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Greenspan Minimizes Impact of Costly Oil

Many Economists Remain Concerned

By Nell Henderson
Washington Post Staff Writer
Saturday, October 16, 2004; Page E01

Federal Reserve Chairman Alan Greenspan said yesterday that higher oil prices have had a "noticeable" effect on the U.S. economy this year but are not likely to cause serious damage unless they move significantly higher.

Greenspan's comments in a speech here addressed worries that the world may soon run out of oil, or that high oil prices might cause a replay of the double-digit inflation and interest rates that plagued the economy in the 1970s and early 1980s.

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On the contrary, in Greenspan's upbeat long view, new technologies, higher oil prices and market forces will cause the world to become less oil-dependent over time. He described the inevitable transition to new energy sources as comparable to previous ones in which oil displaced coal, and coal displaced wood long before the supply of either ran out.

Meanwhile, however, there is growing concern among economists, on Wall Street, and even within the Fed, that sustained high oil prices are starting to slow U.S. and global economic growth, raising the risk of recession. Even short of that, high oil prices could drag growth to a sluggish pace that creates few new jobs, squeezes corporate profits and depresses stock prices in the much nearer term, some analysts say.

Growth in the United States, Europe and Japan combined is projected to slow early next year to a 1.5 percent annual rate, "a stall speed that could easily give way to outright recession," Stephen S. Roach, chief economist for Morgan Stanley, said in a recent analysis.

Oil prices above $50 a barrel "highlight stagflationary risks to our current forecast," the Goldman Sachs economics team said a few weeks ago, warning of the possible combination of stagnating growth and rising inflation. Benchmark U.S. crude oil for November delivery closed yesterday at $54.93 a barrel on the New York Mercantile Exchange.

Greenspan, in contrast, appeared to play down the current effects of rising oil prices by comparing them with the much worse economic turmoil of decades ago.

"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," he said, while adding that "obviously the risk of more serious negative consequences would intensify if oil prices were to move materially higher."

Government data released yesterday provided more mixed signals on the economy's strength last month. Retail spending surged 1.5 percent while manufacturing output fell 0.3 percent, though part of that drop may be due to the recent hurricanes. Inflation remained tame.

But rising oil prices have prompted many analysts to start lowering their forecasts for U.S. and world economic growth this year and next.

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