The potential for oil and gas prices to continue rising rather than flatten out, as the current futures market suggests, could put optimistic economic forecasts in jeopardy, Federal Reserve Chairman Alan Greenspan told the House Financial Services Committee last week. As energy prices rise and place upward pressure on costs, Greenspan said the central bank would likely continue increasing interest rates gradually to curb core inflation.
"A further rise [in energy prices] could cut materially into private spending and thus damp the rate of economic expansion," he said. "In recent weeks, spot prices for crude oil and natural gas have been both high and volatile. Prices for far-future delivery of oil and gas have risen even more markedly than spot prices over the past year.
"Apparently, market participants now see little prospect of appreciable relief from elevated energy prices for years to come."
Greenspan referred to the industry's growing ability to tap world oil and gas reserves, but he also noted that most of those reserves are located in places where foreign investment is restricted or faces considerable political risk.
"Moreover, the preponderance of oil and gas revenues of the dominant national oil companies is perceived as necessary to meet the domestic needs of growing populations. These factors have the potential to constrain the ability of producers to expand capacity to keep up with the projected growth of world demand, which has been propelled to an unexpected extent by burgeoning demand in emerging Asia."
Greenspan cited the growing number of liquefied natural gas import terminals in the United States as a positive factor in influencing natural gas prices going forward. "More favorably, the current and prospective expansion of U.S. capability to import liquefied natural gas will help ease longer-term natural gas stringencies and perhaps bring natural gas prices in the United States down to world levels."
While there are significant uncertainties regarding energy prices, he said the Federal Reserve's base forecast still calls for continued economic growth and contained inflationary pressures.
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