Jeff Rubin, former chief economist at CIBC World Markets Inc., took your questions at Wednesday at 12:15 p.m.
Mr. Rubin built his reputation on a number of successful predictions, including one in 2000 that oil prices would hit $50 (U.S.) a barrel within five years and correctly calling the residential real estate market bust in the early 1990s. He was named Canada's top economist a number of times.
Mr. Rubin recently forecast that the price of oil will reach $225 a barrel by 2012, and his book, called Why Your World Is About to Get a Whole Lot Smaller, is about how oil scarcity will lead to the end of globalization.
"It's a book about the way the world is about to change. We've all got our eyes right now on the global financial meltdown, but I believe that oil scarcity will change the global economy even more profoundly and, in the process, change all of our lives - from where we work to where we live to what we eat," Mr. Rubin says.
Join our live, online discussion on these ideas. Get a head start by submitting your question here. Your questions and Mr. Rubin's answers will appear in the space below.
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Sonali Verma : Thank you for joining us. We have a lot of questions, so let's get started.
Jeff, quite a few readers have questions on how public policy -- and private citizens -- may need to change:
William Trick writes: Do you have confidence that the present form of government in Canada (or the USA) has the capability of dealing with the the long term and most profound social adjustments and economic changes our country will face in the next decade or so… I don't.
Richard Christensen writes: If we will be faced with $200.00 a barrel oil by 2012 or sooner what should individuals in Canada be doing, at this time, in order to prepare for this radical change in the cost of oil? Also, what should the federal government be doing that it is not already doing?
Jeremy Dietz writes: I have yet to read your book, but was wondering how you see U.S. imposed environmental legislation affecting the Alberta Oil Sands? Will this have any negative effect on an industry that accounts for only 5% of Canada's GHGs?
Jonathan Houle writes: As an engineer, I tend to see problems as opportunities for things to change and improve. In your opinion, who will most profit and benefit from the way in which fossil fuel scarcity will drastically change the way we live? Do you think we (the Western society) will be able to adapt quickly enough or even take the pre-emptive (hard) steps needed to avert such a hard shock on our way of life? Or we will have to rely mostly on government policy to steer us through this problem?
Jeff Rubin: I believe that the oil sand producers will ultimately have to pay for the carbon emissions they emit. At the same time, the Canadian oil sands is America's future oil supply so that the economic impact on the oilsands for paying for their carbon will be minimal. In other words, when the price ofa barrel of oil is $150, no one is going to worry about the additional $5 that people will have to pay for the carbon cost.
I believe there will be many winners from triple digit oil prices, particularly manufacturers and farmers. We won't be able to source food and manufactured goods from China when it costs so much to ship goods across oceans.
D.A. Kozak writes: Canadians on the retail side pay hefty premiums to fill up their gas tanks by about 30% more than the Americans; we pay three times more than the Americans for cell phone service; and we pay 30% more for new cars and 75% more for used cars than Americans. Does any of these Canadian premiums make it into the decisions whether to do new business in Canada?
Also since all cost components of business are addressed before making an investment, will Canadian gas being much higher than American gas and transport costs added into wasting more energy waiting at the border be a major negative for any new business investments in Canada?
Jeff Rubin: Yes, they do but they can be offset by other advantages. Oil and energy usually costs more in canada than in the U.S., often because of government policies, but the fact of the matter is that we have a lot of energy. Why is there an aluminum industry in BC or Quebec, we have no bauxite but we have power. And while power is generally expensive compared to most places in the US, it is not expensive compared to many other jusrisdictions in the world, i.e. Europe.
All things considered Canada will be better off than most countries in a world of double-digit oil prices, if for no other reason than that we will become a lot more important an energy supplier, given the likely impact that rising oil prices will have on oil sand development and production.
Tikka Sharma writes from Calgary: Mr. Rubin, I've heard some academics contend that the rise in oil prices to $147US/BBL last year was due in great part to environmental pressures from western governments. I've also heard it was hurricanes on the US gulf coast in 2005, peak oil, increased demand from the BRIC countries, and also speculators.
In a bull market, any one of these factors would lead to a price increase, but put them all together, and you have a commodity bubble.
Do you see these same factors playing themselves out again over the next few years; will any of Obama's initiatives to curb US consumption of oil have significant impacts? If high oil was really a "cause" of this recent recession, how can we be optimistic if oil is at $225US/BBL by 2012?
Jeff Rubin: You can point to a multitude of special factors behind triple-digit oil prices but the simple reality is that world oil demand is growing rapidly while supply has been stagnant. That equation is only going to get worse over time, leading to even tighter oil markets.
Will $225 oil cause another and even deeper recession than the one we are currently in? Possibly yes, but not necessarily so. We can't stop oil from getting to that price but we can make sure than when that happens, it doesn't have the same devastating impact on the economy as it has in the past. We have to reduce the amount of oil or energy to produce a dollar of GDP. And the surest way of doing that is replacing today's global economy with local economies.
Sonali Verma, Globe Investor: Jeff, we have a couple of questions about inflation:
Grant Bierlmeier writes: Assuming increasing energy prices relative to other prices throughout the economy, what possible outcomes does Mr. Rubin see in store for inflation in the coming five years and what corresponding alternatives will be available for governments and their central banks to respond to these conditions, given that some of the inflationary pressure will be generated by increasing scarcity of the primary energy inputs to the economy, rather than increasing consumer demand?
Andy Kochar writes: I had the pleasure of meeting Mr Rubin on more than one occasion back when he was with CIBC. History has shown that asset bubble bursts are usually deflationary and hence result in a weaker consumer. Inflation worries a consumer and inflationary expectations worry a fixed income investor. When do you think these 2 variables return to our economy and why?
Jeff Rubin: I think the new world will be a highly inflationary -- not only because of the direct passthrough of oil costs into final prices but more fundamentally, by reversing globalization and bringing manufacturing jobs back home. Of course, higher prices come with all those jobs that will be coming home.
I expect that we will be seeing US inflation around 5 per cent again within 12 months of an economic recovery. Since I no longer work for an invesmtent bank, I no longer give investment advice, but I think the implications for the bond market are pretty clear.
Sonali Verma, Globe Investor: And Jeff, we have a few questions about alternative fuel sources:
Glenn Carnegie writes: Historically, it seems that, periods of low oil prices usually defer the sense of urgency towards development of alternative fuel sources. Is there any evidence that this is now occurring or do you believe the peak oil theory is readily accepted and we have start to act accordingly ?
Philippe Davidson writes: You predict that the price of oil will reach $200 per barrel or more in the near future. Don't you think that before oil prices establish themselves at these or higher levels for long periods of time time, demand will either switch to alternative sources of energy or be contained if not reduced altogether by new energy-efficient technologies?
Stefan Szary writes: I've got through half of your book 'Why Your World is About to Get a Whole Lot Smaller', though I didn't need much convincing as I'm sympathetic to the 'peak' proposition.
My question is this: Given the continued depletion/use of cheap, conventional oil, and the significant geo-economical and geo-political ramifications of the 'peak process', what do you foresee as feasible replacements, if any? Baring some paradigm shifting technological breakthrough, what is your position on item like coal-to-liquids technology?
Jeff Rubin: No question that over time, triple-digit oil prices will induce and incent the development of new fuel technolgies. But in the here and now, the answer will not be in finding some new fuel source but in reducing our fuel needs - in short - by reducing the energy requirements per unit of GDP. And that process is bound to make all of our worlds smaller because it means that once again, production will move closer to markets and we will become less and less dependent on both imports and exports.
P.S. - As for peak oil, it's not that the world is running out of oil in an absolute geological sense, but it is running out of the type of oil you and I can afford to fill your tank with.
Shawn Bellihal writes from Calgary: What's the model price of oil the Alberta oil producers are anticipating, for reviving the Mega projects that have been currently placed on 'HOLD', and when do you project we will attain that price?
Jeff Rubin: For most, we need a price of near $90 per barrel to generate a reasonable economic return on the billions of dollars a new oil sand project requires. And that's true for most unconvetional oil projects around the world.
Dave Thompson writes from Edmonton: If I understand correctly, oil supply will be low coming out of the recession, and demand will be high, driving oil prices up. At the same time, Canada's national economy won't be so hot. What will the economy look like in oil-producing regions like Alberta?
Jeff Rubin: Better than it will look in oil-consuming provinces like Ontario or Quebec. Virtually all of oil sand production is going to be exported to the US, so the fact that demand may remain weak in Canada really won't have that much of an impact on the oil patch's fortunes.
Mike Larsson writes from Montreal: I bought your book yesterday and was anticipating it for a while. It's a great book - highly readable for non economists. I would argue essential reading for Canadians.
As an export meat trader in montreal in 2005/2006, I was playing close attention to the future direction of the Canadian dollar and the price of corn. Both are key indicators for the export dependent Canadian meat industry, and both are tied to the price of oil.
I noticed that your unconventional predictions of the future price trend for oil and the dollar were in line with the predictions of the major agricultural economists at the American Universities (eg - Purdue). Corn was $2 a bushel, and had been low for a long time.
Economists were predicting a doubling of the price of corn - corn behaved according to your scarcity theory: its rocketed up to over $5, then fell back - but its not fallen back to previous levels. Speculators in the corn futures markets and the ethanol mandate were targetted as the main factors, but agricultural economists are focussed on the long term structural trends: scarcity of the fertilizers (petrolium based) and land & water scarcity.
My first question is what do you see regarding the "petrodollar" in your scenario - will the dollar keep rising with oil? (this kills our agricultural exports in general)
The second question: does the ethanol mandate make sense in the long term,considering that petroleum based fertilizers are the basis for ethanol production?
Jeff Rubin: Canada will be an even more important energy supplier to the world (ie. US market) than it ever was in the past in a world of triple-digit oil prices bacause of all the oil it will pull out of the tar sands. The Canadian dollar will rise and ultimately trade at a premium to the greenback. Sure, it falls in a recession but note it fell to 80 cents, not 60 cents. If 80 is the bottom in the world's depeest post-war recession, I see it at parity within 12 months of a global economic recovery.
Corn-based ethanol makes no sense either in the short-run or the long-run. For reasons that I've explained in the book - ie, the . But even as ethanol production is ultimately abandoned, remember that modern agriculture is really about turning oil into food. If the price of oil goes up, guess what happens to food prices.
Sonali Verma, Globe Investor: Jeff, we have a couple of questions on developing countries:
Bill Graham writes from Alberta: If $140 oil had enough destructive power to stop the 'rich' western consumers from driving, how can we possible believe that forecasts for oil consumption that reflect tens of millions of new Chinese drivers pushing the price of oil to $200 or more?
Laszlo Erdosy writes: What role do you see China and India in the near future? Will these countries replace the American consumer, who seems to have gone into hibernation? Finally, where do you think gold is heading?
Jeff Rubin: Because the big barrier to owning a car in the Chinas of the world isn't the price of filling up its tank - it's how many years you have to save to buy a car. And the price of buying a car over there is falling as rapidly as the price of filling it up is rising. Tata's will cost only $2,500 to buy in India. And everybody who buys a Tata in India or a CHERRY in China gets a straw to start sucking up the world's dwindling oil supply, which, incidentally, they have the right to do.
Ken writes from Surrey, BC: Can you explain why natural gas appears to be negatively correlated with oil prices? And do you see this as a long term trend or transitory phenomenon?
Jeff Rubin: It isn't - it only appears to be in North America right now. Gas costs three times as much in Europe or Asia, which is why we should be an exporter of LNG instead of an importer. Don't forget, oil has a world price while natural gas has local or regional prices because its hard to move it around the world.
Irene VanderSpek writes: Can you explain why the price for gas at the pump has not fallen in lockstep with the drop in price of a barrel of crude?
At the high I paid around $1.45 per liter with a barrel going for about $145.00. Yesterday I paid $1.02 with a barrel costing around $60.00 but I remember paying 33 cents per liter at one point in the late nineties and paying 69 cents on average back then. Obviously, at those price points refining-, operating-, transportation- and marketing costs were also covered.
Has OPEC created an artificial shortage, have refineries in North America cut back production or do oil companies maybe want to generate a higher profit at consumer level?
Jeff Rubin: A key reason is that a big part of the price of gasoline is taxes while oil prices are a pure commodity price.
A second reason is the crack spread, or the diffence between oil prices and refined gasoline prices. Crack spreads have been under pressure because of refinery capacity issues. Don't forget, many refineries can't take oil sand product because they involve much more processing. As we come to depend on more unconventional fuel like oil sands, we can expect crack spreads (or refining costs) to increase over time.
Elizabeth Fleming writes: How do we persuade our politicians to start making only land use decisions that future generations will be able to sustain?
Manitoba continues to allow sprawl in and around its urban centres even though peak oil and global warming are known realities.
The Government of Manitoba has drafted a new Provincial Land Use Policies document to guide future development. It is a discouraging, business-as-usual re-working of Policies that have not been effective in the past and now will actually further encourage urban sprawl.
The Provincial Council of Women of Manitoba responded to the draft this month at http://www.mts.net/~pcwm/plup_response.pdf
The Council makes many of the points that you do. Where do we find decision-makers in Canada who see how we have to change the "same-old" patterns of development?
Jeff Rubin: Oil prices, not politicians, will determine land use. When it costs $2 per litre for gasoline, people won't be able to afford to live in the suburbs and they will return to the cities, from which they once came. Rising urban density will become the counterpoint to yesterday's suburban sprawl.
Richard Wakefield writes from London, ON: Compared to the book The Long Emergency, your prediction of the future is much more optimistic. One only has to look at our past to see that when resources are scarce wars break out. With China rapidly becoming the next Super Power supplanting the US and buying oil fields with AK47's, the next resource war would be like nothing we have ever seen before. It's like musical chairs where not only is a chair removed during the song, but another dancer is added to the floor.
That's what peak oil is in a growing economy. The question is, should we not be preparing for a return to the horse and buggy days with far fewer people?
Jeff Rubin: The future for human civiilization doesn't have to be the back side of the . Peak oil only condemns us to an ever falling standard of living if we insist on trying to consume as much energy as we did when oil was abundant and cheap. I am optimistic that people will respond to soaring oil prices by re-engineering their lives. And as more and more of us do that, we will, in turn, re-engineer our economy.
Brent Beach writes: I have read that the value of all US residential mortgages rose from $6.9 trillion in 2000 to $14.6 trillion in 2006 while percentage of home ownership rose from about 65% to 69%. So, a few more homes but much larger mortgages per home. Presumably people spent that money - it became part of the 70% of the US economy that is domestic spending. That amounts to about $1 trillion a year in spending in a $14 trillion economy.
With that money gone - no longer any ongoing free money - and the additional burden of more than twice the mortgage costs, is there much hope for US economic growth over the next 10 to 15 years?
Jeff Rubin: There is always hope, and between zero interest rates and the biggest budget deficit in history, Washington will get the economy growing again. But whether that rebound will be sustainable depends on the energy issue. Remember, we can bail out the banks, we can bail out the car makers, we can bail out the homeowners - but there can be no energy bail out.
Robert Adams writes: Jeff: Did CIBC force you out over the book? Regards and thanks for the clear-eyed commentary.
Jeff Rubin: Let's just say it was time for me to leave and you know, after 20 years, maybe time to do something a little different.
Diane Anderson writes from Chicago: What do you think will happen to Mexican oil production over the next 3 to 5 years if the oil price stays in a range of $50-60?
Jeff Rubin: Probably the same thing that will happen if oil is $150 per barrel. Mexico will cease to be an oil exporter of any consequence within the next 3-5 years because of the rapid depletion of its Cantarrell field, which is still home to over 40 per cent of the country's oil production.
Terri Evans writes: I'd be interested to learn of Mr. Rubin's insight on how the trend toward re-industrialization and de-globalization will impact urban settlement across the country. For instance, does he envision that Canada's population will continue to gravitate towards its largest metropolitan regions / corridors? How will small and medium sized cities fare in a more localizing Canada?
Jeff Rubin: It will be the movement from the suburbs to the city cores that will be most notable. But in order for the Torontos, Montreals, Calgarys and Vancouvers of the country to absorb those people, they will have to rezone cities for much greater urban densities. And we will also have to provide much more in the way of public transit since the primary reason people will be fleeing the suburbs is that oil prices will force them to give up their cars.
J. Kenneth Yurchuk writes: Good day Mr. Rubin, and thanks for taking our questions. I am curious about the juxtaposition of two of your recent prognostications. You predicted new lows were imminent for the TSX in early March, and you are predicting a return to record highs for the price of oil.
Considering the make-up of the TSX with its heavy weighting towards resource stocks, isn't it just a little counterintuitive to say the least, to expect a petro-weighted exchange to tank whan petro prices go through the roof?
Jeff Rubin: Don't work for CIBC World markets anymore and, hence, don't forecast the TSX anymore. However, there seem to be two important investment themes from the book. Oil prices are going up and we are moving to an inflationary world, marked by ever rising energy and food prices. The TSX, as you know, has a large energy and fertilizer component. You can take it from there.
Jon Seaby writes from Toronto: With all the money that is being flooded into the US economy, and for that matter the world economy, do you think that interest rates are set to rise considerably (i.e. like they were in the late 70's 20-25%) in the next 3-5 years globally, specifically in Canada do you see interest rates rising considerably (similar to the late 70's as well) in the next 3-5 yrs?
Jeff Rubin: Interest rates are generally a mirror on inflation. I believe inflation is coming back, hence i believe interst rates will move up sharply over the next couple of years. While I dont do investment advice any more, I will say this - if I had a mortgage, I would lock in now.
Jonathan Houle writes: Thanks for taking the time to answer our questions Jeff. Although you predict a contraction with respect to economic globalization (i.e.: supply chain costs being too high) , how do you think high fossil fuel prices will effect what I like to call "cultural globalization?"
By that I mean the spread of content, material, media, etc. over new mediums such as the internet. Could it be possible that this phenomenon simply be poised to grow even further due to the new found costs of travel and making "physical" content available to people? If you don't mind me asking, what role do you see the internet having in this new economy devoid of cheap fossil fuels.
Jeff Rubin: Interesting question - triple digit oil prices will disconnect us physcially with the rest of the world but, as you point out, not necessarily in an electronic sense. Will we substitute more use of the internet for the lost physical travel and contact? Don't know - but it's possible.
Bertrand Montel writes from Montreal: I tend to agree with your prospective analysis and we may indeed see a reduction in international travel and freight. While such trend may support some kind of relocalization of manufacturing, it may also have some unexpected consequences as to human capital / labor localization. I emigrated to Canada 6 years ago and I'm now a Canadian citizen. Easy and relatively cheap travel facilitated my emigration and I think it may have played a key role in international migration.
My concern is that OECD countries may see a significant decrease in immigration of qualified people who are more likely to want to travel back and forth to their homeland than people upon whom economic emigration is imposed. This may consequently prevent aging countries to succeed in relocalizing manufacturing. What are your thoughts?
Jeff Rubin: That's already started to happen. Immigration is tightening up in the US, UK, Australia and Canada as well. And as unemployment rises (a casualty of triple-digit oil), our willingness to accept immigrants diminishes, no matter where we are in the world. A smaller world may well translate into a more stationary world, not only for goods but for but people as well.
W. Leonard Waddingham writes from Brockville, ON: Where do you see this price of natural gas being in 6 months, one yr, two yrs & beyond?
Jeff Rubin: $5 per mcf by the end of the year and probably moving closer to the $7- $10 range over the next couple of years.
Sonali Verma, Globe Investor: Thank you very much for joining us. We really appreciate it.
Jeff Rubin: My pleasure. Thanks for all your comments and for reading the book. I will be on a book tour across the country starting next week and I encourage you to all come out and, hopefully, resume the conversation.