Jeff Rubin’s Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalization is the winner of Canada’s 2010 National Business Book Award. The award was established in 1985 to recognize the outstanding talent in Canadian business writing. The $20,000 prize is sponsored by PricewaterhouseCoopers, BMO Financial Group and media partner The Globe and Mail.
Mr. Rubin also writes a blog for ReportonBusienss.com called Jeff Rubin's Smaller World.
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Read excerpts from all of this year's National Business Book Award nominees:
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Jeff Rubin is former chief economist at CIBC World Markets. Read an excerpt and listen to a reading from his book below.
Excerpted from Why Your World Is About to Get a Whole Lot Smaller. Copyright © 2009 Jeff Rubin. Published by Random House Canada. Reproduced by arrangement with the Publisher. All rights reserved.
It is funny how a recession looks like good news to some people.
When global credit evaporated in the wake of the 2008 subprime mortgage crisis, oil prices tumbled along with the values of the world’s stock markets. Seemingly overnight the price of a barrel of oil plunged from an all-time high of $147 (U.S.) a barrel to as low as the high $30s. Predictably, those who had piled into oil markets scrambled for the exit doors, especially hedge funds and other investors who were forced to sell their oil positions to come up with some money to cover the losses they were sustaining in the rest of their portfolios. And, just as predictably, what many observers concluded from watching prices fall was that there must not have been an energy scarcity problem after all, and that triple-digit prices had been just a speculative blip.
Of course, most of the commentators saying that were people who had never thought oil prices would ever get above $50 per barrel in the first place. Sure, if you think the market is going to solve the problem of high oil prices and then the price drops, you might be tempted to think that the market has done what you had such faith it would.
But no one said that oil prices will never fall. In fact, increasingly wild and destructive movement in prices is exactly what you would expect in an environment of global scarcity. Oil demand will drop in a recession, and so will the price of oil. So that can’t be a surprise to anyone.
But we shouldn’t be looking at oil prices as the effect of the recession. They are the cause. While the financial crisis from the imploding US subprime mortgage market gets top billing for the 2008 recession, the ascent of oil prices to record triple-digit levels played a far more major role in derailing growth in the North American and European economies.
To claim that the price decline is evidence that record prices were the consequence of massive speculation in oil markets is to ignore the underlying problem: a fundamental mismatch between global supply and demand. But what today’s skeptics don’t explain is why oil prices aren’t $20 per barrel, as they were only eight years ago, during the last recession. West Texas prices have hovered around $40 per barrel, and Brent prices, the European benchmark, have traded around $45 even though this recession is well over three times as severe.
There is a good reason prices won’t fall that far. The skeptics may not want to talk about it, but at $60 to $90 per barrel, many of the world’s largest energy megaprojects, such as the Canadian oil sands, won’t go ahead because those prices will no longer provide a sufficient economic return. Finding pocket change is getting pretty expensive these days and it’s not going to get any cheaper tomorrow. If you believe that high prices bring new supply out of the ground, you are pretty much committed to the fact that every drop in price means that there is less oil to go around. There may be oil out there under the ground, but no one is going to sign up to lose money pumping it. The laws of economics cut both ways.
