Greenspan says run-up in energy prices was `accident waiting to happen'

WASHINGTON (AP) _ The sharp run-up in energy prices following the shutdown of Gulf Coast production facilities was an ``an accident waiting to happen,'' Federal Reserve Chairman Alan Greenspan

Tuesday, October 18th 2005, 5:27 am

By: News On 6

WASHINGTON (AP) _ The sharp run-up in energy prices following the shutdown of Gulf Coast production facilities was an ``an accident waiting to happen,'' Federal Reserve Chairman Alan Greenspan said, while adding that it should not have the severe economic impact of the 1970s oil shocks.

``The current surge in oil prices, though noticeable, is likely to prove significantly less consequential to economic growth and inflation than the surge in the 1970s,'' Greenspan said Tuesday in a speech to Japanese business executives in Tokyo. A copy of his remarks was released late Monday in Washington.

Greenspan said that was because the world was a lot more energy-efficient now than when the Arab oil embargo triggered the first surge in oil prices in 1973.

``Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on,'' he said, although he did not quantify how much of a slowdown will occur.

Private economists have said the fallout from Hurricane Katrina, which hit Aug. 29, and Hurricane Rita, which struck Sept. 24, could shave as much as a full percentage point off growth in the second half of this year as consumers, forced to pay higher energy bills, cut back on spending in other areas.

A rising demand for oil, spurred by increased use in Asian countries such as China, has eliminated the slack in world oil markets that Greenspan said had kept oil prices relatively contained from 1985 through 2000. The oil market this year, he said, ``had been subject to a degree of strain not experienced in a generation.''

Since the first oil shock of 1973, the amount of oil consumed per unit of economic output has fallen by one-third worldwide and has been cut in half in the United States, developments that make the U.S. and global economies less susceptible to oil price shocks, Greenspan said. And he predicted that if high energy prices persist, countries will become even more energy-efficient.

He noted that gasoline demand had declined ``markedly'' in the United States in recent weeks, ``presumably partly as consequence of higher prices.''

Price signals sent by free markets will spur research and development into new approaches to the production and use of energy ``that we can now only barely envision,'' Greenspan said.

``If history is any guide, oil will eventually be overtaken by less-costly alternatives well before conventional oil reserves run out,'' he said. But he cautioned that the transition will still take time.

``We and the rest of the world doubtless will have to live with the geopolitical and other uncertainties of the oil markets for some time to come,'' he said.

In his speech, Greenspan made no reference to how the recent run-up in energy prices will affect Federal Reserve interest rate policies.

The government reported Friday that consumer prices shot up in September by the biggest amount in a quarter-century, led by a record increase in gasoline prices.

Many analysts believe the Fed, which raised a key interest rate for an 11th time in September, will keep raising rates at its last two meetings of this year in November and December in an effort to keep the jump in energy prices from pushing overall inflation higher.