Among the many compelling speakers at the Association for the Study of Peak Oil (ASPO-USA) conference in Washington, DC this October, only a few gave keynote addresses to the attendees. Jeff Rubin, former chief economist at CIBC World Markets and author of Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization, was among that elite. His talk, "Oil and the End of Globalization" hinged on a few key points. One of the most compelling, a refrain he returned to again and again, was that "distance costs money."
As an economist, Rubin analyzes the role of prices in the overall financial picture. And with world economic crises, from fraud and abuse, to bubbles and bailouts, from credit to credit collapse, a world economy on the verge of a meltdown has become the third leg of imminent disaster among those who like to talk about...well, imminent disaster.
First it was climate change. Then it was climate change and the global peak in oil production. Now it's about how climate change, peak oil, and economic collapse are headed for a shared crash. Perhaps economic crash will stave off a climate meltdown, but perhaps only by a few decades. Perhaps an economy in crisis also depresses oil prices, which will at some point increase energy demand. But then that increased demand will lead to more energy use, more greenhouse gas emissions, and worse climate change. Effects of climate change then could hurt the economy and, and, and....THEN...
That's the question.
There are more than enough bleak looking potential outcomes on the horizon in today's world. And to hear it from some Cassandras, that horizon might only be about ten feet away. Who to trust to sort it all out becomes a major question when evaluating competing notions about the future. In another column I address how this relates to a fourth tier problem—communication—but more on that later.
Right now the hot topic in financial blame falls on shyster bankers and their whole rotten crew. Bad apples becomes the explanation for a nation and a world in recession, for the crumbling economies of countries and the reason why millions of Americans risk losing the roof over their heads. And a much worse spread of toxic loss looms just around the corner.
Speculators and bad-faith financial players are a major part of the story, no doubt. But for Rubin, the larger story of spreading ruin wouldn't even be unfolding if it weren't for the oil price spikes of 2008.
"Most people view the recent recession as purely a financial crisis, one whose origins lie in the failed sub-prime mortgage market in the US. But what people fail to ask themselves is, What caused the Fed Funds rate to go from one to five percent in 2005 and 2006? Inflation went up to six percent because of the spike in oil prices. Every recession since 1973 has had oil's fingerprints all over it. Oil shocks are inflationary."
But it's just this kind of insider view that lay financial writer Nicole Foss says misses the point. Foss, who is touring the world as Stoneleigh, urges folks to cash out and hunker down for deflation.
People have had enough of experts, Stoneleigh suggests. "If anything, the fact that I am not a formally taught economist carried more weight with many who were there at the ASPO conference. I taught myself informally everything I know about economics," Stoneleigh says.
She has her beefs with Rubin, too. She accuses him of mischaracterizing her as a monetarist. "Monetarists don’t recognize the role of credit, and as I say, credit is the absolute key to why we are going into a deflation."
And there's the crux. While Rubin and Stoneleigh might agree on how some of these terms and effects play off of each other, the plain fact is that when someone hears that one of them says inflation is coming and bound to deliver a wallop, and the other says, no, it's deflation that will kick our asses, there's a disconnect.
For Rubin, resolving this is simple. For him, it's all about prices. And the key price is the cost of a barrel of oil.
"Other economists were basically in denial that oil prices could ever get to $147 a barrel. They said they'd stay at $30," Rubin explained. "Also, most are in the financial markets. They think they're the center of the universe and they don't look farther. If the Fed funds rate had stayed at zero percent all those people in Arizona would still be in their homes. But all of a sudden money wasn't free, there was a massive de-leveraging of the system. And when oil prices go up again it will be the same as in 1973."
Indeed oil still hovers in the mid $80 range. Though volatility might send it back to $40, Rubin says this is only a signal that, "we've gone into another oil-caused recession."
But before prices go anywhere near as south as all that, Rubin expects them to go back to the triple digit range that hit 2008 in the knee, dragging the economy into the ditch.
Though economists still bemoan the current economy (while curiously remarking on its exact opposite, saying that we're in recovery) oil prices haven't yet reflected the real intensity that tightened supply would suggest. In a sense, relatively low American gas prices suggest that the US is not in fact in recovery. At least if Rubin's take on energy as the driver is correct. The problem is that world demand has grown too, with no signs of slowing down.
"It's not the American consumer who drove prices up in '08 and it won't be the American consumer who drives up demand in '11. Our demand has peaked. But unfortunately we'll feel the effects," says Rubin.
Rubin cites an increasingly energy hungry China along with a Middle East that is just as content to burn its own oil at home in order to ski down indoor slopes in July as they are to continue exporting oil to us. Competition has, in a word, increased.
The form increased competition has taken hasn't necessarily meant that the US is a player. Quite the opposite in fact. With our manufacturing jobs exported, and service jobs more about pouring coffee than selling software, the US continues to limp along. There's no clear vision for a way out of the morass even while President Obama tours Asia pushing continued global economic plans. For the administration concern about fuel costs and the competition for resources seems to be far from their minds and absent from their strategy.
But for Rubin, the global economy and the price of oil go hand in hand, and their future isn't promising. " Globalization is about to become obsolete. Globalization doesn't work in that world of triple-digit oil prices, where distance costs money."
For him, our leaders aren't likely to change course and lead in the ways most needed. "Institutions like the Fed or Congress or the White House will be the last people to recognize this. They won't be the ones to re-engineer the economy."
As a firm believer in the power of prices, Rubin sees business waking up to the crisis first. Citing Proctor and Gamble as a company already rerouting their supply networks closer to home, Rubin says prices are driving decisions on organization even as we speak. That same response will play out all over the country: "I don't have a lot of faith in Congress, but I do have a lot of faith in ordinary Americans. We're going to reshape our economy."
"The way we can grow our economies in the face of those transport prices is to go back to a regional economy. Triple-digit oil prices may breathe new life into our Rust Belt and turn suburbs back into farmland. In order to be able to grow with those kinds of oil prices, we're going to have to go back to a more local economy."
In tomorrow's more localized economy, Rubin says, "Transport costs will not play as important a role."
Similarly, Rubin sees a return to hard resources as the drivers of real value. "Countries with resources are doing better than those without, like Canada doing better than the US. Oil and potash are more important than research in motion," he explains. "By the same token, the Middle East will become less important to the US. Your future supply won't be coming from OPEC and it won't be cheap. Places like Canada and Venezuela will become more important."
Going local is certainly fashionable, and makes sense on a certain level. But if Rubin firmly believes in the power of prices, what about the higher cost of making things at home again?
To him this isn't such a problem, again, because distance costs money. "If we're not importing our steel from China and start making our own steel in places like Pennsylvania and Ohio it won't cost as much as hauling it across the Pacific Ocean, but it will cost more. The Fed is absolutely wrong in thinking the big boogie man is Japanese style deflation. The real problem is American-style inflation. Things will become more expensive as production is repatriated at home."
And there's other good news. "We'll also have a more diversified economy. Not everybody will be working in services, on Wall Street or at Starbucks."
But we're not going to get there on a smooth and easy road. There's plenty of games already set in motion that will have to run their course or fall apart before resolving into something more manageable.
"People are hurting right now because there's a 9.6% unemployment rate and that's with a hugely artificially stimulated economy with a huge federal debt and deficits at the state and local level along with zero percent interest rates," explains Rubin. "These policies that buffered the severity of the recession today just make the future more problematic."
He argues that debt will need to be paid down through tax increases and budget cuts. "There are many examples around the world that record budget deficits and zero percent interest rates are a marriage that cannot last. America has become a borrower and China is basically funding the Treasury deficit. There are very tough adjustments that America faces."
For Rubin the solution is a vigorous move away from oil dependence. He says the way to do that is to relocalize, and he says we'll do that not because of community projects like Transition initiatives as much as because of the power of prices. "That's what the price signals that triple digit oil prices will do. I have great faith in the power of prices to change people's behavior."
Some advance awareness of the problem could help. But Rubin says that the public doesn't hear a lot of discussion of the issues that he talks about in his blog. "The majority of Americans probably believe that oil prices only got to their previous high because of market speculation," he says. That's a view also held by those who invest the market roulette with greater power than resources. But Rubin says when oil prices go back up, "we'll see a sea change."
Even if there is volatility, with prices spiking and then plunging, the main input, or lack of it, remains key. "That doesn't mean there's a lot of oil in the world. That just means we've gone into another oil-caused recession. But what could be a more telling indictment of the global economy than that scenario, that a global economy doesn't work in a world of triple digit oil?"