Energy Matters

Nuclear is the most reasonable power source, Alan Greenspan told some 1,200 CERAWeek attendees at dinner this evening in Houston. Daniel Yergin, founder and chairman of Cambridge Energy Research Associates, which is a business unit of IHS Inc., moderated the program.

“They have to use nuclear…when all the trade-offs are made,” Greenspan said, drawing some applause in agreement. Trade-offs include the cost of natural resources and of guaranteeing energy supply. Removing pressures on world oil “is where we’re going,” he said.

Greenspan spoke candidly, sans “Fedspeak,” which he admits in his autobiography he employed purposefully while Fed chairman.

At the CERA program, on CO2 “cap and trade,” he said the trade part makes sense but the “cap” part is unclear. “I don’t think there has been enough discussion of what we mean by ‘the cap.’” If done wrong, “you will end up with lower economic activity and significantly higher unemployment.”

Is the U.S. in Iraq because of oil?

Greenspan quipped, “There will be a footnote in the paperback (version of his autobiography).” But, seriously, in answer, “if there had been no oil under the sands in Iraq…(there would have been no) Saddam Hussein threatening his neighbors…to gain control of the Strait of Hormuz…If oil weren’t in Iraq, Saddam would not have been heard of…and the two Gulf Wars would not have existed…It’s a fundamental fact that if oil had not been discovered, it would be a different world.”

What about how world economies have absorbed higher oil prices? “It is really quite remarkable.”

Is the U.S. in a recession? “I think we’re clearly on the edge. It’s 50% or better. We’re looking at the moment at two strong forces working against each other…I don’t think people are sufficiently yet aware of the state (the American and international economies are in)…Today there is a state where…(businesses) are not pressed for credit needs…(They have surplus cash flow.) The need of funds is quite low…So the unavailability of credit has not been (a problem yet).”

He added that subprime credit “has created a major credit problem around the world.”

When will the credit pullback end? When home prices stabilize. “Until you stabilize home prices, you’re going to continue to get (unknown) loss estimates….” Credit issuers will continue to be tighter than likely needed until they can define the total exposure.

If demand for credit was greater, “we would be talking about how long and how deep (a recession) and we’re not there yet.”

He adds that, “if it wasn’t subprime (lending) that caused the problem, it would have been something else…There is a human tendency for which there is no learning curve in which we place euphoria on top of euphoria (resulting in greater risk-taking) and people look back and say, ‘Why did I do that?’” These bubbles are brought on by every generation. “When they break…(and) there is a break, there is a primordial fear (that results in excessive pullback). We are in a stall speed…but not enough yet to call it a recession…It doesn’t fit in any form to call it a recession.”

Are we barreling down to stagflation? “Stagflation is too strong a term for what we’re on the edge of.”

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch and Oil and Gas Investor This Week

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