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Greenspan Says Oil to Keep Rising on Capacity Limits

 

By David Tweed

May 14 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said oil prices will keep rising as energy companies have invested too little in production and infrastructure to cope with higher demand.

Companies haven’t been reinvesting enough to keep supply growing in line with demand, Greenspan said via satellite to a conference sponsored by Deutsche Bank AG in Singapore, according to an investment strategist who attended the event and who spoke on the condition of anonymity.

Increasing futures-market activity is expanding the aggregate demand for oil because more needs to be held in storage to meet contracts, Greenspan said, according to the person who attended the event.

“There’s evidence that fundamentals are pointing to higher prices,” said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd. in Hong Kong. “Even as demand and supply are in balance, the risks to supply and oil’s attraction as an inflation hedge are pulling it higher.”

Crude oil rose to a record $126.98 a barrel in New York yesterday on concern U.S. refiners may fail to meet demand for fuels such as diesel and heating oil. Supplies of distillates in developed countries fell 6.7 percent to 477.6 million barrels in March from a year earlier, according to International Energy Agency estimates.

Inflationary Pressures

Crude oil for June delivery was at $125.99 a barrel at 11:53 a.m. Singapore time in after-hours electronic trading on the New York Mercantile Exchange.

Higher prices of energy and raw materials are fanning inflation around the world, even as economic growth slows. Fed officials yesterday said they’re concerned about rising prices, reinforcing traders’ expectations that the central bank’s next move will be to raise borrowing costs rather than lower them.

San Francisco Fed President Janet Yellen said the central bank can’t be “complacent about inflation,” and Cleveland Fed President Sandra Pianalto said prices are rising “somewhat faster than I would prefer.”

“If Greenspan is correct that prices will rise, then inflationary pressures would set in,” said CFC Seymour’s Kowalczyk. “That would prompt the Fed to act to tighten lending.”

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This entry was posted on Thursday, May 15th, 2008 at 8:40 pm and is filed under Economic Strains of Peak Oil, Price of oil. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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1 response so far ↓

  • 1 Tommy Atkins // May 20, 2008 at 2:46 pm

    Greenspan’s comments sound very theoretical to me. There’s only so much storage available to oil “speculators” and the last I checked, oil stocks are not up significantly. In fact, I think they’re well below the 2007 average. So the evidence is just not there that speculators are driving the price up.

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