Jeff Rubin on oil and de-globalization

Jeff Rubin, former chief economist and chief strategist at CIBC World Markets, has published Why Your World is About to Get a Whole Lot Smaller. It is an important, entertaining read. I spoke to him yesterday about the price of oil and his prediction that local economies will take on renewed importance.

Why is our world about to get smaller?
The issue is we’re running out of oil. Not in some absolute, geological sense. There are 165 billion barrels in the Canadian oil sands alone. But we’re running out of the oil that Canadians and other folks can afford to burn. Because the very prices that it will take to lift all of that oil out of the sand, or out from 10,000 feet below the sea bed of the Gulf of Mexico, are prices that will take you off the road. They’ll be the kind of prices that we’ve already got a glimpse of and that will very quickly see again when the recession is over. There’s really not a whole lot we can do to prevent oil prices from getting back into triple-digit levels. But we can take steps to ensure that the next time oil prices get to those levels, they don’t have the same devastating impact that they have today.

You’re predicting $200 a barrel for oil. When?
By 2012. But you know what, we don’t need to see $200 oil, we just need to see triple-digit oil for the things that I’ve written in my book to start happening. By that I mean de-globalization. I believe we’ll see triple-digit oil prices within 12 months of an economic recovery.

You believe that the price of oil triggered the downturn.
There’s no question that the sub-prime mortgage market and the credit squeeze added fuel to the fire. But we didn’t need any help from Lehman Brothers for triple-digit oil prices to deep-six the world economy. Let’s not forget that oil shocks half this size, even in real dollar terms in 1973 and 1979, produced devastating recessions in their own right. Why wouldn’t a shock twice as big produce an even bigger recession. How did sub-prime mortgages create the recessions that were twice as deep overseas as they were in Cleveland? And why did they start even before the recession started in Cleveland.

You describe a scenario where the economy recovers, oil prices rise and then we go back into recession.
Not necessarily. It’s only the trigger for another deep recession if we insist on trying to consume oil like we did when it was much cheaper and much more abundant. What we’ve got to do is find a way of reducing the energy requirements of our economy. I think the single most important way of reducing that is to go back to local economies because globalization, by that I mean producing something at one end of the world to be sold at the other end of the world, is an extremely energy-intensive way of organizing the economy. And it only works when there’s cheap energy.

How will that change our lives?
You will stop traveling around the world. You’ll stop importing foods from halfway around the world. You’ll stop commuting 50 miles a day to work. You’ll start changing your diet. You won’t have an avocado salad in February in Toronto because the price of flying in that avocado makes that salad more costly than a filet mignon.

Local economies become important again.
Triple-digit oil prices will breathe new life into our rust belt. Let’s take steel for example. Think of what has to happen for China to export steel to us. They first have to schlep iron ore from Brazil, all the way across the Pacific Ocean, convert that into steel, which in itself is a pretty energy-intensive proposition, and then ship the finished steel back across the Pacific Ocean to us. Believe me, the savings and labour costs are going to be more than eaten up by what they burn in fuel. So if we’re no longer getting our steel from China, those old abandoned steel mills in Hamilton may soon spring back to life. We’re going to have to make more of our things. And that’s going to be as true of steel, as it is of food, as it is of plasma TVs.

If we don’t make the changes you describe, what happens?
We just bang our heads against the ceiling of $150 oil prices and go right back into recession. But I’m saying that peak oil doesn’t have to mean peak GDP. Peak oil only has to mean peak GDP if we insist on engineering our GDP with so much oil. When we go back to local economies, we’re going to find we’re able to produce things without burning so much oil because we’re not going to be moving them around the world. The recipe for success in tomorrow’s economy is not to find a specialized niche in the global market, but rather to reconnect with your local market and serve that market because the very distance that keeps you from exporting also keeps exporters from penetrating your market.

What does this mean to investors?
Obviously, I think oil prices are going higher, significantly higher. The second thing that comes out of my book is that we’re headed to a very inflationary world. Higher oil prices are going to de-globalize the economy. What it’s going to do is mean that we can no longer consume things made by other people’s cheap labour. We’re going to have to start producing things ourselves, and that means we’re going to be paying a lot more for the things we buy.

Jeff Rubin.-----CHEERS!!!