Greenspan calls 'price frenzy' for oil a concern

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The strain of satisfying the world's appetite for energy is the worst in a generation and is creating a "price frenzy" with important effects on the economy, Federal Reserve Chairman Alan Greenspan said yesterday.

Record high prices for oil, gasoline and natural gas are forcing businesses and consumers to find ways to be more efficient and conserve fuel. Successful adjustments, particularly by the nation's 200 million drivers who consume 11 percent of the world's oil, will be critical to the health of the economy, he said in an address to the National Petrochemical and Refiners Association.

"Altering the magnitude and manner of U.S. energy consumption will significantly affect the path of the U.S. economy," he said.

A survey of consumers yesterday showed that many are trying to conserve fuel by consolidating errands and making fewer trips by car. Consumers also are cutting back in other areas, such as eating out, to accommodate higher gas bills, according to the survey by the International Council of Shopping Centers.

"Higher prices in recent months have slowed the growth of oil demand, but only modestly," Mr. Greenspan said.

The Fed chairman held out hope that oil prices will come down some as businesses increase their stockpiles of crude oil, in comments that helped to lower the price of premium crude by nearly $1 to $56.04 in New York trading yesterday.

But he said that "inexorable" forces are driving prices higher as supplies have failed to increase in line with growing demand in the United States, China and elsewhere.

Mr. Greenspan noted an array of sometimes disturbing developments that has conspired to constrain supplies. While for years improved technology enabled energy companies to get more oil and gas out of existing deposits, such techniques no longer suffice to raise supplies in the United States, he said.

Meanwhile, oil-producing nations and corporations have been slow to invest the billions of dollars needed to open up new oil reserves and increase supplies, leading to a razor-thin cushion of surplus that has become a principal force in driving up prices, he said.

Most of the world's remaining oil reserves are in countries that prohibit or tightly restrict development by Western oil companies, and where "major geopolitical uncertainties" have bottled up expansion of supplies in recent years, he said.

While not mentioning them by name, Mr. Greenspan was referring to the insurgency in Iraq, which has blocked repair and expansion of Iraq's vast oil resources for the past two years, as well as political developments in Russia and Venezuela, which have slowed or stopped development of major reserves located there.

The failure of these countries to make the needed investments is a major reason for elevated prices, he said.

"Besides feared shortfalls in crude oil capacity, the status of world refining capacity has become worrisome as well," he said. Too few refiners are able to convert crude oil that is heavy with sulfur -- about 80 percent of world oil supplies -- into the clean, desulphurized gasolines required by environmental laws, he said.

As with oil, efforts to find new supplies of natural gas in the United States and Canada are coming up dry, he said, making it necessary to create a global market for superfrozen liquefied gas imports that currently does not exist.

The reopening of mothballed port facilities to offload liquefied gas in Maryland and Georgia were promising developments, he said, and more plans have been laid to build port facilities where they are needed elsewhere around the nation to service consumers.

In the decades ahead, the availability of adequate energy supplies may depend on the development of exotic resources such as Canada's vast deposits of oil shale and gigantic stores of natural gas hydrates buried deep in the Arctic oceans.

Increased use of coal and nuclear power also will be needed to replace dwindling oil and gas supplies in the years ahead, he said.

While today's high prices may be forcing people to make difficult decisions and trade-offs, he said, they encourage the development of the alternative energy sources by making them economically feasible.