alan greenspan : energy remarks by mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the economic club of new york, new york, 20 may 2005. * * * over the past twenty years, the american economy has absorbed the major shocks of two stock market slumps, the terrorist attacks of september 11, and debilitating corporate scandals. but we have also been subjected to other shocks, the most immediately prominent ones being the oil and gas price surges of the past two years. indeed, most analysts attribute the economic soft spots of the past two years to energy shocks. accordingly, i will devote the rest of my formal remarks to developments in oil and gas markets, and i will endeavor to address broader issues of the world economy in the question and answer period. * * * world markets for oil and natural gas have been subject to a degree of strain over the past year not experienced for a generation. increased demand and lagging additions to productive capacity have combined to eliminate a significant amount of the slack in energy markets that was essential in containing energy prices between 1985 and 2000. reflecting a low short - term elasticity of demand, higher prices in recent months have slowed the growth of oil demand, but only modestly. that slowdown, coupled with expanded production also induced by the price firmness, required markets to absorb an unexpected pickup in the pace of inventory accumulation. the initial response was a marked drop in spot prices for light, sweet crude oil. but that drop left forward prices sufficiently above spot prices to create an above - normal rate of return for oil bought for inventory and hedged, even after storage and interest costs are accounted for. as i indicated in early april, this emerging condition could encourage the buildup of enough of an inventory buffer to damp the price frenzy. indeed, since early april, private crude oil inventories in the united states have been accumulated at a seasonally adjusted rate of around 250, 000 barrels a day, rising as of last week to the highest seasonally adjusted level in three years. a somewhat lesser, but still important, accumulation of crude oil is evident in other major countries. inventory accumulation is likely to continue unless demand rises, output declines, or we run out of storage capacity. in the united states, natural gas prices in recent weeks, seasonally adjusted, have come off their peak of early april, but those prices still remain significantly above the average level of 2004. working levels of gas inventories are

. as the manner in which energy is produced and consumed evolves, it is not unreasonable to expect that, in the long run, the prices per unit of energy from various sources would tend to converge. at present, long - term futures prices for natural gas are, on a btu - equivalent basis, notably less expensive than those for crude oil. clearly, limited substitution possibilities across fuels have resulted in persistent cost differentials, but those very differentials inspire the technologies that, over time, reduce such limitations. a clear example is gas - to - liquids ( gtl ) technology, which converts natural gas to high - quality naphtha and diesel fuel. given the large - scale production facilities that are currently being contemplated, gtl is poised to become an increasingly important component of the world's energy supply. current projections of production however remain modest. gtl promises to add a good measure of flexibility in the way that natural gas resources are utilized. in addition, given the concerns over the long - term adequacy of liquid production capacity from conventional oil reserves, gas to liquids may provide an attractive, competitively priced, option for making use of stranded gas, which, for lack of access to transportation infrastructure, cannot be brought to market. * * * in summary, improving technology and ongoing shifts in the structure of economic activity are reducing the energy intensity of industrial countries, and presumably recent oil price increases will accelerate the pace of displacement of energy - intensive production facilities. if history is any guide, oil will eventually be overtaken by less - costly alternatives well before conventional oil reserves run out. indeed, oil displaced coal despite still vast untapped reserves of coal, and coal displaced wood without denuding our forest lands. innovation is already altering the power source of motor vehicles, and much research is directed at reducing gasoline requirements. moreover, new technologies to preserve existing conventional oil reserves will emerge in the years ahead. we will begin the transition to the next major sources of energy perhaps before midcentury as production from conventional oil reservoirs, according to central tendency scenarios of the energy information administration, is projected to peak. in fact, the development and application of new sources of energy, especially nonconventional oil, is already in train. nonetheless, the transition will take time. we, and the rest of the world, doubtless will have to live with the geopolitical and other uncertainties of the oil markets for some time to come. * * * we are unable to