Greenspan: Economy Will Adjust to Oil Prices

This year's oil price surge will not be a replay of the oil shocks of the 1970s and 1980s that sent the United States into a series of recessions, Federal Reserve (search) Chairman Alan Greenspan (search) said Friday.

Greenspan delivered a generally upbeat assessment of the economy's ability to withstand this year's spike in oil prices, but he added a significant qualifier.

"Obviously, the risk of more serious negative consequences would intensify if oil prices were to move materially higher," the Fed chairman said in his most extensive comments this year on energy.

Greenspan spoke on a day when crude oil prices climbed further into record territory with the price in New York trading hitting $54.88, up 12 cents from Thursday's record close.

He said that even at the current levels, crude oil prices are still about 40 percent below the all-time highs — in inflation-adjusted terms — of February 1981.

"The impact of the current surge in oil prices, thought noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s," Greenspan said in a Washington speech.

His comments had a soothing impact on Wall Street, giving a boost to stock prices that had plunged Thursday over new supply worries given the threats to production in the Middle East and other key oil producing countries.

Greenspan predicted the global economy will adjust to the recent surge in prices by boosting energy exploration and production and by increasing fuel efficiency. But he conceded that the transition period could feature unexpected bumps.

"We and the rest of the world doubtless will have to live with the uncertainties of the oil markets for some time to come," he said.

Greenspan said this year's rise in oil prices, which currently stand 80 percent higher than 12 months ago, had the effect of imposing a tax on U.S. consumers equivalent to 0.75 percent of the country's total economic output, or about $80 billion.

That was a smaller dampening effect than the oil crises of the 1970s, he said, which were severe enough to send the country into a number of recessions.

But Greenspan said he believed existing technology and improvements spurred by higher prices should be sufficient to "ensure the needed supplies (of energy) for a very long while."

He made no direct reference to what the central bank might do in response to continued increases in energy prices. But many analysts read his remarks as a signal that the Fed is not yet concerned enough to suspend its campaign to boost interest rates to make sure inflation stays under control.

The Fed has raised its key interest rate from a 46-year low of 1 percent to 1.75 percent in three quarter-point moves in June, August and September. Many analysts look for a fourth rate hike when the Fed next meets Nov. 10.

"Greenspan is saying that the increase in energy prices is a minor, not a major, problem," said David Wyss, chief economist at Standard & Poor's (search) in New York. "But nobody knows for sure because nobody knows what is going to happen in the Middle East."

Wyss said he believes oil price increases that have already occurred will trim about 1 percentage point from economic growth next year. He is forecasting the gross domestic product will expand by just 3.5 percent next year, compared with estimates by many analysts of 4 percent-plus GDP growth this year.

Greenspan several months ago said the big jump in oil prices had helped push the country into a "soft patch" of sharply slower economic growth as consumers cut back drastically on their spending. However, last month Greenspan said he believed the economy has "regained some traction" after the summer slowdown.

Economic data of late has been mixed. The government reported Friday that retail sales jumped by 1.5 percent in September, the biggest increase in six months, but industrial production rose a barely discernible 0.1 percent as oil and gas production was restrained by the hurricanes that battered the Atlantic and Gulf coasts.

President Bush, campaigning for re-election, insists the economy is on the rebound, but challenger John Kerry, pointing to lackluster job growth, says many people are still facing economic difficulties.