Wednesday, June 23, 2010

Interview with Jeff Rubin

Jeff Rubin was the chief economist at CIBC World Markets for almost twenty years. He as one of the first economist to accurate predict soaring oil prices back in 2000 and is now a sought-after energy expert. Peak Oil Review caught up to him in Toronto last week. Part 1 of a 2-part interview:

POR: In the year since your book was published, how has it been received?

Rubin: It’s funny that you should ask, because just last week the book won the National Business Book Award up here in Canada. And I just came back from Portugal where the book has just come out. Over 50,000 hard-cover copies have sold in Canada, making it the #1 hardcover non-fiction up here last year. And the new revised paperback version will be released in the fall. It’s selling in over 15 countries in seven different languages: English, French, Spanish, Italian, German, Portugese, Croatian, and it’s coming out in Chinese. So I’m very pleased with it. I wrote the book in a way that would make it as accessible to as many people as possible. I went to great pains to write it in a different way from what I used to write for the institutional investor audience for many years.

POR: How has it been received by the oil industry?

Rubin: I think its reception by industry is directly proportional to the price of oil. There are many people in industry who feel threatened by the book’s message. What’s surprising is how many sectors of the economy see the book as pretty optimistic, particular when it comes to the return of some long-lost manufacturing at the local level. And that’s a subject of as much interest in Barcelona and Lisbon as it was in Seattle or Toronto. I think the other part of the book that resonates well in different places is the return to a local and regional focus; that’s of as much interest in Europe as it is in North America.

POR: As you reflect on the book, what was the single most important point that you made, the one you want two guys who’ve read the book and who are having a beer to reflect on?

Rubin: The take-home? Certainly there’s nothing new about the depletion story, since Hubbert called that back in 1956. The take-home is that depletion does not have to be apocalyptic. It will only be apocalyptic if we continue to consume oil as we have in the past when it was cheap and abundant. Because I’m an economist and I believe in the power of prices, I believe that we’re going to change. I believe that a global economy, where we move resources all around the world to be assembled by the cheapest labor force and then be shipped to the other end of the world-that’s not a rational way of doing business in a world of $150-a-barrel oil. What we’re going to see is a whole reengineering of our economy, and while we’re going to make a lot of sacrifices in terms of our past energy consumption, we’re going to find that our new smaller world has a lot of silver linings. And in a lot of ways it is going to be more livable and sustainable than the old oily world we’re leaving behind. Peak oil will be an agent of change, and much of that change will be positive, not negative.

If we continue to commute 60 miles each way in SUVs, we’re going to get screwed. All of a sudden, peak oil will equal peak GDP; that’s not just an economic recession for a couple of quarters, that’s a world of no economic growth. The point of my book is that, while we can’t do anything about triple-digit oil prices, there’s a whole lot we can do to make sure that when we encounter triple-digit oil prices, they don’t have to be so devastating as in the past. We have to reduce, in effect, oil per unit of GDP, and the way we do that is to go from a global economy back to a local economy because a global economy is an extremely oily way of doing business. And that switch isn’t something that the Federal Reserve Board or US Treasury or the Bank of Canada or the European Central Bank is going to put in place; that is going to be the aggregate result of all the micro decisions that consumers make about what we eat, where we live and how we get around. I think triple-digit oil prices will lead us to make the right decisions on those fronts, and the result will be a very different economy than the economy we know.

POR: But do you think we’ll make the macro decisions about relocalizing manufacturing in a timely fashion?

Rubin: We already saw that when oil got to $147 a barrel, it was cheaper to make steel in the US than it was to bring it in from China. China had to import iron ore from Australia or Brazil, make it into steel and ship it back. There’s only an hour and a half of labor time in making a ton of steel. What you save on wages you more than lost on bunker fuel. The other question is, how strong is the economy going to be and how much steel will the economy consume? That’s going to depend in part on how readily we transition to this local economy. Because if we don’t…if we stay with the oil-based global economy, then we’re just going to go back into an endless series of oil-induced recessions; the economy recovers, but very quickly oil gets back up to $150 a barrel and bang, we go back into recession. Oil drops back to $40 a barrel, we recover but only temporarily. That’s a future I think we have to avoid. And the way to avoid that is to abandon the model of the global economy because it just doesn’t make sense in a world where transport costs will be so dear.

POR: You mentioned in the book that at $60 to $90 oil, a lot of the megaprojects are postponed or cancelled. At current $75 oil prices, are those back in action?

Rubin: Let’s talk about the Canadian tar sands, which are the primary source of US oil import growth. Last year there were $50 billion dollars of new projects-either new mining or in situ or heavy oil upgrader project-that were suddenly slashed because they made absolutely no sense at $40 oil. Now that we’re up around $70-$80, I’d say that we got about half of that back. But we’re going to need not only the other half back but much more if the tar sands are going to fulfill the IEA’s forecast of 3 million barrels a day by 2020. So we’re going to need a lot more capital spending in the region and we’re going to need triple digit oil prices. Now, one thing that will probably boost capital spending in the tar sands is if in fact what’s happening in the Macondo well becomes the equivalent of what Three Mile Island was for nuclear; if it is, and all of a sudden there is no more deepwater drilling in the Gulf, then a lot of the $18 billion in spending in that region is likely to find its way up north. When you look at new non-OPEC supply, it’s deep water, and after deep water it’s tar sands. The Orinoco isn’t open to these companies, so by default it’s the Athabasca tar sands.

POR: When it comes to Venezuela’s Orinoco, what’s your long-term view of Chavez’s intents?

Rubin: He’s just done a $20 billion loan with China and much of that will be repaid with oil from the Orinoco, so I’m not sure he’s unique in that respect. If you look at Saudi Aramco, they’re fare more interested in pursuing long-term oil contracts with India and China than they are with the US. Chavez has invited Iran and China to help develop the Orinoco, after he effectively expropriated ExxonMobil’s assets. Hugo Chavez is actually more in step with how the geopolitical world of oil works today than Alberta or the Gulf of Mexico, because in most places in the world companies like Exxon do not have access to hydrocarbon resources. Those are typically the exclusive preserve of the state oil company. And we’re not just talking about China or Venezuela, we’re talking about places like Mexico. The advantage of the Canadian tar sands is that it probably represents about 75% of the investible oil reserves in the world, where companies like Exxon can go in, own a resource, and spend billions developing the resource, and not worry about getting expropriated. So that’s one thing the tar sands have in their favor, not to mention the fact that the government just cut its royalties. But of course the negative thing is that the tar sands is an extremely costly way of getting oil, and as we try to ramp up production, the cost curve is going to go even higher.

After the blowout at the Macondo well, all of a sudden the tar sands operators were trying to sell themselves as a green alternative to deep water oil. I found that particularly amusing because Canada was the pariah at the Copenhagen environmental summit 6 months ago precisely because of the tar sands. That the tar sands operators are trying to claim a comparative advantage on the environmental front tells you how low the bar has fallen.

[Part 2 of the interview will be carried in next week's Peak Oil Review.]

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