Verbatim Text Of Fed Chairman Greenspan’s Speech On Oil

The following is the verbatim remarks by Federal Reserve Chairman Alan
Greenspan on oil to the National Italian American Foundation, Washington, D.C.

10-15 09:12: Verbatim Text Of Fed Chairman Greenspan’s Speech On Oil
DJ Verbatim Text Of Fed Chairman Greenspan’s Speech On Oil

The following is the verbatim remarks by Federal Reserve Chairman Alan
Greenspan on oil to the National Italian American Foundation, Washington, D.C.
NEW YORK (Dow Jones)–Owing to the current turmoil in oil markets, a number
of analysts have raised the specter of the world soon running out of oil. This
concern emerges periodically in large measure because of the inherent
uncertainty of estimates of worldwide reserves. Such episodes of heightened
anxiety about pending depletion date back a century and more. But, unlike past
concerns, the current situation reflects an increasing fear that existing
reserves and productive crude oil capacity have become subject to potential
geopolitical adversity. These anxieties patently are not frivolous given the
stark realities evident in many areas of the world.

While there are concerns of seeming inadequate levels of investment to meet
expected rising world demand for oil over coming decades, technology, given a
more supportive environment, is likely to ensure the needed supplies, at least
for a very long while.

Notwithstanding the recent paucity of discoveries of new major oil fields,
innovation has proved adequate to meet ever-rising demands for oil.
Increasingly sophisticated techniques have facilitated far deeper drilling of
promising fields, especially offshore, and have significantly increased the
average proportion of oil reserves eventually brought to the surface. During
the past decade, despite more than 250 billion barrels of oil extracted
worldwide, net proved reserves rose in excess of 100 billion barrels. That is,
gross additions to reserves have significantly exceeded the extraction of oil
the reserves replaced. Indeed, in fields where, two decades ago, roughly
one-thir the oil in place ultimately could be extracted, almost half
appears to be recoverable today. I exclude from these calculations the reported
vast reserves of so-called unconventional oils such as Canadian tar sands and
Venezuelan heavy oil.

Gains in proved reserves have been concentrated among OPEC members, though
proved reserves in the United States, for the most part offshore, apparently
have risen slightly during the past five years. The uptrend in world proved
reserves is likely to continue at least for awhile. Oil service firms still
report significant involvement in reservoir extension and enhancement.
Nonetheless, growing uncertainties about the long-term security of world oil
production, especially in the Middle East, have been pressing oil prices
sharply higher.

These heightened worries about the reliability of supply have led to a
pronounced increase in the demand to hold larger precautionary inventories of
oil. In addition to the ongoing endeavors of the oil industry to build
inventories, demand from investors who have accumulated large net long
positions in distant oil futures and options is expanding once again. Such
speculative positions are claims against future oil holdings of oil firms.
Currently, strained capacity has limited the ability of oil producers to
quickly satisfy this markedly increased demand for inventory.

Adding to the difficulties is the rising consumption of oil, especially in
China and India, both of which are expanding economically in ways that are
relatively energy intensive. Even the recent notable pickup in OPEC output, by
exhausting most of its remaining excess capacity, has only modestly satisfied
overall demand. Output from producers outside OPEC has also increased
materially, but investment in new producing wells has lagged, limiting growth
of production in the near term.

Crude oil prices are also being distorted by shortages of capacity to upgrade
the higher sulphur content and heavier grades of crude oil. Over the years,
increasing demand for the environmentally desirable lighter grades of oil
products has pressed refiners to upgrade the heavier crude oils, which compose
more than two-thirds of total world output. But refiners have been only partly
successful in that effort, judging from the recent extraordinarily large
increase in price spreads between the lighter and heavier crudes. For example,
the spread between the price of West Texas intermediate (WTI), a light,
low-sulphur crude, and Dubai, a benchmark heavier grade, has risen about $10
per barrel since late August, to an exceptionally high $17 a barrel. While spot
prices for WTI soared in recent weeks to meet the rising demand for light
products, prices of heavier crudes lagged.

This temporary partial fragmentation of the crude oil market has clearly
pushed gasoline prices higher than would have been the case were all crudes
available to supply the demand for lighter grades of oil products. Moreover,
gasoline prices are no longer buffered against increasing crude oil costs as
they were during the summer surge in crude oil prices. Earlier refinery
capacity shortages had augmented gasoline refinery-marketing margins by 20 to
30 cents per gallon. But those elevated margins were quickly eroded by
competition, thus allowing gasoline prices to actually fall during the summer
months even as crude oil prices remained firm. That cushion no longer exists.
Refinery-marketing margins are back to normal and, hence, future gasoline and
home heating oil prices will likely mirror changes in costs of light crude oil.
With increasing investment in upgrading capacity at refineries, the
short-term refinery problem will be resolved. More worrisome are the
longer-term uncertainties that in recent years have been boosting prices in
distant futures markets for oil.

Between 1990 and 2000, although spot crude oil prices ranged between $11 and
$40 per barrel for WTI crude, distant futures exhibited little variation around
$20 per barrel. The presumption was that temporary increases in demand or
shortfalls of supply would lead producers, with sufficient time to seek,
discover, drill, and lift oil, or expand reservoir recovery from existing
fields, to raise output by enough to eventually cause prices to fall back to
the presumed long-term marginal cost of extracting oil. Even an increasingly
inhospitable and costly exploratory environment–an environment that reflects
more than a century of draining the more immediately accessible sources of
crude oil–did not seem to weigh significantly on distant price prospects.

Such long-term price tranquility has faded dramatically over the past four
years. Prices for delivery in 2010 of light, low-sulphur crude rose to more
than $35 per barrel when spot prices touched near $49 per barrel in late
August. Rising geopolitical concerns about insecure reserves and the lack of
investment to exploit them appear to be the key sources of upward pressure on
distant future prices. However, the most recent runup in spot prices to nearly

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