Greenspan: Energy Prices a Drag on Economy

Rising energy prices have acted like a tax on businesses and consumers and have not received enough attention as a cause of the U.S. economic slowdown, Federal Reserve Board Chairman Alan Greenspan told International Monetary Conference delegates in Singapore last week. However, with oil and natural gas prices declining, he expects less pressure on businesses and consumers.

In the United States, the cost of oil and gas was up 1.8% in April, compared with a 2.1% drop in March. Fuel oil prices decreased 2.1% in April, and the cost of natural gas was down 1.6%. Energy costs overall account for about one tenth of the consumer price index.

Discounting the price of gasoline, which he also said could decline this summer, "overall, energy prices have declined since the first quarter, suggesting some easing of pressure on profit margins," he said.

Greenspan warned, however, that California's continuing power crisis could be a problem for the nation's gross domestic product. "I wish I were as sanguine about the growing electric power crisis in California, an economy that accounts for an eight of our GDP," said Greenspan. "Unfortunately, the significant additions to capacity that are currently being planned or under construction will not be in place in time for the rising seasonal demands this summer, which threaten shortfalls and blackouts."

Greenspan said that so far, the effect on California and neighboring states had been "modest," but he noted that "this imbalance should only be a concern in the short run. It is nonetheless a concern for the national economic outlook."

In a speech in May, Greenspan told the Economic Club of New York that the energy costs' rise had "pressed down directly on profit margins, especially in the fourth and first quarters. A substantial portion of the rise in total costs of nonfinancial, non-energy corporations between the second quarter of last year and the first quarter of this year reflected the increase in energy costs."

Greenspan noted that "going forward, the prospect for higher electricity costs is most pronounced, of course, in California."

Said Greenspan, "Because we import little natural gas, higher prices largely result in a transfer of income from natural gas users to natural gas producers. Nonetheless, these higher prices are likely to weigh on the economy in the short run because the increase in capital spending by energy producers is unlikely to offset the drag on spending by energy consumers."

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