28-06-01 With the price of gasoline and natural gas falling in recent months, the country should be able to escape from the current energy crisis without any further adverse effects on the economy, Federal Reserve Chairman Alan Greenspan said. Greenspan said the Federal Reserve has been paying close attention to the big jump in the price of gasoline and natural gas throughout the country and the electric power shortages in California, given the crucial role energy plays in the overall economy.
He noted that the last three recession periods in the United States -- 1990-91, 1980-82 and 1974-75 -- all were preceded by sharp spikes in the price of oil. "As a consequence, we at the Federal Reserve are especially attentive to developments in energy markets and their effects on the behaviour of households and businesses," Greenspan said in a speech to the Economic Club of Chicago.

Greenspan said there have been several recent favourable developments, including a drop in the price of both natural gas and gasoline since the beginning of this year and lower demand for electricity in California as the surge in prices there has induced greater conservation.
"Since the start of the year, spot prices for natural gas have fallen significantly as the earlier run-up in prices induced a dramatic rise in drilling, a boost to output and curtailed demand," Greenspan said. He said the country was also experiencing a decline in retail gasoline prices following big price increases over the past two years.
Greenspan said the decline in gasoline prices was especially important for the economy because in previous energy crises, the jump in gasoline costs not only reduced the amount of money American consumers had to spend for other products but also shook consumer confidence.

The Fed, which has cut interest rates six times this year, most recently with a quarter-point reduction, has been concerned that the current period of economic weakness could cause consumers to cut back sharply on their spending and push the country into a full-fledged recession. Greenspan said in his Chicago remarks that recent developments, including increased supplies of gasoline and natural gas and falling prices, gave hope that the worst of the energy crunch has passed.
"The short-term energy problems we are experiencing for gasoline, natural gas and electric power will be resolved, one hopes, without any further adverse impact on our economy," he said. While the electric power shortages in California will continue to be a problem until increased generating capacity is brought on line, Greenspan said, "fortunately, the overall effects on the California economy, and on those of its neighbouring states seems to have been modest, at least to date."
However, minutes of the Fed's May meeting that were released bolstered the view of many economists that the central bank is close to the end of its credit easing efforts. In the May discussions, some Fed officials were already beginning to express worries that the Fed could overdo the rate cuts and thus increase inflation pressures once the economy regains its footing.

Greenspan used his energy speech to sound many of the same themes of increased production that are reflected in the energy plan that President Bush sent to Congress. Greenspan said it was important for the country to pursue increased production of all kinds of energy from oil and coal to nuclear power and renewable energy sources.
He also warned against imposing price caps on energy costs, saying interference with market forces would send the wrong pricing signals. "We must remember that the same price signals that are so critical for the allocative process in the short run also signal profit opportunities for long-term supply expansion," Greenspan said.