tripled from 2002 to 2004, but they actually fell a bit last year as production disruptions in a number of countries limited supply and as consumers in other countries competed for available cargoes. thus, natural gas prices are likely to remain elevated for at least the coming few years. it is possible, however, that within a decade new supplies from previously untapped areas of north america could boost available output here, while imports of lng will increase to more substantial levels as countries seek to bring their isolated natural gas reserves to market. given time, these developments could serve to lower natural gas prices in the united states significantly. nonetheless, because of the higher costs of producing these supplies relative to the traditional sources of natural gas, as well as the elevated cost of other energy sources such as oil, natural gas prices seem unlikely to return to the level of the 1990s. thus, the supply - demand fundamentals seem consistent with the view now taken by market participants that the days of persistently cheap oil and natural gas are likely behind us. the good news is that, in the longer run, we have options. i have already noted the scope for improvements in energy efficiency and increased conservation. considerable potential exists as well for substituting other energy sources for oil and natural gas, including coal, nuclear energy, and renewable sources such as bio - fuels and wind power. given enough time, market mechanisms are likely to increase energy supplies, including alternative energy sources, while simultaneously encouraging conservation and substitution away from oil and natural gas to other types of energy. economic and policy implications of increased energy prices what are the economic implications of the higher energy prices that we are experiencing? in the long run, higher energy prices are likely to reduce somewhat the productive capacity of the u. s. economy. that outcome would occur, for example, if high energy costs make businesses less willing to invest in new capital or cause some existing capital to become economically obsolete. all else being equal, these effects tend to restrain the growth of labor productivity, which in turn implies that real wages and profits will be lower than they otherwise would have been. also, the higher cost of imported oil is likely to adversely affect our terms of trade ; that is, americans will have to sell more goods and services abroad to pay for a given quantity of oil and other imports. for the medium term at least, the higher bill for oil imports will increase the u. s. current account deficit, implying a greater need for foreign financing. under the assumption

" financial stability " staff groups to oversee such monitoring and, in some cases, to publish regular financial stability reports. in the event that such monitoring suggests that the operations of some institutions or markets are under significant strain and, importantly, that the resulting pressures on businesses and households could have a material adverse effect on the real economy, the central bank may want to respond by adjusting the stance of monetary policy. finally, financial innovations may on occasion warrant new regulations because financial institutions either cannot or will not manage the associated risks appropriately. indeed, regulation should be seen as part of the broader " infrastructure " that supports both financial stability and innovation, and like other more traditional infrastructure, regulatory regimes have to keep up. for example, developments in financial markets and advances in the ability of banks to measure and manage their risks have increasingly made the existing capital regulation of the largest banks, the 1988 basel accord, look antiquated. basel ii is a more flexible framework than basel i and is intended to better permit capital regulation to keep up with financial market innovations in the future. to conclude, i wish to emphasize that policymakers should have a bias toward trusting financial markets to manage the introduction of new products and the development of new institutions smoothly and without undue stress to the financial system. however, we cannot take such an outcome for granted : financial firms may not consider the effects of their decisions on the stability of other firms or on the broader financial markets, and some may lack the incentives and ability to learn about and manage the risks induced by financial innovations. in such cases, policymakers may need to work with markets and their participants, and on occasion regulate them, to achieve the desired outcomes. however, policymakers should, wherever possible, avoid premature regulation that could stifle innovation. i would note that a significant number of substantial shocks to financial markets have occurred in recent years - - including, for example, the difficulties at long - term capital management and the unexpected and massive fraud at some high - profile companies - - and yet the broader effects on the real economy have ultimately been quite small. our financial markets are flexible and resilient, and they can absorb shocks surprisingly well. as a result, most risks caused by new developments in financial markets should be manageable without heavy - handed regulation. this meeting is a good example of what my middle course suggests we should be doing : working hard to understand innovations and their possible implications. alertness and knowledge on the part of policymakers would go a long way toward