Jeff Rubin was the chief economist at CIBC World Markets for almost twenty years. He is one of the first economists to accurately predict soaring oil prices back in 2000 and is now a sought-after energy expert. Peak Oil Review caught up to him in Toronto the week before last. Part 2 of the 2-part interview:
POR: Is there a growing number of economists who are getting the resource depletion story, or is it still business as usual?
Rubin: I think more economists are coming around. I can just see that from the number of economists who respond to my blog. I think what’s happening is that economists are beginning to realize that, yes, the supply curve-meaning, the higher the price of oil, the more oil we’ll find-has a big problem in that much of the new oil that we’ll find, like tar sands or deep water, we won’t be able to afford to burn. Economists’ responses will be that $150 oil will give us new forms of supply but that those prices will send a lot of motorists to the sidelines. Sure, we can produce 4 or 5 million barrels a day out of the Athabasca tar sands or Venezuela’s heavy oil, but the prices to produce it translate into $7-a-gallon gasoline. Can we really afford to burn that? They are starting to understand that depletion is more an economic term than a geologic term because we not going to hit the absolute limit of oil supply; as we’re keep drilling towards the bottom of the barrel, it’s going to get too expensive to bring out what’s left.
POR: Who in the oil industry gets peak oil?
Rubin: I think everybody gets peak oil in some sense because, you know, what’s BP doing drilling in a mile of water at the Macondo well, or planning to develop the Tiber field which is much deeper below the ocean floor? Or for that matter, what’s Suncor doing in the tar sands? We’re there because that’s all that’s left. They may not want to articulate it as peak oil, but their actions speak louder than their words. When you’re spending billions of dollars on new tar sands production where you need $90 to $100 a barrel to provide adequate economic returns on your investment, you can call it whatever you want but I call it peak oil.
They had a pilot project in Fort McMurray (Alberta) in 1920, so this is not a new discovery. Neither is the Orinoco. The only thing that’s new is that, not only are these seen as commercially viable sources of supply, but now a recent CERA report says these are going to be the single largest source of supply of US imports. What do you call that if it’s not peak oil?
POR: Speaking of CERA, Daniel Yergin wouldn’t call anything peak oil. If you had to pick the four horsemen of false oil optimism, the list would include Cambridge Energy Research Associates, the US EIA, OPEC, and a voice or two from industry-maybe BP and ExxonMobil. What’s going to make them change their tune so they don’t postpone acknowledgement of this looming reality?
Rubin: I’m not sure that it’s really going to matter what those folks think or say any more because those folks, especially CERA and the International Energy Agency, have lost so much credibility on this issue that I don’t think people are going to be terribly concerned about their view on oil supply.
They’ve been so patently out to lunch in the last five years about oil supply that I don’t think that’s where people are looking for such information.
I think that what’s happening in the Gulf of Mexico is bringing things into focus. Once Americans get over their initial rage at BP, they’re going to ask themselves the more fundamental question which is “why are we drilling a mile below the ocean floor?” The answer they’re going to get may not be called peak oil but for all intents and purposes that’s the answer they’re going to get. If the deepwater Gulf of Mexico was Plan A, and Plan A is now off the table, Plan B can only be one thing: consume less oil. You can call it peak oil, or you can call it $150 to $200 oil prices, but it basically all takes you to the same place-we’re to consume less.
POR: For the upcoming paperback version of your book, are you doing some updates?
Rubin: We did updates on supply, on deep water, on Canadian tar sands, but also on how the environment can change. One of the changes is that the first time we encountered triple-digit oil prices, we ran up massive record deficits trying to stimulate our economies. The next time we encounter triple-digit oil prices, which I think will be reasonably soon, not only will we no longer have the latitude to fight them with deficit spending but we’re going to start having to pay back those deficits that we racked up. In other words, yesterday’s bailouts are tomorrow’s spending cuts. Then I think we’ll look back and see that the bailouts of the auto companies were such a colossal and costly mistake.
POR: When do you see inflationary forces overcoming deflationary forces in a big way?
Rubin: I argued in the book that what really sparked the financial crisis was the fact that the Federal Reserve had to move the Fed funds rate from 1 to 5.5 percent following in a similar rise in US inflation that came from the energy component. We’re already beyond the minus signs in inflation, we’re in the two percent inflation range. If we’re going to see triple-digit oil prices by 2011, then we’re probably going to see inflation close to double where it is today. While people are worried about deflation, history has shown that these huge massive deficits that have arisen have as their dancing partner inflation and not deflation. The US government has always monetized those deficits, meaning that they’ve always printed money to pay for them in the past and I see no reason why they won’t do that in the future, particularly when so much of the debt is owned abroad.
POR: Any comment on the Pickens plan and shale gas?
Rubin: Two comments. First of all, I think what’s happening in the Gulf is going to raise the environmental bar, not just for deep water but also for shale gas. There are a number of environmental issues surrounding shale gas drilling and we’re going to find that many jurisdictions may not be as open to shale gas development as the industry believes, particularly when it comes to contamination of ground water.
Secondly, we can substitute natural gas for oil for a whole lot of things, and we have. For furnaces, for power generation, as a feedstock for petrochemicals-we can make that substitution. But oil packs four times the energy density of natural gas and that’s why oil is our transport fuel. Yeah, there’s 130,000 natural-gas-powered vehicles in the United States, but out of a vehicle stock of 245 million, that’s not going to do the trick. So the Pickens plan doesn’t mean anything until we can use natural gas as a widespread transportation fuel, and we’re a long way off from doing that.
What I say about the Pickens plan is the same thing I say about growing corn to feed our gas tanks and a lot of other stuff; instead of learning how to turn cow shit into high-octane fuel, we have to learn how to get off the ropes. In other words, the adjustment has to be more on the demand side than on the supply side. I’m sure that’s not a message that North Americans want to hear, but it’s the message that $7-a-gallon gasoline will deliver loud and clear in the near future.
POR: Thanks very much for your time.
Interview with Jeff RubinConsumer caution may fuel debate over stimulus, deficits