Silver Linings
Viewing the world from Nova Scotia

Silver Donald Cameron
23 May 2009

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Jeff Rubin: Prophet of Petroleum

When Jeff Rubin said that oil was going to $50 a barrel, other economists thought he was on drugs. But it did. They scoffed again when he said it would go beyond $100. It went to $147 before dropping to $50. Don't be suckered, says Rubin. As the recession ends, oil will go far higher -- $200, $400, who knows?

For 20 years, Rubin was Chief Economist at CIBC World Markets. His newly-published book Why Your World Is About To Get a Whole Lot Smaller (Random House,$29.95) rests on a simple argument. Our entire globalized economy depends on cheap oil, but we have already burned most of the easily-obtained free-flowing oil. That's why we're now spending vast amounts to wring the difficult oil from the deep sea and the tar sands, because that's all that's left.

So the world's steadily-rising demand for oil ultimately can't be satisfied. According to conventional economics, when a thing is scarce, its price goes up. Higher prices stimulate more production, which drives the price down again. But not this time. With the easy oil already used, we'll be hard-pressed even to maintain today's production for very long. More and more dollars will chase less and less oil, and the price will soar.

When the oil price jumps, the economy slumps. One of Rubin's startling assertions is that four of the last five world recessions were caused by upward spikes in oil prices -- two after the OPEC oil shocks of the 1970s, one after Iraq invaded Kuwait and torched its oil wells, and another one right now. This recession, Rubin contends, is a result not of malodorous mortgages in Middle America, but of $147 oil.

There's a pattern, says Rubin. The oil price rises, and the economy stalls. The demand for oil then drops sharply, and the oil price falls. Consumers and producers alike heave a sigh of relief and get back to work until the next spike. But notice this: the prices always ratchet upward. In 2000, when Rubin predicted $50 oil, a $30 price was considered high. Just eight years later, we regard $50 oil as cheap.

Without cheap oil, the globalized economy withers. As fuel costs become prohibitive, companies stop importing raw materials and shipping products halfway around the world. High transport costs, says Rubin, work exactly the same as a tariff, penalizing imports. Firms realize that they can compete more effectively if their factory is close to the consumer.

The bad news is, no more Chinese-made bargains at Wal-Mart, no more cheap food from California and Chile. The good news is, a lot more jobs in factories close to home, and a bright new dawn for local agriculture.

Coping with climate change will also erode globalization. Rubin predicts that the US will soon impose mandatory carbon controls on its own industries -- and will insist that its trading partners cut their own emissions too, or face a carbon tariff for their products at the border.

Indeed, a carbon-control bill now in Congress includes a provision to impose tariffs on imports from countries with lax climate-change rules. The main target is China, but Stephen Harper's Canada is not exempt. Expect hard questions about the tar sands, for instance. Bob Page, an Alberta energy executive, chairs the national roundtable on environment and the economy, a true fox in the henhouse. He condemns the Congressional initiative as "protectionism." I'd call it "leadership."

The inevitable adjustments will be painful for a small province that generates power from coal and heats its homes with oil, but we may like the eventual results. Think of walkable neighbourhoods, efficient public transit, revitalized small towns and villages, close relationships between local businesses and customers. Cleaner air, safer food, healthier forests. How bad is that? Europeans, Rubin notes, already live like that. In 1950 we lived that way too, and we thought our lives were pretty good.

Is Rubin correct? Well, this summer, Marjorie and I are going to insulate and tighten the house, build a woodshed and install a solar hot water heater. Last winter's oil prices were an unexpected gift. They gave us a chance to prepare for the next spike -- and we're not going to waste it.

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I'm Silver Donald Cameron, a professional columnist and author. My most recent books are Sailing Away from Winter, and The Living Beach. For more about me, go to www.silverdonaldcameron.ca