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Greenspan: Pricey oil no big deal, yet
Says few signs have pointed to economic weakness but makes case for free-market switch to energy diversity; touts ethanol.

(NEW YORK) - CNNMoney.com) -- Former Federal Reserve Chairman Alan Greenspan told lawmakers Wednesday the U.S. and world economy has been able to withstand the high price of oil, but argued that crude is running out and a free-market-led switch is already under way.

"It is difficult to find serious erosion in world economic activity as a result of rising oil prices," said Greenspan, testifying before the Senate Foreign Relations committee. "But recent data indicate we are finally experiencing some impact."

Alan Greenspan
Alan Greenspan
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He encouraged a switch to more diverse sources of energy, like liquefied natural gas, nuclear and, especially, cellulosic ethanol, but cautioned against too much government involvement in nurturing these industries.

"It would kill the market effort," he said, responding to questions from several senators who asked if the government should embark on a Manhattan Project or Apollo-like venture to promote alternative fuels. "I think at the moment the markets are working in the direction of a solution. But what investment fund would want to compete with unlimited funding?"

He was especially bullish on cellulosic ethanol, which differs from current ethanol in that it can be made from any section of the plant as opposed to just part of it - in the case of corn it could be made from the leaves and stalk instead of just the kernel.

"If it begins to be credible, you'll get an awful lot of investments coming in, especially if the numbers make sense, which I think they do," he said. "It's the only thing that can generate the volumes to be a competitive thrust against gasoline."

Experts have said cellulosic ethanol is anywhere from 2 to 10 years away from being commercially competitive.

In another nod to market forces, Greenspan cautioned against what he said was a growing trend toward protectionism within the U.S., saying flexibility had helped allow the country to weather not only the recent oil price shocks but also other major events like Sept. 11, 2001 and the stock market crash of 1987.

"It undermines the flexibility process," he said. "It limits the ability of everything to move."

He also defended big investment fund money in the oil markets, often criticized for artificially driving up prices, as helping reduce demand and bring about a switch to a more diverse energy mix.

"Speculators...[T]end to advance the adjustment process so when corrections occur they are far less abrupt," he said. "We are literally seeing significant acceleration of energy production in the corporate sector and a decline in demand. That would not have happened without the financial sector."

Several recent studies have said U.S. demand for gasoline is still rising despite the high prices, but that it's not rising as fast as usual.

He said high prices have been effective in helping bring the growth in demand down, but said more is needed.

"One in seven barrels [of oil production worldwide] are used on U.S. highways," said Greenspan. "How do we get consumption down?"

In addition to the fact that oil is essentially a finite resource and discoveries of new reserves haven't kept pace with increases in production, he blamed the high prices partly on a lack of refining capacity and partly on a lack of reinvestment by foreign nationalized oil companies and their reluctance to let multi-national firms extract in their territory.

"It's not as though the oil isn't there," he said. "It just that the capacity to bring it to production is a very big question, and a very big problem."

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Even bullish investors wary of ethanol

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.