.75 percent from 2.5 percent and signaled it would lift the rate further in coming months to keep the lid on inflation.

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