Alan Greenspan, the former chairman of the US Federal Reserve, today said the global economy is starting to show the burden of higher oil prices after a long period of resilience. A price spike in the wake of a successful terrorist attack could derail economic growth, he warned.

"If we get a big shock it can create a significant contraction in the economy," Mr Greenspan said in his first appearance before Congress since stepping down as the head of America's central bank after 17 years earlier this year.

"It’s very difficult to tell how much because a large part is psychological."

Shortly after Mr Greenspan's comments, oil prices fell by more than $1 a barrel after official US government data showed rising domestic inventories of crude-oil and gasoline.

Oil prices hovered just above $71 a barrel in New York after testing $75 earlier this week on fears Iran could halt supplies as part of its disputes with the US over its nuclear-fuel enrichment programme.

Mr Greenspan, who was appointed as an economic advisor to Gordon Brown after leaving the Fed in January, said the US and global economies have already shown some signs of softening in the face of surging energy costs.

"To date, it is difficult to find serious erosion in world economic activity as a consequence of sharply higher oil prices. Indeed, we have just experienced one of the strongest global economic expansions since the end of World War II," he said.

"The United States, especially, has been able to absorb the huge implicit tax of rising oil prices so far. However, recent data indicate we may finally be experiencing some impact."

Ben Bernanke, Mr Greenspan's replacement at the Fed, has been forced to take a hawkish stance on inflation despite evidence suggesting the US economy is cooling.

The consequent prospect of interest rates rising while the US economy slows has played a large part in recent sell-offs of equities around the globe.

Mr Greenspan said that American business "to date has largely succeeded in finding productivity improvements that have contained energy costs." But he added that consumers "are struggling with rising gasoline prices."

According to Mr Greenspan, worries over geopolitical stability and terrorism have been a major factor in the volatile crude markets.

"Growing threats of violence to oilfields, pipelines, storage facilities, and refineries, especially in the Middle East, have increased the private demand to hold oil inventories worldwide," he told the the Senate Foreign Relations Committee.

"Oil users judge they need to be prepared for the possibility that at some point a raid will succeed, with a devastating impact on supply."

Mr Greenspan added that the rapid rise of speculation from hedge funds and others in oil markets had been helpful and had helped the global economy absorb the shock of higher prices.

"What the financial system has done is preventive medicine," he said.

Light sweet crude for July delivery fell $1.35 to $71.15 a barrel on the New York Mercantile Exchange, where gasoline futures slid by 4.38 cents to $2.135 per gallon. July Brent crude futures on London’s ICE Futures exchange fell 43 cents to $70.38 a barrel.

In its weekly petroleum report, the US Energy Department said US crude-oil stocks grew last week by 1.1 million barrels to 346.6 million barrels, or 4 per cent above year ago levels. Gasoline inventories grew by 1 million barrels to 210.3 million barrels, or 2.5 per cent below year ago levels.

The market also reacted to reports that gunmen have kidnapped five South Koreans in an overnight raid on a southern Nigeria natural-gas plant owned by Royal Dutch Shell.

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