February 2010

The end of globalization

Energy prices are bound to get higher, so we need to start thinking smaller, says Jeff Rubin

By J. Borsato

Jeff Rubin - chief economist of CIBC World Markets

It is a challenge to stand out amid the countless pundits and prognosticators with their daily chorus of predictions and explanations for why our economy is growing, stagnating or faltering. Jeff Rubin, however, has risen to the task and above the din. The outspoken former chief economist of CIBC World Markets earned fame through a string of successful predictions — and a flash of colourful language — about the price of crude oil, forecasting $100 per barrel at a time when half of that seemed a stretch.

In his new book, Why Your World is About to Get a Whole Lot Smaller, Rubin makes ever bolder predictions. He asserts the 2008 price spike of $150 per barrel was not a speculative peak, but a peek into the future. Oil prices will continue to rise as supply falls. The belief that alternative energy sources will smoothly replace fossil fuels is misguided. Ultimately, he argues, energy costs will affect everything we take for granted — the global exchange of goods, how our food is grown, where and how far we travel. Our world will become smaller.

CIM reached Rubin by telephone recently to discuss what implications his predictions have for Canada and its mining industry.

CIM: Your concept of oil economics places crude oil and its derivatives at the centre of a functioning economy.  You argue that the focus on sub-prime mortgages as the cause of the 2008 market crash is misguided and that it ignores the critical role soaring oil prices played. Given your disagreement with established opinion on its causation, what do you feel should be the correct response to the crisis?

Rubin: High energy prices cause recessions, but far from it being the end of the world, I believe the whole idea of recovery from a recession must be redefined as oil supplies dwindle.

The moment the economy stops sputtering and comes back to life, oil prices will resume their upward trajectory.  We need to make the world smaller in order to combat high oil prices.

CIM: What about supply? Can we expect new production to augment supplies from the traditional oil-rich regions such as the Middle East and the southern United States?

Rubin: The discovery of new wells is following a bell-shaped curve, and we’re rounding the arch towards a precipitous drop. To make matters worse, the benchmark in oil production, light sweet crude, is on the decline even faster, while supplies of heavier crude and bitumen extracted from oil sands are filling the gap.  As these patterns continue, oil prices will respond by moving higher to offset the increased production costs.

CIM: Skeptics have difficulty envisioning chronically high oil prices because they are not borne out by history.  In the past, spikes in the price of oil were met with increased production, technological solutions and a return to alternate energy forms such as coal and natural gas. Why is it any different now?

Rubin: The energy crises of the 1970s were political in nature and were basically solved with increased production to flood world markets, bringing the price down. The spikes in the price of oil today are fundamentally different.  World production has hardly budged since 2005. There are those who feel that the triple-digit oil prices of 2008 were a speculative blip. They are dead are wrong!

Page 1 of 2. Next
Post a comment


PDF Version