On June 7, Alan Green-span testified before the Foreign Relations Committee of the U.S. Senate. He understands the world marketplace for petroleum. He also has access to the very best information on world oil resources and the politics of national oil companies. What follows is a review of his 1,000-word presentation.

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World oil consumption is now at about 85 million barrels a day with almost no margin for production increases. “The growing threat of violence to oil fields, pipelines, storage facilities and refineries … could have devastating impact on supply.” The great majority of world oil reserves are controlled by national oil companies. In previous years the major oil companies (the “seven sisters” – Texaco, Mobil, Esso, Gulf Oil, etc.) dominated the management of reserves. These national oil companies are using their great flow of dollars to help provide services to growing populations, not in searching for new oil and the proper management of current oil inventories.

The present oil market is driven by four events: (1) the great demand, (2) the venerability of the fragile oil infrastructure, (3) the lack, anywhere in the world, of spare oil capacity, and (4) the poor management of present oil fields operated by national oil companies. Pemex, the Mexico national oil company, has called for outside help in managing the declining Cantarell field, the second largest, and most recent, of the Giant Oil Field in the world.

These events have driven consumers to hedge future oil price increases by contracting for future oil deliveries at a fixed price. As military, economic and political fortunes change, the value of these contracts will change hourly as posted on the New York Mercantile Exchange. Oil from remote fields is shipped by tanker to refineries, then to the ultimate consumer in an elapsed time of less than two months. Future contracts, however, are typically written for 18 months.

On the “long side” of each contract the buyer agrees to pay a fixed amount for oil that is still in the ground. These contracts are bought and sold many times prior to the actual delivery of the oil. This speculative bidding up of the price of oil is a good thing.

As speculators (“punters” in British slang) drive the price above the cost of lifting the oil, investments will be made in both conservation and alternate sources of fuels.

The last refinery constructed in the United States was in 1976. This failure of refinery capacity to keep up with demand is another concern. The newer generation of available oil comes from heavy and high sulfur sources of crude which require more sophisticated refining processes.

In times past the marketplace demanded a wide range of petroleum products including heavy oils for electric power generation and industrial heating. The bulk of this demand has shifted to natural gas. An ever-increasing fraction of the crude-oil barrel must now be made into transportation fuels which, again, complicates the refining process.

Greenspan has little faith in ethanol from corn. If the entire corn crop were converted to ethanol, we would have less than 10 percent of our transportation fuel. He mentioned, several times, the appropriateness of working on ethanol from cellulous.

So much for Greenspan’s comments. What are the implications for the public? After World War II several decades of increasing incomes and decreasing energy cost drove a rapidly changing lifestyle: larger homes, creation of suburbia, second cars, second homes, big lawns, hot tubs, swimming pools – you name it – if it took energy we did it.

Now the situation is reversed: energy costs are rising faster than incomes. How do we reverse 50 years of past history? For those in the upper 50 percent of the income distribution small adjustment will be painless. For the bottom 20 percent of the income distribution the impact will be daunting.

Richard C. Hill, of Old Town, is emeritus professor of mechanical engineering at the University of Maine.