High energy prices to impact US energy use

Apr 27, 2004 02:00 AM

Federal Reserve Chairman Alan Greenspan said the likelihood of persistently high energy prices would help check US energy use and lead businesses to rethink energy-related investment decisions.
"The rise in six-year oil and (natural) gas futures prices is almost surely going to affect the growth of oil and gas consumption in the United States," Greenspan told a conference on energy security sponsored by the Centre for Strategic and International Studies.

The Fed chief said the "dramatic rise" in oil and natural gas futures prices in recent years carried the potential to "significantly affect the long-term path of the US economy." Greenspan said that since prices had risen sharply for the delivery of oil and natural gas six years out, such elevated prices would likely prove the norm.
"Six years is a period long enough to seek, discover, drill, and lift oil and gas, and hence futures prices at that horizon can be viewed as effective long-term prices," he said. "The recent (price) shift... has been substantial enough and persistent enough to influence business investment decisions, especially for facilities that require large quantities of natural gas," Greenspan added.
"Although the effect of these developments on energy-related investments is significant, it doubtless will fall far short of the large changes in our capital stock that followed the 1970s surge in crude oil prices," he said, noting that the US economy had grown much less energy-dependent.

Greenspan said high oil prices "presumably" reflected concerns over the potential for long-term supply disruptions in the Middle East, adding that market forces were as important a determinant of prices as the oil-producing OPEC cartel.
"Although OPEC production quotas have been a significant factor in price determination for a third of a century, the story since 1973 has been as much one of the power of markets as of power over markets," he said. "The signals provided by market prices have eventually resolved even the most seeminglyinsurmountable difficulties of inadequate domestic supply in the United States," Greenspan added.

Crude oil prices have been above the $ 22 to $ 28 target price range set by OPEC for all but one working day since last November, with US crude prices hovering near $ 38 a barrel in recent days. Saudi Oil Minister Ali al-Naimi told the conference earlier experts had underestimated oil demand in the first quarter.
"There are signs that worldwide inventories have begun to build but no one really knows for sure," he said.

At a meeting of finance ministers and central bankers from the Group of Seven nations, Greenspan had said precautionary stock building was partly behind surging energy costs, according to French officials. At the conclusion of their talks, the G7 ministers heralded a building global economic recovery, but said further oil price rises posed a threat. As for the rise in natural gas futures prices, Greenspan pinned it on North American supply-and-demand issues.
"Dramatic changes in technology in recent years, while making existing natural gas reserves stretch further, have been unable, in the face of inexorably rising demand, to keep the underlying long-term price for natural gas in the United States from rising," Greenspan said.

As he has on numerous occasions, Greenspan said the United States should increase the number of port facilities that can handle LNG.
"Without the flexibility that such facilities impart, imbalances in supply and demand must inevitably engender price volatility," he said.
Greenspan welcomed signs that a "major expansion" of US natural gas import facilities was under way, but said: "The near term, however, is apt to continue to be challenging."

Source: The Associated Press
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