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THE NEW YORK TIMES: Greenspan Says U.S Can Weather Record Oil: “Last week, the Bush administration rejected Shell Oil Co.'s request to swap sour crude oil for sweet grades from the federal Strategic Petroleum Reserve, according to industry sources.” (



Posted October 16, 2004


WASHINGTON (Reuters) - Record oil prices have taken a ``noticeable'' toll on the U.S. economy but are not likely to inflict the same level of pain as in the 1970s, Federal Reserve Chairman Alan Greenspan said on Friday.


``The impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s,'' Greenspan told a luncheon hosted by the National Italian American Federation.


U.S. crude oil prices showed little reaction to Greenspan's remarks, but in late trading they marched to a record high $55 a barrel (CLX4) before settling at $54.93, up 17 cents for the day, on worry over winter heating oil supplies.


``So far this year, the rise in the value of imported oil -- essentially a tax on U.S. residents -- has amounted to about 3/4 percent of GDP (gross domestic product),'' the Fed chief said. ``The risk of more serious negative consequences would intensify if oil prices were to move materially higher.''


High oil prices can both cut into economic growth and boost inflation, a one-two punch that can be hard for a central bank to combat. The 1970s oil price spike led to a period of ``stagflation'' in which consumer prices rose swiftly despite a weak economy.


The dollar pared losses and bond prices fell after Greenspan's remarks, which traders saw as suggesting the Fed's plan to raise interest rates at a ``measured'' pace was unaltered. The stock market was unaffected.


``It is clear that this is not intended to be a policy speech. It is, rather, another Greenspan history lesson,'' said Christopher Low, chief economist at FTN Financial in New York.


Greenspan said over the long haul, technological advances and market forces would likely ensure the world had enough crude as it makes an eventual transition to other energy sources and cuts its dependence on oil.


``Over coming decades, technology, given a more supportive environment, is likely to ensure the needed supplied,'' he said.




Greenspan noted that prices for U.S. crude oil for delivery in 2010 had not tracked the sharp rise in the spot market in recent weeks, which he said suggested ``part of the recent rise in spot prices is expected to wash out over the longer run.''


He attributed the run-up in oil costs to a combination of factors: strong global demand, precautionary stock-building amid supply worries and a revival in market speculation.


Greenspan also addressed the U.S. oil market's growing concern about shrinking supplies of light, sweet grades of crude that are easier to make into gasoline and heating oil.


Supply concerns have led to a premium for sweet crude of as much as $12.50 per barrel over the heavier, sour grades that are more plentiful, a price spread Greenspan said would eventually narrow as U.S. refining capacity rose.


``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,'' he said.


Last week, the Bush administration rejected Shell Oil Co.'s request to swap sour crude oil for sweet grades from the federal Strategic Petroleum Reserve, according to industry sources. The government has granted requests by five U.S. refiners to borrow outright 5.4 million barrels of sweet crude from the stockpile to replace supplies cut by Hurricane Ivan.


As oil prices have surged, financial markets have wagered more heavily on a pause in the U.S. central bank's campaign to move historically low interest rates to more normal levels.


The Fed is widely expected to raise overnight borrowing costs a slim quarter-percentage point to 2 percent at its next policy meeting on Nov. 10.


However, with economic data mixed, oil prices weighing on consumers and no signs yet of a broad-based inflationary outbreak, economists and futures markets have begun to bet the Fed could hold fire at its subsequent gathering in December.


Greenspan did little on Friday to alter those bets.

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