Greenspan warns of energy crisis: Former Fed chief urges speedy development of non-oil sources

By KEVIN G. HALL
Knight Ridder Newspapers

June 8, 2006

WASHINGTON - Rising energy prices are pushing up inflation and increasingly threatening the U.S. economy, former Federal Reserve Chairman Alan Greenspan testified Wednesday.

He called for speedily developing alternative energy sources such as ethanol and liquefied natural gas.

In his first appearance on Capitol Hill since he ended his nearly 19-year Fed tenure Jan. 31, Greenspan testified before the Senate Foreign Relations Committee that America had better reduce its dependence on foreign oil or suffer damaging economic consequences.

A recent terrorist attack on Saudi Arabia's main oil refinery, though thwarted, should serve as a warning that a successful hit on an oil installation could spark a global price shock that would create "a significant contraction in the economy," Greenspan said.

While the U.S. and global economies have shown surprising resiliency to rising oil and natural-gas prices since 2002, Greenspan said "recent data indicate we may finally be experiencing some impact."

The former Fed chief also detailed how investors, rather than users of oil, have come to set the price of oil through purchasing futures contracts. These speculators are betting that oil will cost more than $60 a barrel six or seven years out, he said, suggesting there won't be a significant retreat for oil prices in coming years.

Prince Turki al-Faisal, Saudi Arabia's ambassador to the United States, told Knight Ridder last week that oil producers are being blamed for high prices when speculators have added $15 or $20 to the price per barrel in today's tight market.

"Traders are taking advantage of this issue," the ambassador said.

Greenspan noted that three-quarters of the world's oil reserves are state-owned. The run-up in prices is resulting in huge amounts of cash "to countries that are not friends of ours," he said. This "is a very serious issue."

Greenspan said financial speculators are doing the country a favor by accelerating the move away from oil. "What the financial system has done is preventive medicine" by encouraging less expensive alternatives to oil, he said.

The bulk of his nearly three-hour testimony focused on reducing oil dependence and boosting energy security.

The influential former Fed chief said repeatedly that cellulosic ethanol, a next-generation alternative fuel that could be made from virtually any plant fiber, appeared to be the most promising solution to America's oil addiction.

"I'd move as quickly as I could to find out whether cellulosic is a practical alternative," he said.

He said conventional corn-based ethanol holds little promise to reduce America's oil dependence significantly. If every bushel of corn grown in the United States went to producing ethanol, it would displace only about 10 percent of projected U.S. gasoline consumption, he said.

To make cellulosic ethanol, scientists deploy mass-produced, biologically engineered enzymes that can break down virtually any plant stock for fermentation and conversion into ethanol. Among its benefits is that, unlike gasoline or conventional ethanol, its production doesn't produce gases that contribute to global warming.

Pressed repeatedly, Greenspan frowned on the idea of a federal "man-to-the-moon"-type project to create alternative fuels. As a political conservative and market-oriented economist, Greenspan typically prefers private-sector to governmental solutions.

"I would hope we don't have to do that," he said. "At the moment, I think markets are working in the direction of a solution."

If cellulosic ethanol proves viable, he said, hedge funds and other investors will pour money in to develop the industry. In May, investment bank Goldman Sachs & Co. took a $30 million stake in Iogen Corp., a Canadian company that's pioneering cellulosic ethanol technologies.

America's energy future, he said, doesn't turn on a choice between good and bad, but between "not so good or worse. We have to make a choice of one or the other."

Greenspan also touted liquefied natural gas as an important tool in reducing dependence on oil and gasoline.

For years, he'd lamented the lack of liquefied natural-gas terminals in the United States. On Wednesday he complained that Japan and other countries had locked up supplies in long-term contracts.

"This could be another source of replacement for petroleum," he said.