MercoPress. South Atlantic News Agency

Oil addiction threatening US economy warns Greenspan

Rising energy prices are pushing up inflation and increasingly threatening the U.S. economy, former Federal Reserve Chairman Alan Greenspan testified this week before Congress.

In his first appearance on Capitol Hill since he ended his nearly two decades as Fed chief, Greenspan told the Senate Foreign Relations Committee that the United States 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.

Speculators are betting that oil will cost above 60 US dollars a barrel six or seven years out, he said, suggesting that there won't be a significant retreat for oil prices in coming years.

But "current oil prices over time should lower to some extent our worrisome dependence on petroleum" with the development of alternative fuels and broader use of electric-hybrid cars.

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'' and this ''is a very serious issue".

Besides China and United States oil appetite have virtually absorbed all idle pumping capacity and on the other side investment has been insufficient with the possible exception of Saudi Arabia, which leaves the world oil market in a very precarious, volatile situation.

Greenspan called for a speedy development of alternative energy sources such as ethanol from cellulose and liquefied natural gas.

But he ruled out conventional corn ethanol since if every bushel of US corn went to producing ethanol, it would only replace 10% of the US gasoline consumption. Among the benefits from cellulose ethanol is that unlike gasoline its production does not produce gases that contribute to global warming.

As to liquid gas Greenspan said he was disappointed with the lack of natural-gas terminals in the US and pointed out that Japan and other countries "have locked supplies in long term contracts".