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.
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.
The National Association for Business Economics said a panel of its members recently estimated the U.S. economy will expand 4.3 percent this year, down from the 4.7 percent pace they had projected in May, when oil first crossed the $40 a barrel threshold.
Morgan Stanley has shaved its forecast of U.S. economic growth to 3.5 percent next year, from 3.8 percent previously.
European Central Bank President Jean-Claude Trichet said yesterday that rising oil prices are boosting the risks to growth in the 12 countries that share the euro currency, Bloomberg News reported.
Oil prices have clearly had some effect on the U.S. economy, Greenspan said. Economic growth slowed sharply in the early summer, after oil rose above $40 a barrel and gasoline peaked above $2 a gallon in May. Since then, consumer spending has swung up and down, job creation has been lackluster, and business investment has not risen as much as is typical at this point in an expansion.
Greenspan estimated the higher cost of imported oil this year to be worth about three-fourths of a percent of the nation's gross domestic product -- equivalent to more than $80 billion out of today's $11 trillion a year economy. But, he said, "the effects were far larger in the crises of the 1970s."
The impact was greater in the past largely because oil was much more expensive, peaking in 1981 at around $80 per barrel in today's dollars.
The U.S. economy today also is far more energy efficient, using half as much oil to produce a dollar of GDP as it did in the 1970s, for a variety of reasons. They include the development of more fuel-efficient cars and other technologies, the use of alternative energy sources, the shrinking of the more energy-intensive manufacturing sector and the growth of services.
Many companies have not yet felt the effects of higher oil prices because they locked in lower prices through futures contracts, analysts said. With U.S. corporate profit growth so strong over the past year, many companies also have been able to absorb higher energy costs without raising prices.
But economists worry that these same companies will feel the effects in months to come if oil prices stay high. Eventually, their lower-cost fuel contracts will expire, profits will shrink, and stock prices will sag. Some of the current corporate reluctance to add workers and expand production capacity may reflect these sorts of worries among executives.
High oil prices also had less effect on consumers than in the past because gasoline prices fell during the summer, reflecting the ample inventories at the time.
Now gasoline prices are rising again -- with the national average for a gallon of regular hitting $2 yesterday at the same time heating oil prices are rising. That raises the risk that high energy prices will dampen consumer spending.
Despite the rise in oil prices, inflation has remained mild in recent months. Prices paid to producers of finished goods rose just 0.1 percent last month, the Labor Department reported. If inflation rises, that would also cut into consumers' spending power.
Greenspan did not indicate yesterday how oil prices are likely to influence the Fed's interest rate decisions.
The Fed chairman attributed much of the recent increase in oil prices to temporary factors, such as the disruptions to supplies from the Gulf of Mexico because of the hurricanes. But he agreed that worries about war, terrorism and other geopolitical events that could hurt oil supplies "are not frivolous given the stark realities evident in many areas of the world. . . . We, and the rest of the world, doubtless will have to live with the uncertainties of the oil markets for some time to come."