The U.S. Federal Reserve Chairman says higher oil prices will slow world markets. But the U.S central bank chief told business leaders in Tokyo that the damage will not be as severe as that seen when energy costs surged in the 1970s.
Alan Greenspan is warning that high oil prices will be a burden on the global economy for some time.
"Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on," he said. "In the United States, Japan and elsewhere, the effect on growth would have been greater had oil not declined in importance as an input to world economic activity since the 1970s."
In a speech in Tokyo, the Federal Reserve chairman also said that, with tight world markets and high demand, the shutdown of oil platforms and refineries last month by hurricanes in the United States was "an accident waiting to happen." He said that even before the hurricanes, the world oil market had become strained to a degree not experienced for more than a generation.
But Mr. Greenspan said, because of increased energy efficiency, the damage will be less serious than it might have been. Since prices originally surged in the 1970s, oil's role as a factor in global gross domestic product has fallen by one-third, and by half in the United States.
He praised the improvement seen in Japan, which has rapidly shifted to other energy sources and improved efficiency.
"Subsequently, shocked by the increase in prices and without indigenous production to cushion the effect on incomes, Japan sharply curtailed the growth of its oil use, reducing the ratio of oil consumption to GDP by about half as well," he said.
But Mr. Greenspan is troubled by constraints in refining capacity.
"Besides feared shortfalls in crude oil capacity, the status of world refining capacity has become worrisome as well," he said. "Crude oil production has been rising faster than refining capacity over the past decade."
Mr. Greenspan says markets will have to be innovative in developing new approaches to energy production.
And if history is any guide, he said, less costly energy sources will replace oil long before reserves run out. As an example, he mentioned how oil displaced coal as the preferred fuel while there were still large untapped reserves of coal. But he cautioned the transition to new fuels would take time.