Former Federal Reserve Chairman Alan Greenspan testifies on Capitol Hill, Wednesday, June 7, 2006 before the Senate Foreign Relations committee hearing on the economics of oil

The former chairman of the U.S. Federal Reserve, Alan Greenspan, says the global economy has been able to absorb sharp increases in oil prices.  But in an appearance on Capitol Hill Wednesday, he said high energy costs are beginning to have an impact on economic growth. 

Alan Greenspan told the Senate Foreign Relations Committee that the U.S. and other world economies are beginning to soften in the wake of spiraling oil prices, although he said the impact does not appear to be serious.

He said the global economy and the United States in particular have long been able to absorb sharp increases in the price of oil.

"The U.S. economy has been able to absorb the huge impact of rising oil prices with little consequence to date because it has become far more flexible over the past three decades, owing to deregulation and globalization," Greenspan said.

But he warned against any price or import restrictions:

"Growing protectionism would undermine that flexibility and make our nation increasingly vulnerable to the vagaries of the oil market," Greenspan said.

Greenspan said high oil prices - topping $70 a barrel - are the result of a sharp decline in spare global oil production capacity and refinery shortages.  He said the high cost of oil should prompt the United States to more seriously consider the development of alternative fuels.  

He said ethanol could become a key alternative to gasoline, although only for the short-term, as the source of ethanol - corn - is limited in supply.  A better idea, he suggested, is cellulosic ethanol, made from wood chips and similar materials:

"Cellulosic ethanol - should it fulfill its promise -- would help to wean us of our petroleum dependence, as could clean coal and nuclear power," Greenspan said.

Greenspan said the United States must decrease the demand for foreign oil if it is to achieve energy security.

"From a national security point of view, we will not be disassociated from petroleum, but problem that is easy to be concerned about - namely all this huge amount of cash going to countries who are not friends of ours - is a very serious issue," Greenspan said.

He also commented on China, where demand for cars is increasing rapidly, and fuel efficiency is not a high priority.

"Their oil efficiency is half of ours;  namely, that the ratio of oil consumption to GDP is twice that of the United States, and there is a great deal of inefficiency and obviously because their basic desire is essentially to move as fast as they can in the manufacturing area, the issue of fuel efficiency is not of the highest priority, even though they are aware of it, and obviously increasingly aware of environmental problems that affect them," Greenspan said.

It was Greenspan's first appearance on Capitol Hill since retiring as head of the Federal Reserve in January.