Fed chief predicts oil prices to fall

Federal Reserve chairman Dr Alan Greenspan said on Thursday that world oil prices were likely to fall from their recent highs and that the oil price spike had done little damage to the US economy.

In an upbeat speech at The Cato Institute's annual monetary conference, Dr Greenspan also said there was no "credible evidence" that the acceleration of productivity growth, which had been spurred by technological advances in recent years, had come to an end.

The continuing gain in productivity - the amount of goods and services produced for each hour worked - has allowed firms to pay higher wages without passing those costs on to their customers and "has been essential to containing price increases", the Fed chairman said.

Touching on a key issue in the current presidential campaign, Dr Greenspan said the big swing in the federal budget from large deficits in the early 1990s to growing surpluses most recently "has helped fill the pool of saving that has fed productivity-enhancing and cost-reducing capital formation". The earlier outsized federal budget deficit was absorbing an inordinate share of our national saving, he said.

Vice-President Mr Al Gore, the Democrat presidential nominee, frequently makes this same point about federal finances in his campaign appearances while attacking his opponent, Republican Governor George W Bush of Texas, for proposing a broad tax cut that would reduce future budget surpluses by $US1.6 billion ($3 billion) over the next decade.

However, Mr Gore has also proposed a series of smaller tax cuts that would reduce the surpluses by about $US500 billion over the same period and has urged spending increases for a variety of programs that also would eat into the surplus.

"The mounting fiscal surpluses have been an important source of national saving, muting upward pressures on interest rates at a time of strong demand for private credit," Dr Greenspan said.

"By keeping the cost of capital lower than it otherwise would have been, the surpluses have contributed to [greater capital investments] and faster growth of productivity."

Then with a nod to the campaign promises and the large increase in the fiscal 2001 budget now pending in Congress, he added, "But I believe most of us harbour doubts about whether the dynamics of the political process, some of which have been on display in the current budgetary deliberations, will allow the surpluses to continue to grow."

Dr Greenspan's comments on the outlook for oil prices and how their increase has affected the economy were the most detailed he has ever given.

After noting that the US economy uses oil much less intensively than it did in the 1970s when oil price spikes did great damage, Dr Greenspan said it "still has the potential to alter the forces governing economic growth in the US".

"To date, the spillover from the surge in oil prices has been modest," he said. "Any effect on inflation expectations has been virtually nil. Moreover, despite some slowing that likely has been related in part to the bite from the so-called 'oil tax' on household incomes, the growth of consumer spending has remained firm. But policymakers will need to be on the alert for oil-driven, indeed energy-driven, risks to our expansion."

Dr Greenspan said oil prices likely would fall because they were far above the cost of producing crude oil even from the most expensive oil fields in operation. New technological advances have "more than doubled the drilling success rate for new field wildcat wells during the past decade ... [and] newer recovery techniques reportedly have raised the proportion of oil reserves eventually brought to the surface from a third to nearly a half in recent decades," he said.

While prices for oil currently available to refiners have soared and plunged, the price per barrel in futures contracts calling for oil to be delivered six years down the road generally moved lower over the past decade, Dr Greenspan said. That six-year time span was long enough for companies "to seek, discover, drill and lift oil," he said.

- The Washington Post

http://www.smh.com.au/news/0010/21/business/business15.html

-- Martin Thompson (mthom1927@aol.com), October 20, 2000