Kate Mackenzie Jeff Rubin interview: ‘When you spend more on fuel than food, an economic contraction will follow’

Earlier this week I spoke to Jeff Rubin, former chief economist at CIBC and one of the most mainstream of the economists who believe in peak oil (in that he believes conventional oil production has peaked). He’s recently had a book published called ‘Your world is about to get a whole lot smaller’, about globalisation in the age of energy scarcity. Following is an extract of our conversation:

What do you think the oil price rise to now $68 will mean for economic recovery?

I think we’ll see a return to triple digit prices very early into an economic recovery, probably within 12 months of that recovery being under way, and I guess the issue is going to be: will the return to triple digit oil prices lead us right back into recession? Because I think triple-digit oil prices have played a much larger role in the global recession than it’s yet been given credit for.

If that is the case, will a future rendez-vous with triple digit oil lead to a similar result?


FT: For now, are we safe though?

JR: It wasn’t that long ago – maybe four or five years – that today’s depressed level would’ve been described as an all time high. If what was an all-time high only five years ago is where oil trades in a very deep recession, where does oil trade going forward?

Once we get into triple digit prices, what we find is it’s no longer compatible with a global economy… distance costs money and things that we thought made a lot of sense like importing food or steel from China cease making sense.

FT: And what do you think this will mean?

JR: The global economy is mostly about wage arbitrage… but the implicit assumption is that we can move goods and not just finished goods, [but also] the intermediary inputs around the world – that distance does not cost money.

We’ve already seen evidence that China was losing advantage in the North American steel market because it wasn’t economically feasible to ship it across.

FT: Do you think speculators played a significant role in the last oil price shock?

JR: I think there’s a bigger picture. Sure speculators were involved in pushing oil to 147 (dollars per barrel), but what brought the speculators to the table in the first place? Oil went from 50 to 150 and there was no increase in supply – it seemed like a one-way bet. Those speculators will return to the table because the only oil we will be getting is [more expensive to retrieve]. There’s 165bn barrels of oil in Alberta… but can we get it out?

FT: How will it affect the economy?

JR: Last summer prices were $4a gallon – your av American household was paying more to fill up their SUVs than to fill up their stomachs. You don’t need Lehmans or subprime mortgages… when you spend more on fuel than food, an economic contaction will follow.

There’s not a whole lot we can do to stop oil prices getting back to tripe digit prices, because the very oil we’re relying on requires those extraction methods.. (But) we can make sure the next time we see those figures, we can reduce the impact that will have on our economy.

The single most important thing we can do is go back to a local economy.

FT: So you’re basically saying: no more competitive advantage?

JR: Competitive advantage used to be a one equation mode: find the lowest wage rate. and now it’s a more complex equation; distance costs money. The physical separation from producer to market… that starts to become a bigger factor.

And it leads to some pretty perverse results. Who would’ve thought that triple digit oil could breathe new life into our hollowed out rustbelt?… But that’s exactly what’s going to happen, because it’s not going to make economic sense to bring oil in from China.

Note: This interview was not recorded; so some elipses exist where there are gaps in my notes. Similarly the questions are only a rough approximation of the questions I asked Rubin, as I had not written these down at the time.