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Review by James Pressley
June 23 (Bloomberg) -- If Jeff Rubin is right, traders can bet on oil prices gushing to $200 a barrel. Everyone else will see “the 18-wheeler of globalization” thrown into reverse.
This is more than idle prattle. Rubin is a former chief economist at Toronto investment bank CIBC World Markets Inc. He made a name for himself with his accurate predictions that oil prices would reach $50 a barrel in 2005 and $100 a barrel in 2007. In July, they topped $140 a barrel.
If you blamed the record prices on rogue traders and hedge funds, you were mistaken, he argues in his cogent book, “Why Your World Is About to Get a Whole Lot Smaller.” On a planet with shrinking supplies and expanding demand, there’s only one place prices can go, he says: up. The recession brought us no more than a breather.
“In the next cycle, the same imbalance will probably take us to $200 per barrel before another recession temporarily knocks back prices and demand,” he writes.
Rubin’s argument, compressed, goes like this: The global economy runs on oil -- from the gasoline that fuels commuter cars to the sludge called bunker fuel that propels container ships from China to California. When oil is cheap, low-wage countries have an edge. When crude hits triple digits, Western workers become competitive again. Before we know it, our food and clothes will come from fields and factories closer to home.
“Many of those high-paying manufacturing jobs that we thought we had lost forever to cheap labor markets overseas may be soon coming back home,” Rubin writes, noting that U.S.-made steel became cheaper than Chinese imports in 2007 for the first time in more than a decade. U.S. is the world’s biggest oil user.
Cheap Oil
Rubin believes in “peak oil” -- that there’s only so much of the black gunk in the ground and that production will one day peak, plateau and decline. Yet this isn’t so much a book about peak oil as it is about cheap oil.
We’re running out of conventional crude, like the Texas tea that gushed from Spindletop in 1901 and drove oil to three cents a barrel, prompting railroads and steamship lines to switch from coal to oil, as Bryan Burrough writes in “The Big Rich.”
Good luck finding a Spindletop today. Tapping new reserves now means such things as deepwater drilling in the hurricane- prone Gulf of Mexico or extracting it from the ground in northern Alberta, “where temperatures drop to -20 degrees Fahrenheit in winter and each barrel of oil is soaked into two tons of sand,” Rubin says.
Extracting that oil isn’t easy. Imagine scraping tar sand from open pits with bulldozers, hauling it away in 24-cylinder dump trucks and burning it at temperatures hot enough to separate the bitumen from the earth.
Ski Dubai
Countries lucky enough to sit on lakes of conventional oil, by contrast, are consuming barrel after barrel of the stuff themselves, at subsidized prices. Rubin rattles off data.
Even as oil spiked on world markets, drivers in Hugo Chavez’s Venezuela could fill up their tanks for 25 cents a gallon. In Saudi Arabia or Iran, the price runs 45 cents to 50 cents a gallon. Ski Dubai -- a 25-story-high indoor resort full of artificial ski runs in the desert -- and the mall where it’s housed burn the equivalent of 3,500 barrels of oil a day, or about one barrel per visitor.
Demand has also soared in China, India, Russia and Brazil, where roads are packed with first-time drivers discovering the joys of car ownership and traffic jams.
Rubin’s conclusions are hardly popular at home in Canada, which stood second only to Saudi Arabia in proven oil reserves with 179 billion barrels as of January 2008, according to the Oil and Gas Journal. Critics say he underestimates the power of globalization and ignores trends in technology and conservation that are already changing the way we live.
Yet I wouldn’t mind eating more food and wearing more clothes that come from farms and factories down the road instead of across the ocean. Like Rubin, I’m not ready to write off the economies of the West.
“Why Your World Is About to Get a Whole Lot Smaller” is from Virgin Books in the U.K. and from Random House in the U.S. (286 pages, 18.99 pounds, $26).
(James Pressley writes for Bloomberg News. The opinions expressed are his own.)
To contact the writer on the story: James Pressley in Brussels at jpressley@bloomberg.net.
