Greenspan Testifies on Oil Dependence, and Few Pay Attention
Thursday, June 8, 2006
Shorn of his powers at the Federal Reserve, Alan Greenspan may have lost a tad of the aura and authority that until recently made his every word worth deciphering.
At the 9 a.m. start of the Senate Foreign Relations Committee hearing yesterday, in which Greenspan was testifying for the first time since retiring from the Fed, only two committee members had shown up. Half an hour later, eight members were there, but most of them soon drifted off for a roll call vote, to hear the president of Latvia speak or simply to go about their other business.
As for the stock and oil markets, they had plenty of other things to contend with, such as U.S. talks with Iran and whether Greenspan's successor, Ben S. Bernanke, is planning to raise interest rates.
For those who were listening, Greenspan had few soothing words. The balance of world oil supply and demand "has become so precarious that even small acts of sabotage or local insurrection have a significant impact on oil prices," he told the senators. And, he added, while the U.S. economy "has been able to absorb the huge implicit tax of rising oil prices so far . . . recent data indicate we may finally be experiencing some impact."
He said U.S. business "to date has largely succeeded in finding productivity improvements that have contained energy costs." But, he added, "American households are struggling with rising gasoline prices."
Greenspan, president of Greenspan Associates LLC, said the price of oil was so high, and national and economic security concerns so grave, that the United States is starting to wean itself off petroleum. "We are seeing the gradual disengagement of the United States from petroleum," he said, though he said it was a bit "like watching grass grow."
He said that in the meantime, the United States should increase liquefied natural gas imports, push research into cellulosic ethanol, and embrace clean coal and nuclear power. "Oil in the years ahead will remain an important element of our energy future, but it need no longer be the dominant player," he said.
While many oil companies, oil ministers and analysts have blamed hedge funds and speculators for causing the recent run-up in oil prices, Greenspan said that "the new participants, investors and speculators, to the world's $2 trillion-a-year oil market are hastening the adjustment process" by pushing world oil prices up "sooner than they would have otherwise."
"Rising prices are a very effective tool in compressing demand," Greenspan said.
He said the investment funds in the oil-trading business had also stimulated an increase in oil inventories.
Greenspan stressed a need to reduce consumption or increase supply of petroleum but emphasized that the countries with the largest oil reserves showed little interest in expanding production.
Asked by senators about ethanol, Greenspan said corn-based ethanol would play "only a limited role" in reducing U.S. oil demand because the country could grow only so much corn. "Its ability to displace gasoline is modest at best," he said. The more promising basis for mass ethanol production is cellulosic, he said. "I'd like to see us move quickly to determine whether cellulosic is feasible."
The feedstocks for cellulosic ethanol include agricultural wastes, grasses, wood and other biomass, such as municipal waste. Although these feedstocks are less expensive than corn, they are also more costly to convert into ethanol. New technologies, however, might reduce those costs.