In the closing weeks of a US presidential campaign during which nominal oil prices have set records and gas prices have shuttered businesses, conversation among candidates about energy has been striking for its absence. On Oct. 15, however, a federal official not running for anything broke the silence.
Speaking to the National Italian American Foundation in Washington, DC, US Federal Reserve Chairman Alan Greenspan explained tumult in the oil market with insight seldom encountered outside the industry itself—and not that often within it. His exegesis partially filled a void the presidential candidates have created on a crucial subject and surely did so with more sophistication than either of them would have mustered. Although the address left a void of its own, the oil and gas industry could do worse than to gird its political agenda with Greenspan's message, which glittered with confidence in technical innovation and the efficiency of markets.
Technology, markets
Example: Citing concerns about the adequacy of petroleum resources and investment in relation to steadily rising demand for oil, Greenspan said, "Technology, given a more supportive environment, is likely to ensure the needed supplies, at least for a very long while."
Example: Noting the important role of quotas set by the Organization of Petroleum Exporting Countries in the past 3 decades, he said, "The story since 1973 has been as much about the power of markets as it has been about power over markets."
Example: Pointing to past forecasts that oil prices in real terms would now be twice what they actually are, he said, "The failure of oil prices to rise as projected in the 1970s is a testament to the power of markets and the technologies they foster."
Greenspan touched on most of the major stresses on the oil market: rising demand; nearly full utilization of production capacity; the growing need to make light, low-sulfur products out of increasingly heavy, sour crudes; and elevation of distant-month futures prices and pressure to build inventories due to geopolitical concerns, insecure reserves, and sluggish investment. He also put the current level of oil prices in useful perspective, pointing out that the crude price in real terms remains only three fifths of the historic peak of February 1981. And he called a price jump now "likely to prove less consequential to economic growth and inflation than in the 1970s," when the dollar value of crude-price gains represented a far larger share of national economic output.
In a period of tension over energy supply, it's more than a little strange that such a comprehensive address on oil came from the Federal Reserve chairman instead of candidates for the presidency. But it's hardly regrettable. The market orientation of Greenspan's message would come under assault in any political fray over energy. The subject needs attention, nevertheless.
Energy conditions in the US are, in fact, more precarious than Greenspan made them seem. The reason isn't oil; it's natural gas. Problems of gas supply are more immediate and local than those of oil supply. The economic effects so far are graver. And the government should be taking action.
The gas problem is no mystery. The market can't grow because of limits to supply. It's therefore jettisoning demand from its industrial sector to accommodate structural gains in gas use for power generation. Industries dependent on gas for fuel or feedstock are suffering; many have closed plants. Although gas inventories are above average, an unusually cold winter would cause problems.
Action needed
Supply has become a constraint on demand because increased gas drilling on available US acreage can do little more than sustain overall production. Supplementary supplies from LNG and the Arctic are years in the future. And a government that could act usefully on supply by opening prospective land to leasing and development refuses to do so.
Just as innovation and free markets can and will, as Greenspan asserted, restore balance to the global oil market, they can solve gas problems confronting the US. But they must be allowed to work. Leasing bans and permitting hurdles represent government in the way of activity essential to American welfare. The candidates don't want to talk about this lapse now. But one of them will have to do something about it soon.
