Drawing a parallel to the 1970s oil crisis, Ben Bernanke, president of the Federal Reserve, said the US economy was holding up well in the face of "severe oil-price shock" because the country was less dependent on petroleum.
The US economy is holding up in the face of a "serious oil-price shock" because it is less dependent on petroleum than in the 1970s, Federal Reserve chairman Ben Bernanke said Wednesday.
Bernanke said the record surge in energy costs has created "significant challenges" for the US and world economy but that the situation is far different than the oil crisis of the 1970s.
"Then, as now, we were experiencing a serious oil-price shock, sharply rising prices for food and other commodities and subpar economic growth," Bernanke said in remarks prepared for delivery at Harvard University's commencement.
But Bernanke said the "silver lining" in high oil prices is that it provides "a powerful incentive for action," including conservation and other measures to become more energy efficient.
"The improvement in energy efficiency is one of the reasons why a given increase in crude oil prices does less damage to the US economy than it did in the 1970s," he maintained.
"Although our economy has thus far dealt with the current oil-price shock comparatively well, the United States and the rest of the world still face significant challenges in dealing with the rising global demand for energy, especially if continued demand growth and constrained supplies maintain intense pressure on prices," he added.
"As we saw after the oil-price shock of the 1970s, given some time, the economy can become much more energy-efficient even as it continues to grow and living standards improve."
Bernanke said oil prices have been a factor in inflation, which he argued has been "significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s and then again in 1980."
But he argued that the central bank hopes to keep inflation expectations from rising, which could fuel more price pressures.
"If people expect an increase in inflation to be temporary and do not build it into their longer-term plans for setting wages and prices, then the inflation created by a shock to oil prices will tend to fade relatively quickly," he said.
"Importantly, we see little indication today of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward."
Bernanke was a 1975 graduate of Harvard.
Date created : 2008-06-04