Jeff Rubin wins National Business Book Award

Share

Jeff Rubin's Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalization is the winner of Canada's 2010 National Business Book Award. The award was established in 1985 to recognize the outstanding talent in Canadian business writing. The $20,000 prize is sponsored by PricewaterhouseCoopers, BMO Financial Group and media partner The Globe and Mail.

Mr. Rubin also writes a blog for ReportonBusienss.com called Jeff Rubin's Smaller World.

Jeff Rubin is former chief economist at CIBC World Markets. Read an excerpt and listen to a reading from his book below.

Excerpted from Why Your World Is About to Get a Whole Lot Smaller. Copyright © 2009 Jeff Rubin. Published by Random House Canada. Reproduced by arrangement with the Publisher. All rights reserved.

It is funny how a recession looks like good news to some people.

When global credit evaporated in the wake of the 2008 subprime mortgage crisis, oil prices tumbled along with the values of the world's stock markets. Seemingly overnight the price of a barrel of oil plunged from an all-time high of $147 (U.S.) a barrel to as low as the high $30s. Predictably, those who had piled into oil markets scrambled for the exit doors, especially hedge funds and other investors who were forced to sell their oil positions to come up with some money to cover the losses they were sustaining in the rest of their portfolios. And, just as predictably, what many observers concluded from watching prices fall was that there must not have been an energy scarcity problem after all, and that triple-digit prices had been just a speculative blip.

Of course, most of the commentators saying that were people who had never thought oil prices would ever get above $50 per barrel in the first place. Sure, if you think the market is going to solve the problem of high oil prices and then the price drops, you might be tempted to think that the market has done what you had such faith it would.

But no one said that oil prices will never fall. In fact, increasingly wild and destructive movement in prices is exactly what you would expect in an environment of global scarcity. Oil demand will drop in a recession, and so will the price of oil. So that can't be a surprise to anyone.

But we shouldn't be looking at oil prices as the effect of the recession. They are the cause. While the financial crisis from the imploding US subprime mortgage market gets top billing for the 2008 recession, the ascent of oil prices to record triple-digit levels played a far more major role in derailing growth in the North American and European economies.

To claim that the price decline is evidence that record prices were the consequence of massive speculation in oil markets is to ignore the underlying problem: a fundamental mismatch between global supply and demand. But what today's skeptics don't explain is why oil prices aren't $20 per barrel, as they were only eight years ago, during the last recession. West Texas prices have hovered around $40 per barrel, and Brent prices, the European benchmark, have traded around $45 even though this recession is well over three times as severe.

There is a good reason prices won't fall that far. The skeptics may not want to talk about it, but at $60 to $90 per barrel, many of the world's largest energy megaprojects, such as the Canadian oil sands, won't go ahead because those prices will no longer provide a sufficient economic return. Finding pocket change is getting pretty expensive these days and it's not going to get any cheaper tomorrow. If you believe that high prices bring new supply out of the ground, you are pretty much committed to the fact that every drop in price means that there is less oil to go around. There may be oil out there under the ground, but no one is going to sign up to lose money pumping it. The laws of economics cut both ways.

In any case, as we will see, it matters less every day how much oil is consumed by the countries of the Organization for Economic Co-operation and Development (OECD), a club of the world's thirty most advanced and wealthiest democracies. We may be easing off on demand in North America and Europe, but elsewhere in the world drivers and policy makers are getting on the accelerator even more enthusiastically than we are getting off. We can cut back as much as we like, yet as long as the Saudis and Venezuelans, the Chinese and Indians keep their feet on the gas, it is not going to matter.

In August 2008, when oil prices peaked, Americans drove 15 billion miles fewer than the previous August, the largest drop since the government started collecting data in 1942. That kind of collapse in demand is part of the reason for the decline in prices. But there are plenty of drivers elsewhere in the world who are more than happy to drive those miles and burn that oil. Even if demand were to stagnate in the rich countries, it is only going to grow elsewhere and eventually catch up to where we were when prices were so high.

But demand is not going to stagnate forever. This recession may be the deepest post-war downturn, but that is just testament to the destructive power of triple-digit oil prices. If $40 is as cheap as oil gets in the most severe recession, what happens to oil prices when the economy picks up again?

Simple. Once the dust settles from the various crises rocking financial markets, we are looking at the same basic demand-supply imbalance that we were looking at before the recession began.

That imbalance took us to nearly $150 per barrel before the recession set in. In the next cycle, the same imbalance will probably take us to $200 per barrel before another recession temporarily knocks back prices and demand.

Economic activity goes hand in hand with energy use. If you want to grow the economy, you need to burn more energy- that's precisely why dwindling oil reserves pose such a threat to global economic growth. If instead the economy falters and begins to contract, less energy is used and hence its price will fall. That doesn't mean that triple- digit oil prices were a temporary aberration, but it does give a sense of how hard it is to keep the world economy running on cheap oil and it should make it pretty clear what happens to oil prices when the recession is over.

Other than lulling us into an unjustified sense of optimism about the future direction of oil prices, a global recession will do absolutely nothing about the unavoidable fact that oil production is nearing a plateau while oil consumption around the world is still rising. Recessions don't diminish our dependence on oil; they just cut back a little on our appetite for it. When we start to feel a little better, we will be guzzling it again, and we may well be left wanting more. Because unlike after past oil shocks, there is no post- shock boost in oil supply to look forward to any more.

If we wait for Adam Smith's invisible hand to pull abundant sources of new cheap oil out of the ground, we are going to be waiting for Godot. Governments around the world may be thrusting bailout money into the hands of businesses and taxpayers, but you can count on one thing. There will be no energy bailout.

Jeff Rubin on triple-digit oil