High crude oil and natural gas prices have put energy markets under a degree of strain that hasn’t been seen in a generation, Federal Reserve Chairman Alan Greenspan said Tuesday, but he warned policy-makers against interfering with market forces he hoped would eventually stabilize prices.
The Fed chief expressed hope that market forces would spur conservation by businesses and consumers and greater energy exploration by energy companies. That should help get prices under control, he said.
He also urged policy-makers to be careful in any responses they might make to allow market forces to work. Greenspan, in prepared remarks to an energy conference, warned that they should avoid any action that would “distort or stifle the meaningful functioning of our markets.”
Greenspan spoke via satellite to the National Petrochemical and Refiners Association meeting in San Antonio, Texas. A copy of his prepared remarks was distributed in Washington.
“We must remember that the same price signals that are so critical for balancing energy supply and demand in the short run also signal profit opportunities for long-term supply expansion,” Greenspan said, in urging that market forces be allowed to take care of the problem.
On Tuesday, light, sweet crude fell 97 cents to settle at $56.04 a barrel on the New York Mercantile Exchange. Heating oil was down 2.11 cents at $1.6211 a gallon, while unleaded gas was down 3.36 cents $1.688 a gallon.
Brent crude futures fell 79 cents to settle at $55.44 a barrel on the International Petroleum Exchange in London.
Oil prices closed last week at a new, all-time high of $57.27 a barrel.
The Bush administration has been pushing Congress to enact energy legislation. Lawmakers in the House are working on a bill with the aim of promoting increased production of a broad range of energy sources — from coal to natural gas. The measure is not expected to have much impact on the price spikes seen in recent weeks, however.
Congress has been trying for five years to enact broad energy legislation. A compromise on a bill fell apart in 2003 in a dispute over liability protection for manufacturers of a gasoline additive and concern about the bill’s $31 billion price tag.
Greenspan also said that the higher energy prices will not only stimulate new exploration but also research and development “that will unlock new approaches to energy production and use that we can now only scarcely envision.”
“Markets for oil and natural gas have been subject to a degree of strain over the past year not experienced for a generation,” Greenspan said. Strong demand and lags in boosting production capacity were factors in the price increases, he said.
Higher prices oil prices in recent months have slowed the growth of demand, “but only modestly,” Greenspan noted.
Greenspan, in his prepared remarks, did not talk about the future course of interest rate policy in the United States. The Federal Reserve has boosted short term interest rates seven times since last June to keep inflation in check. Economists are expecting another increase on May 3, the Fed’s next scheduled meeting.
The Fed chief did not go into detail about the impact of high energy prices on economic activity.
In a speech last October, Greenspan said that the surge in energy prices should not be enough to push the country into a recession.
At the time of those remarks, oil was trading for around $55 a barrel — slightly lower than current prices.
Greenspan on Tuesday stressed that “altering the magnitude and manner of U.S. energy consumption will significantly affect the path of the U.S. economy over the long term.”
He said it was critically important that America’s 200 million automobiles on the highways — which he noted consume 11 percent of total world oil production — become more fuel efficient.
Greenspan also said that the resolution of “current, major geopolitical uncertainties will materially affect oil prices in the years ahead.”