Greenspan: Oil-Price Surge May `Wash Out` Over Time -2-

10-15 09:35: Greenspan: Oil-Price Surge May `Wash Out` Over Time -2-
DJ Greenspan: Oil-Price Surge May `Wash Out` Over Time -2-

The remarks suggested the U.S. central bank will persist with its campaign of
higher interest rates despite sharply higher oil prices. Crude-oil prices have
climbed about 40% in the last 12 months, but the economy has continued to
expand at a pace Fed policymakers consider acceptable. The Fed, accordingly,
has raised its key interest rate three times since June and is expected to
raise it again next month.

Greenspan attributed the increase in long-term oil prices mostly to “rising
geopolitical concerns about insecure reserves and the lack of investment to
exploit them.” Insurgent attacks on Iraq’s oil infrastructure and civil unrest
in Nigeria have fanned worries about the outlook for supply because
oil-exporting nations already are operating near the limits of their production
capacity.

But Greenspan also cited a “speculative” element to the price increase.
“Heightened worries about the reliability of supply have led to a pronounced
increase in the demand to hold larger precautionary inventories of oil,” he
said. Moreover, “demand from investors who have accumulated large net long
positions in distant oil futures and options is expanding again.”

“Such speculative positions are claims against future oil holdings of oil
firms,” he said. “Currently, strained capacity has limited the ability of oil
producers to quickly satisfy this markedly increased demand for inventory.”

But the outlook isn’t all bleak, he said. Technological advancements have led
to the discovery of 100 billion barrels more of oil than was produced over the
last decade, he said. “The uptrend in world proved reserves is likely to
continue at least for a while,” Greenspan said.

Moreover, investment in improving the capacity of oil refineries rowing –
a development Greenspan said will help expand the supply of refined oil. Many
refineries are designed to process high-quality crude oil but the recent
increases in output have been in lower-quality crude, leading to a spike in
prices for higher-quality oil.

Greenspan also said that if oil prices stay high, they will induce a change
in consumption patterns that will make the high prices unsustainable.

“Much of the capital infrastructure of the United States and elsewhere was
built in anticipation of lower real oil prices than currently prevail or are
anticipated for the future,” he said. “Unless oil prices fall back, some of the
more oil-intensive parts of our capital stock would lose part of their
competitive edge and, presumably, be displaced, as was the case following the
price increases of the late 1970s.”

Greenspan said predictions of catastrophically high oil prices have often
turned out to be wrong in the past. In the 1970s, he said, the U.S. Department
of Energy predicted that oil prices would rise above $100 a barrel, measured in
current dollars. That never happened.

“The failure of oil prices to rise as projected in the late 1970s is a
testament to the power of markets and the technologies they foster,” Greenspan
said. Adjusted for inflation, today’s oil prices are three-fifths of their
level in 1981.

Under the circumstances, he said, “the impact of the current surge in oil
prices, though noticeable, is likely to prove less consequential to economic
growth and inflation than in the 1970s.”

-By Joseph Rebello and Campion Walsh, Dow Jones Newswires; 202-862-9279;
joseph.rebello@dowjones.com

(END) Dow Jones Newswires

10-15-04 1235ET

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