updated 4/27/2004 3:39:08 PM ET 2004-04-27T19:39:08

The United States needs to expand the global trade in natural gas as a way to prevent future sharp price increases from harming its economy, Federal Reserve Chairman Alan Greenspan said Tuesday.

Greenspan said a dramatic rise in recent years in the price of both oil and gas for delivery six years into the future was almost certain to have an impact on the U.S. economy.

But he said the impact was likely to be greater for users of natural gas because they had no global supply to cushion price increases.

“If North American gas markets are to function with the flexibility exhibited by oil, more extensive access to the vast world reserves of gas is required,” Greenspan said in remarks to an energy conference sponsored by the Center for Strategic and International Studies.

Greenspan said imports of liquefied natural gas accounted for only 2 percent of the U.S. market last year in part because environmental and safety concerns have limited the number of U.S. ports with facilities to handle liquefied natural gas, or LNG, shipments.

But he said that situation could be changing.

“Given notable cost reductions for both liquefaction and transportation of LNG, significant global trade is developing,” he said. “And high natural gas prices projected by distant futures prices have made imported gas a more attractive option for us.”

Greenspan said the fact that worldwide imports account for 57 percent of global oil consumption but only 23 percent of natural gas consumption showed the growth potential for trade in natural gas.

Greenspan said the price of energy contracts for delivery six years into the future had taken a sharp jump upward over the past four years after a decade of “tranquility.”

He noted that the price of oil for delivery in six years fell from $20 per barrel just before the first Gulf War to $16 to $19 per barrel in 1999.

Distant futures contracts for natural gas were less than $2 per 1,000 cubic feet of natural gas at the time of the first Gulf War and had risen only slightly to $2.50 per 1,000 cubic feet by 1999.

But currently, distant futures contracts for oil have risen to more than $27 per barrel while the price increase for natural gas has been even more noticeable, rising from $3.20 per 1,000 cubic feet in 2001 to almost $5 currently.

While Greenspan said the rise in oil prices apparently reflected increased fears about supply disruptions in a more unstable Middle East, he attributed the increase in natural gas prices to the fact that there is more limited global trade in natural gas.

“Natural gas pricing ... is inherently far more volatile than oil, doubtless reflecting, in part, less-developed, price-damping global trade,” he said.

To deal with these price pressures, Greenspan called for more access to global supplies through a major expansion of liquefied natural gas terminal facilities and the development of newer technology that allows the liquefied natural gas to be turned back into a gas at offshore facilities.

“As the technology of LNG liquefaction and shipping has improved and as safety considerations have lessened, a major expansion of U.S. import capability appears to be under way,” Greenspan said.

He said these developments offered great promise of boosting the availability of natural gas in the long term. But he cautioned that since it will take years to put the new facilities into operation, the near-term outlook for natural gas prices would likely remain “challenging.”

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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