Fed's George sees recovery headwinds from energy sector

(Reuters) - The U.S. recovery from the coronavirus crisis could face some headwinds from the energy sector, Kansas City Federal Reserve Bank President Esther George said on Friday, as massive cuts in U.S. oil production this year reverberate through the economy.

Until this year, cheap natural gas prices reduced costs for U.S. exporters, giving them a competitive advantage over other countries whose factories are more dependent on oil for their energy, George said at an energy conference.

But now, as the crisis crimped demand for oil and U.S. producers reduced output, natural gas prices have risen relative to oil prices. If that continues, she said, "certain U.S. exports are likely to suffer a decline in competitiveness, and the aggregate economy is likely to face an additional headwind as we continue our recovery."

Meanwhile, she said, states that rely on tax revenue from oil and natural gas extraction are facing shortfalls as output declines.

"Large reserve funds can help to offset some of the decline in tax revenues, but most of these states will also be forced to make spending cuts over the next couple of years, likely creating a further headwind to the recovery," she said.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)

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