Washington, DC, April 6—-Fed Chairman Alan Greenspan said this week that market forces could lead to a big enough increase in crude oil inventories to cool the recent "frenzy" that has sent prices to record highs.
Greenspan said the high oil prices of recent months had slowed oil demand growth, although "only modestly," contributing to a faster pace of oil inventory building.
He added that stockpiling could pick up further as producers seek to cash in on the higher prices future oil deliveries command.
"If sustained, these market technicals could encourage enough of an inventory buffer to damp the current price frenzy," Greenspan told an oil refiners' conference in San Antonio via satellite.
Prices for benchmark light crude, which hit an all-time high of $58.28 a barrel on Monday, settled down 97 cents on Tuesday at $56.04.
Greenspan said that while the price of light crude was only a bit above levels reached in October, when it breached $55 a barrel, the cost for heavier grades had gained notably since then.
Record oil prices have stirred concern, in the United States and abroad, over both inflation and economic growth.
International Monetary Fund Managing Director Rodrigo Rato told Germany's Handelsblatt business daily high oil prices were "increasing downwards risk" to the world economy and would cut 2005 global growth by 1/4 to 1/2 of a percentage point.
Greenspan offered no similar prognostications, but did express concern over both the ability to produce oil globally and to refine it.
He said while supplies and productive capacity were rising, the investment needed to bring the oil to market had fallen short of what was needed to meet fast-growing demand, especially in China. In addition, he called a lack of world refining capacity "worrisome."
Greenspan also touched on lofty natural gas prices and reiterated his view that a limited import capacity had pushed up prices in the United States. But again he expressed confidence market forces would alter the equation.
"The difficulties associated with inadequate domestic (natural gas) supplies will eventually be resolved as consumers and producers react to the signals provided by market prices," he said. "Indeed, the process is already under way," Greenspan added, saying global trade had expanded significantly as the cost of liquefying and transporting natural gas had dropped.
The Fed chief said energy-market developments would "remain central" to the long-run health of the U.S. economy, but said rising prices would lessen the economy's dependence on energy -- adding there was already evidence of such a shift.
In the past, Greenspan said, businesses had usually considered energy price gains fleeting in nature. "The recent shift in expectations, however, has been substantial enough and persistent enough to bias business-investment decisions in favor of energy-cost reduction," he said.
"Of critical importance will be the extent to which the more than 200 million light vehicles on U.S. highways, which consume 11 percent of total world oil production, become more fuel efficient as vehicle buyers choose the lower fuel costs of lighter or hybrid vehicles," Greenspan added.
Greenspan offered little in the way of direction to financial markets seeking to gauge how the U.S. central bank might respond to rising oil prices, which tend to both push up inflation and weigh on economic growth.
"Energy issues present policymakers and citizens with difficult decisions and tradeoffs to make outside the market process," he said. "But those concerns, one hopes, will be addressed in a manner that, to the greatest degree possible, does not distort or stifle the meaningful functioning of our markets."
