Four years ago, when I was still chief economist at CIBC World Markets, I forecast that global economic growth was on pace to send oil prices to $200 (U.S.) a barrel by 2012. In short, the argument was based on a supply-driven analysis that weighed the sources of future oil supply against the prices that would be needed to make the extraction and processing of that oil economically viable.
Since that call (which clearly hasn’t come to pass) received some attention at the time, it feels fitting to spend a few words discussing what happened to derail the projection. That particular analysis, unfortunately, didn’t adequately address the stifling impact that rising oil prices would have on economic growth. At the time, a constrained outlook for global production growth against a backdrop of runaway demand meant prices had nowhere to go but up. As subsequent events would dramatically demonstrate, though, triple-digit prices had a much more critical effect on demand than supply.
By the time oil reached $147 a barrel, the economic drag was more than sufficient to trigger a chain reaction of events—including spurring higher interest rates which pricked the U.S. sub-prime mortgage bubble—that ushered in the deepest global recession of the post-war era. Instead of marching towards $200 a barrel, oil prices abruptly reversed course and plunged all the way to $40 a barrel.
The return of low prices was taken, by some, as proof that oil will continue to be as cheap and abundant as ever. As a quick return to the triple-digit range for oil prices indicates, however, that’s clearly not the case. My call for $200 oil was designed to underscore the massive cost of supplying the world with more than 90 million barrels a day. Then, as now, I stand by the analysis. Pumping out ever more barrels will require ever-higher prices. Just look at what happened when oil prices plunged. In Alberta’s tar patch alone some $50-billion in spending was either cancelled or postponed. The story was much the same offshore Brazil and in Venezuela’s heavy oil belt, a pair of locales that will play a vital role in meeting the world’s future oil needs.
If a mea culpa is in order, its roots can be found in the decision to underplay the demand side of the equation. Oil prices plunged to $40 a barrel after economic growth collapsed, taking global oil demand along for the ride. And that same movie is about to play out again. Recessions are already rolling across Europe. Economic growth in North America is lackluster, at best. Meanwhile, the spectre of sovereign debt defaults in the euro zone continues to hang over global financial markets. Added up, it spells another sharp drop for oil prices not because fuel is abundant, but because once again the world can’t afford to stay out of a recession.
What happened to my forecast for $200 oil? Quite simply, the end of growth.
(Jeff Rubin is an author and former chief economist of CIBC World Markets. His latest book is “ The End of Growth.” Read more from Jeff Rubin on his Globe and Mail page. )