Oil prices to hurt - Greenspan

WASHINGTON (Reuters) - Skyrocketing energy prices will weigh on global growth but will likely exact a much smaller toll than surging oil prices did in the 1970s, U.S.
Federal Reserve Chairman Alan Greenspan said on Monday.

"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," Greenspan said in remarks prepared for delivery in Tokyo to a group of Japanese businessman on Tuesday morning local time.

"The effect of the current surge in oil prices, though noticeable, is likely to prove significantly less consequential to economic growth and inflation than the surge in the 1970s," he said.

Greenspan noted that oil prices remained below their inflation-adjusted peak of 1981 and said the world's economy had grown more energy-efficient in recent decades.

A text of his speech, which did not address the outlook for U.S. monetary policy, was made available in Washington.

U.S. crude oil prices hit a record high of $70.85 a barrel in the immediate aftermath of Hurricane Katrina, which slammed into the U.S. Gulf Coast on August 29, shuttering much of the region's oil-producing and refining capacity. Prices have moved down since and settled at $64.36 a barrel on Monday.

However, Greenspan noted distant oil futures prices had moved up close to current spot prices and said that suggested markets did not expect oil production outside of oil-producing
OPEC countries to be adequate to meet rising world demand.

The Fed chief said OPEC and other developing nations appeared to see little benefit of investing in additional production capacity, citing the "significant proportion" of oil revenue invested in financial assets as evidence.

He also issued a warning on refining capacity.

"Besides feared shortfalls in crude oil capacity, the status of world refining capacity has become worrisome as well," Greenspan said, saying oil production had risen faster than refining capacity for a decade.

"A continuing of this trend would soon make lack of refining capacity the binding constrain on growth in oil use," he said.

But, as he has in the past, Greenspan said market prices were providing the signals that could shift economic behavior in a way that would bring better balance to supply and demand.

"The incentives to alter oil consumption provided by market prices eventually resolved even the most seemingly insurmountable difficulties posed by inadequate supply outside the OPEC cartel," he said.

Greenspan said the ratio of U.S. oil consumption to its gross domestic product had fallen by half since 1973, although the pace at which it was dropping had slowed with the relatively lower oil prices after 1985.

"With real energy prices again on the rise, more-rapid decreases in the intensity of energy use in the years ahead seem virtually inevitable," he said.

He said the U.S. trend toward a less oil-intensive industrial sector and greater energy conservation in recent decades has "likely intensified of late with the sharp, recent increases in oil prices" and a drop in U.S. gasoline consumption in recent weeks was likely due to higher prices.