Economist Jeff Rubin Talks $225 Oil by 2012 and the End of the Global Economy
Jeff Rubin and the cover of his recent book, Why Your World is About to Get a Whole Lot Smaller. (image: treehugger.com)
Jeff Rubin is not an oil alarmist—he doesn’t think that the world’s supply of crude will run out and cause resource wars and food shortages of apocalyptic proportions. In fact, he doesn’t even think the world’s supply of crude is running out at all. Rubin made this clear as he addressed the Business of Climate Change Conference in Toronto last September, opening his keynote address with the statement, “The world’s not running out of oil.” However, after milking the pause for a second or two, Rubin went on: “But it has already run out of oil it can afford to burn.”
Rubin, former head economist at CIBC World Markets, is often referred to as Canada’s top economist, largely because of his bold and accurate economic predictions: in 2000, he forecast that the price of crude would hit $50 per barrel within five years (it broke the $50 mark in 2004) and foresaw the huge price spike of 2008. He recently predicted that the price of crude would hit $100 again by the fourth quarter of this year.
His view of the future of oil and its role in civilization is just as startling as many prevailing theories within the peak oil community, but interestingly different from most that have come before.
As he explained at the Business of Climate Change Conference, Rubin envisions a world that has run out of cheap oil “not in the next 10 to 12 years, but in the next 10 to 12 months.” In his model, the beginning of the oil crisis is not marked by a sudden and extreme depletion of oil reserves, but oil prices that rise at an accelerating rate, driven by rapidly growing demand from the global economy (primarily from developing countries like China and India) and expanding development of expensive and energy-intensive non-conventional sources. According to Rubin, “since 2005 conventional oil supply has not grown, and may never grow again.” As the supply from conventional oil fields drops off, it will have to be replaced by supplies from dirtier, harder-to-process unconventional sources like the tar sands of Alberta, Canada. Because the processing of unconventional sources is so expensive, Rubin argues, the crude oil it produces will be more expensive. Combine higher baseline production costs with growing global demand and you get a huge increase in crude oil prices over a short period of time.As anecdotal evidence of the rapid depletion of conventional oil resources, Rubin pointed to frequent news stories on discoveries of major oil reservoirs in the Gulf of Mexico and elsewhere, in contrast with the lack of reporting on massive, decades-old oil fields drying up. According to Rubin, the world loses 4 million barrels per day of crude oil production every year, but we don’t hear much about it.
On the demand side, Rubin sees the global economy as the overarching driver of the world’s skyrocketing thirst for crude. Globalization has created a system of commerce that requires raw materials to be shipped from their places of origin to far-away industrial centers that produce consumer goods (everything from chicken wings to HD televisions), which are then shipped around the world again to consumers. Petroleum-based fuels power all of this transport, be it by sea vessel, airplane, or truck, Rubin reminded his audience. The problem with the global economy, he says, is that “it assumes that the cost of moving goods around the world is minimal or marginal.” And it was that assumption that allowed the sudden spike in crude oil prices in July of 2008 to trigger a global recession, Rubin said, emphasizing his belief that “the world’s biggest energy shock” and not the sub-prime mortgage crisis in the US caused the most severe economic downturn since the Great Depression.
In short, Rubin emphatically believes that two intensifying and antagonistic trends will cause a blast-off of crude oil prices in the next 15 months: exponentially-increasing demand for oil tied to the global economy and the ever-accelerating depletion of conventional (cheap) oil reserves.
In Rubin's view, the worldwide shipping of raw materials and consumer goods will soon be a relic of a global economy rendered obsolete by astronomical oil prices. (image: noaa.gov)
Instead of calling for government action to avert the crisis-causing apex of these two trends, Rubin thinks the crisis will be addressed by local and individual action driven by market forces. “The prices needed to get unconventional oil out of the ground are the same prices that will get you off the road,” he explained. He elaborated by predicting that stratospheric oil prices would force consumers and producers alike to change behaviors that would eventually lead to a breakdown of the global economy and a return to local economies. After people stop driving, he suggested, they will begin to seek out cheaper goods, which will by then be made and distributed by nearby manufacturers and distributors, who are able to offer affordable prices thanks to lower fuel utilization and a resulting decrease in transport costs. “In a world of triple-digit oil prices, we will not be getting our food from China…we’re going to have to grow our own,” Rubin proclaimed.
So what if Rubin is right? What if his streak of correct predictions extends to this global bombshell? Under Rubin’s model, people should brace themselves for steep increases in gasoline, diesel, and heating oil prices over the next two years (after oil hits $100 this year, Rubin has said, it will reach $225 by 2012). Specifically, those preparations should amount to major cutbacks in consumption of and reliance on petroleum-based fuels—switching to ethanol or biofuels wherever possible, and reducing overall consumption of fuels by switching to more efficient vehicles and appliances are the most obvious first steps.
As is the case with all predictions, only time can prove Rubin’s right or wrong. In five years, Jeff Rubin will be definitively proven to be a genius or a paranoid dud. In the winter of 2015, if you find yourself sitting down in your biofuel-heated home to a dinner of locally produced food carried home on a bicycle while you marvel at the collapse of the global economy and shake your head at $15-a-gallon gasoline, remember, you heard it here first!
(Watch Rubin’s full speech at the Business of Climate Change Conference below)
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pjc says: says:
I’m not sure if I would draw too much of a conclusion from a single press release from Shell. The National Energy Board of Canada estimates the cost of oil production in the tar sands at $40 bl. This estimate was made when natural gas was running at around twice the price it is now, and natural gas is the primary source of energy used to process the tar sands oil.
http://www.neb-one.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/lsnd/pprtntsndchllngs20152006/pprtntsndchllngs20152006-eng.pdf
Economics 101 says the price of oil should be governed by the marginal cost of extraction. That is, it doesn’t matter what the average cost of production is - what matters, is the cost of producing just one more unit. If unconventional oil becomes a bigger part of the energy mix, that shouldn’t by itself cause the price of oil to stick at a level 2X the cost of tar sands production. It doesn’t matter if the tar sands is 10% or 90% of production - what matters is only how much it costs to increase production, and the potential is so vast in the tar sands it is not likely to get tapped out any time soon.
Moreover, one would expect the technology for unconventional and enhanced oil recovery production to get better, and thus for the price to drop and the reserves to expand. This has been the history of tar sands production.
Finally, oil is now trading at around 2X the price of natural gas, on an energy equivalence level. This is quite the high end of the range. Mr. Rubin apparently thinks that gas will shoot up even more dramatically than oil, or that the global economy is too inept to perform even a modest switch from oil to gas. (Bear in mind, a modest switch is all that is required - a 10% transition would radically alter the supply/demand curve of oil).
That said, oil might go to $225. Oil/gas prices ratios might return to their norm, and thus gas would trail along to $60 or so (10X what it trades for today).
But I strongly suspect Mr. Rubin is not basing his investment portfolio on this, but rather on the sales of his book. The more alarmist he is, the more free press he gathers, and the more money he makes. There is quite a large group that abhors globalization. The same people that marched in Seattle 10 years ago and failed to stop international trade are now a rapt audience to any “peak oil”-er who tells them that globalization is soon to end. Do you think the title of his book is an accident? If he called it “Your weekend trips roadtrips are soon going to end”, it would be a more accurate reflection of $225 oil, but it wouldn’t sell quite so well at all.
Josh Garrett says: says:
Thanks for your comments, pjc. First, let me say that this report on Mr. Rubin’s speech is not intended to advocate a “get rich quick scheme” nor does it endorse US Oil Fund (USO) or any other investment property. Certainly, if Rubin’s predictions come true, investments in USO and oil companies would be lucrative ones, but I wrote about his comments not because they constitute investment advice, but because HeatingOil.com covers a wide array of predictions on oil prices, and Mr. Rubin’s is one of the more interesting and provocative ones.
Your point about international shipping being unhindered by $140 oil is well-placed, but to guess at Mr. Rubin’s thinking a bit, you should bear in mind that $225 oil could have a very different effect on shipping than did $140 oil. I think you should also consider the fact that no where in this speech did Mr. Rubin state specific crude prices, and instead referred to “triple-digit” prices–he made the $225 by 2012 prognostication in a telephone interview several months later. Mr. Rubin may well agree with you that $500 oil is the tipping point for the collapse of the global economy–his speech did not include a time line or price points for his prediction, but rather a forceful representation of the de-globalization process as inevitable.
In regards to your assessment of the current state of unconventional oil, I think it is a little off-base. Unconventional oil recovery is not “wildly profitable” at the current crude price of about $75. Just last week, Shell announced plans to divest from their tar sands operations to focus on conventional drilling projects. I believe Rubin’s point is that as conventional production drops off, more global supplies will shift to unconventionally-sourced oil, which is more expensive to produce and will therefore be sold at higher prices. No one has argued that unconventional oil production will peak any time soon. According to Rubin, the more unconventional oil we use, the higher the price will be.
pjc says: says:
First off, you should be skeptical of any get rich quick scheme. And there is a very easy way to make money off such predictions if they are true — invest in USL, or in any number of oil companies.
Second, research the supply chain industry a bit. You might find that even $140 oil did not radically change the economics of moving goods from China. It was a big incentive to move goods by rail instead of trucks, and to drive ships more slowly than they otherwise would have, but globally shipping remained quite profitable.
In other words, driving an automobile, even a Prius, will become unaffordable long before international shipping stops. It will not take $225 oil to localize the economy, it will take something like $500 oil.
But perhaps the most absurd statement of all is “The prices needed to get unconventional oil out of the ground are the same prices that will get you off the road”. Absurd not because it is false, but because it is true right now - unconventional oil is wildly profitable at $75. His prediction requires not just that conventional oil plateau, but unconventional oil production and enhanced oil recovery production plateau as well.
But, by all means, make a leveraged investment in USL and grow fabulously rich if you believe this man.
admin says: says:
You’re absolutely right, Joe, thanks for your comment. I am well aware that no “person who understands peak oil” thinks that the global supply of crude will run out. However, this is the perception of many people who are less-educated (or willfully ignorant) on the topic of peak oil. It was that particular group of people I was addressing in the opening of my post. I’ve changed the line slightly to make my intentions more clear.
And if it makes you feel any better, I have done quite a bit of research.
Joe says: says:
“Jeff Rubin is not a traditional peak oil alarmist—he doesn’t think that the world’s supply of crude will run out”
No person who understands peak oil thinks that oil will run out. It is a about a production peak.
Do some research.