The Hill Times, June 15, 2009

Energy expert and former CIBC economist Jeff Rubin says he's doesn't give a hoot if politicians read his book. When oil prices soar, 'the folk' will force the political players to do the right thing.

By Kate Malloy

Jeff Rubin says global economy will get the "shock of its life" within 12 months of the end of the recession when oil prices hit triple digits and the age of globalization starts to come to an end.

The former maverick chief economist for CIBC's World Markets for about 20 years and author of the new book Why Your World Is About To Get A Whole Lot Smaller: Oil and the End of Globalization, says demand for oil will outstrip supply, food prices will soar, and countries will be shocked into growing their own food, manufacturing their own products, and paying a lot money more for everything.

There will be winners and losers.

The triple digit oil prices will do more for the environment "than 100 Kyotos," he says, but if the world doesn't get off oil, "the values of tolerance and equality may turn out to be artifacts of the era of cheap oil, and the world may face political and cultural upheaval in the stagnant economy of decades ahead."

Mr. Rubin has a lot to say. Skyrocketing oil prices, and not subprime lending caused the global recession. Fuel efficiency leads to increased consumption. Ethanol and other alternative fuels are "a joke." And the green farm-gate? It's one of the most energy-intensive industries in the world and "a head-fake."

Why is the world about to get a whole lot smaller and when will this happen?

"Because distance will cost money in the world of triple-digit oil prices. That means the food that you eat, the steel that you use, everything will all of a sudden have to be produced locally because supplying yourself from far-away markets like China will be penny-wise, pound foolish. What you save on the wage bill, you'll more than burn in bunker fuel."


When will this happen?

"This has already started to happen before the recession kicked in and this will happen within 12 months of an economic recovery because within 12 months of an economic recovery, we'll be staring right back at triple-digit oil prices."


When do you think the recession will end?

"Well, you know, folk have different ideas about that, but recessions are finite events. We've only been in recessions about 20 per cent of the time in the whole post-war period, so whether the recovery starts in two months from now, or whether it starts six months from now, the fact is that whenever it starts, within a very short order of time, within 12 months of that time, we'll be looking right back at triple-digit oil prices."

Why do you say "take away cheap oil, and the global economy will get the shock of its life?" What's going to happen?

"Well, because the global economy is all predicated on cheap oil, so that you bring your components to assemble something, you bring it all around the world to the cheapest labour markets to assemble it, and then you ship it again all around the world again. Well, guess what you have to burn to move goods? Whether you move goods by rail, by truck, by air, or by boat, you're only burning oil and the global economy is a very energy-intensive way of organizing the economy."


So what's the shock of our lives?

"Well, the shock of our lives is that all of a sudden we're going to be eating local food, we're going to be making our own steel and we're going to be making our own flat screen TVs. What's wrong with that? Nothing, except for the fact that everything that we're going to soon make ourselves, that we used to import from China and the developing world, it's going to cost us a whole lot more money to make it ourselves."



Why do you say "skyrocketing oil prices, and not sub-prime lending caused the recession?"

"Well, because you didn't need Lehmann Brothers to go under to create a world recession; you've just needed oil shocks and this was the biggest oil shock of them all. I mean, my problem with the subprime mortgage explanation of the world economy is, how did falling housing prices in Cleveland cause a recession in Japan and Germany? And why were those recessions twice as deep as the recession in Cleveland? Maybe there was something else going on. Now the falling housing prices sure took a huge chunk out of my bonus. Why do you think I'm writing a book? . But there's a big difference between blowing up investment banking bonuses—and I was part of that world at CIBC World Markets—and global GDP, a big difference. If you want to blow up global GDP, you don't need Lehmann Brothers; you just shock oil prices, like '73, like '79, like today which is twice as big a shock than in '73 and '79."


So why's everybody saying that then?

"You know why? Because it's a lot easier to think that way. We can always bail out the banks, we can always bail out the Clevelands' subprime mortgage holders, and we can bail out the auto companies. But guess what? There can't be an energy bailout. If triple-digit oil prices is the real cause of this recession, then there's little governments can do because it's not about government, it's about you and I."


Why do you say "fuel efficiency" doesn't lead to conservation, but leads to increased consumption?

"Because that's what it's done. Take your average car. Your engine is 30 per cent more efficient than it was, say, in the 1970s, but your average vehicle today consumes just as much oil as that gas guzzler your parents drove because what have we done with all those efficiency improvements? All of a sudden, those efficiency improvements have turned into a giant, honking SUV. So our cars now are much faster, they're much bigger, they have all kinds of energy-sucking options that are now standard, like air conditioning, onboard computers, entertainment systems, and we drive our cars 30 per cent more."


Why do you say ethanol and other alternative fuels are "a joke?"

"They're not a joke to the people who are getting all the subsidies, but they're a joke to the energy user because at the end of the day, 75 per cent of all the energy in that seemingly green fuel is hydro-carbons. Corn does not grow itself. Corn does not march down the road to the distillery plant and the distillery plant does not run by itself and ethanol doesn't ship itself. It goes in trucks. All of those things—from the fertilizer to grow corn, to the oil to run the tractor—all of that is burning oil and natural gas, so it's a head-fake.

"We think it's green, but it's very oily. In fact, I'll go even farther than that: behind the façade of the green farm-gate is one of the most energy-intensive industries in the world. Modern agriculture today is really about turning fossil fuel into food when you think about where the fertilizer's coming from and where the energy to run the combine and the tractor. So, I think it's a head-fake."


Why do you say the real dangers of carbon emissions (global warming) come not from North America, but from the developing world—and there should be a "carbon tariff?"

"Because 90 per cent of the growth of global emissions in the last nine years have come from countries outside of Kyoto, the developing world. So all I'm saying is before we start making expensive sacrifices to save the environment, you better make sure that we're not doing that totally in vain. In other words, before we start closing coal plants here and start paying three times more for power, you better make sure that China's not building 800 coal plants and using those 800 coals plants to power manufacturing factories that send us their goods. If China wants to do that, we have to charge them a tariff so they pay the same price for their carbon emissions as we'll pay for our emissions."


Why will Canadian industries like steel and agriculture be revitalized in the world to come?

"Because you won't be able to import those frozen lamb chops from New Zealand. It'll be cheaper to have fresh lamb because the cost of shipping, and not just shipping, steel doesn't have to refrigerated, lamb does. That refrigeration unit on that boat, by the way, is fuelled by bunker fuel, the same thing that's powering the boat's engines. So we'll be raising our own lamb.

"Do you know that last year China exported $6-billion worth of food to America and almost all of that had to be refrigerated. At least steel doesn't have to be refrigerated, so America is not going to eat $6-billion less of food; they're going to grow their own. But the question is where are they going to grow it? Well, I think what's going to happen is real estate values in the suburbs are going to fall because people won't be able to live so far from where they work and, at the same time, food prices are going to soar because of the cost of importing things and all of a sudden some of those far-flung suburbs might get reconverted back to farm land that they were 30 to 40 years ago."


Why do you say the end of the current recession will see oil prices rise to unprecedented levels and that reverse globalization is not necessarily a bad thing?

"Well, oil prices will get to those levels because the only supply that we can bring on is an extremely expensive supply. Like, when the world's relying on the Canadian oil sands to supply it with oil, it's time to buy a bike. It's the bottom of the barrel and it's not that it isn't there, it's there, but it requires a hell of a lot of energy to get it out of the sands and to make that worthwhile you're going to need triple-digit oil prices or people aren't going to get funded to build $3-billion oil sands projects."


You say "like globalization and our affluent, debt-dependent consumer economies, our values of tolerance and equality may turn out to be artifacts of the era of cheap oil, which will mean that we may face political and cultural upheaval in the stagnant economy of decades ahead." Why?

"If we don't get off oil, that's for sure. I mean, look at what's happening in Canada, the U.S., Britain, Australia. Already, there's a backlash against immigration and that's par for the course; any time economies start to stumble then there's a backlash against immigration and also because the unemployment is rising. We're talking about a world slower economic growth, any way you cut it and that means that we're probably likely to see less movement of people, less migration. And if you look at our economy, or the economy of Western Europe or the U.S., we're usually impacted. The last 30 to 40 years have been one of the largest migrations in human history, from the developing world to the developed world."


But then you say "on the other hand, restructuring our economies and our way of life to adjust to an energy-constrained world will offer many opportunities for innovators. There will be many silver things." Why?

"Well, we're going to find that many of the jobs that we thought were gone forever, will be coming home; maybe obviously not car plants, but steel plants, farms, manufacturing jobs. We're certainly going to be a greener economy. I think triple-digit oil prices will do more for greenhouse emissions than 100 Kyotos because we just won't be able to afford it. I think going back to the worlds we've known, maybe our worlds get smaller, but we become attentive custodians of our own little worlds, which probably make our neighbourhoods better places to live. So I don't see this as entirely or at all necessarily apocalyptic.

"It's only apocalyptic if we continue to insist on consuming as much oil as we did when oil was cheap and abundant, then it becomes apocalyptic. But I think we're going to change, which is the whole point of the book."


How will people make that jump from triple-digit oil prices? How will people heat their homes, for instance?

"Maybe people will have smaller homes. Maybe people don't need 3,000 square foot homes, just like maybe people don't need Yukon Denali SUVs and maybe we don't need to eat avocadoes in the winter in Ottawa. Maybe people in California can live without Ontario maple syrup. I mean, we adjust but if we continue to say, 'I've got to eat avocadoes in the winter,' and I've got to continue to drive my Lincoln Navigator or my Yukon Denali, then yeah it becomes apocalyptic, then it becomes like what Detroit is going through right now."


What do you think of the Canadian federal political leadership on these issues of energy and the environment?

"I don't base my hope on that. I base my hope on the market. When gas is $7 a gallon, folk won't have to buy my book. They'll know exactly what to do. They'll get off the road. I think the price mechanism here can be part of the solution."


Do you think the federal government is taking any kind of leadership on any of this stuff?

"It's the price of oil."


That's it?

"It's a pretty big it! For example, why are we spending billions of dollars of taxpayers' money to prop up an industry that's doomed to obsolescence anyway? Why aren't we using that money instead to invest in our future and not our past? Our future is public transit, our past was Yukon Denalis on the 401. But that's where the public investment is going to try to keep Yukon Denalis on the 401. First of all, we shouldn't be building any more Yukon Denalis and why spend more on roads when there's going to be less cars in the future on those roads.

"So that's where I'd say they've got it wrong, but the politicians will get it right, because, ultimately, the voters will tell the politicians. The auto sector is two per cent of the GDP, it's less than that in the U.S., yet, people are conditioned by the past to believe that if we walked away from the auto industry that our economy would crumble. Well, guess what? If that was true, then our economy would have crumbled a long time ago because the auto industry is a shadow of what it once was either in Canada or the United States."


Are you getting any feedback from federal politicians about your book ?

"None whatsoever. But that's not the feedback I'm interested in."


What feedback are you interested in?

"I'm interested in how average people relate to the issues that the book raises because, again, I don't think the solution is Bank of Canada raises interest rates X, or Flaherty tables budget deficit Y. It's where you live, what you eat, what you do; that's what weaning the economy off oil is all about. It's not about the Bank of Canada. It's about you and I and what we do and ultimately, our choices will have political implications."


Why Your World Is About To Get A Whole Lot Smaller: Oil and the End of Globalization, by Jeff Rubin, Random House Canada, pp. 286, $29.95.

kmalloy@hilltimes.com

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