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.

9 thoughts on “Interview with Jeff Rubin, Part 2”

  1. If the price of gasoline gets near $7 a gallon anytime soon, the economy will contract so much, that the demand for oil will fall significantly. That will delay the inevitable oil price explosion.
    When gas does get to $7 a gallon, unemployment might double. People in the USA can only save so much gas, then many of them will be forced to start cutting back on nearly everything else they buy, so as to pay for gasoline to get to work, shop for food, and accomplish essential travel. That cutback will cause millions of jobs to disappear, just like in the Great Depression. Less overall demand = fewer jobs. That will be the first bite of peak oil that we will endure.
    We are not yet at that point, and probably won’t be until the second half of this decade, because future US economic growth will be very slow for years. Another recession next year is quite possible.

  2. High oil prices does not necessarily mean fewer jobs.

    High oil prices, say $200+, means imports from Asia will become too expensive for most products, which means products will have the be made in the West !!!

    If I have to chose between uncontrollable hyperinflation because all our money is being shipped to Asia, or paying more for products made in the West, I prefer the last.

    Globalization among western nations worked perfectly well after WWII.

    Globalization between the West and Asia has been a train wreck, and I can’t wait for peak oil prices to get that stopped.

  3. Gas isn’t going to get to $7-10 a gallon, because the economics won’t support it. Rising oil/gasoline/diesel prices will kill the economy, dropping demand for oil and its price. Oil has a self-limiting function. If it goes too high, demand drops, and so does the price. The U.S. is not Europe or Japan. We have a much bigger footprint, and have to travel by car a lot more as we are not constructed. We cannot operate normally with $7-10 gasoline, like France and Tokyo.

  4. %here is a basic misunderstanding relative to the price of oil. That being that although the US is the biggest consumer of gasoline it is a world market and our influence on demand is being eroded by growth in other sectors.

    Given this, any assertion that the economies will not stand $7 a gallon gasoline as it will collapse with this price has to looked at as optimistic/jingoistic fiction. We do not control the price or the demand as we once did. Sorry folks. Add to this the underlying potential for stagflation and with the collapse of the dollar as a reserve currency inflation remains a real threat.

    As of late we have been given a respite with the problems of the Euro but the abandonment of the dollar as THE reserve currency may well be in the offing. Just think of the impact of loosing our ability to sell our debt to foreigners in exchange for raw materials like petroleum. It could happen and believe will when the market realizes that China is selling our debt for long term supplies of raw materials all over the world.

    Going to get pretty ugly, I suspect.

  5. %here is a basic misunderstanding relative to the price of oil. That being that although the US is the biggest consumer of gasoline it is a world market and our influence on demand is being eroded by growth in other sectors.

    Given this, any assertion that the economies will not stand $7 a gallon gasoline as it will collapse with this price has to looked at as optimistic/jingoistic fiction. We do not control the price or the demand as we once did. Sorry folks. Add to this the underlying potential for stagflation and with the collapse of the dollar as a reserve currency inflation remains a real threat.

    As of late we have been given a respite with the problems of the Euro but the abandonment of the dollar as THE reserve currency may well be in the offing. Just think of the impact of loosing our ability to sell our debt to foreigners in exchange for raw materials like petroleum. It could happen and believe will when the market realizes that China is selling our debt for long term supplies of raw materials all over the world.

    Going to get pretty ugly, I suspect.

  6. %here is a basic misunderstanding relative to the price of oil. That being that although the US is the biggest consumer of gasoline it is a world market and our influence on demand is being eroded by growth in other sectors.

    Given this, any assertion that the economies will not stand $7 a gallon gasoline as it will collapse with this price has to looked at as optimistic/jingoistic fiction. We do not control the price or the demand as we once did. Sorry folks. Add to this the underlying potential for stagflation and with the collapse of the dollar as a reserve currency inflation remains a real threat.

    As of late we have been given a respite with the problems of the Euro but the abandonment of the dollar as THE reserve currency may well be in the offing. Just think of the impact of loosing our ability to sell our debt to foreigners in exchange for raw materials like petroleum. It could happen and believe will when the market realizes that China is selling our debt for long term supplies of raw materials all over the world.

    Going to get pretty ugly, I suspect.

  7. I’m not so sure about the economy not supporting $7 a gallon oil. I commute eight miles to work in a car that averages 28 miles per gallon, which means I use about three gallons per week, or $21 at $7 per gallon, $13 more than it costs now. That would mean cutting expenditure elsewhere by that much, but if my family had the average family income for my city (about $800 per week, perhaps $600 after tax) that would be slightly more than 2% of disposable income. My commuting distance is close to the national average, though my car is more economical than average. I also doubt high oil prices will stop imports from China: transport by sea is an extremely small part of the cost of goods made in China. High oil prices will show themselves in much more subtle ways: higher costs for food, higher costs for long distance travel, higher costs for infrastructure maintenance, etc. The real problem looming is excessive debt all round, and unfunded entitlements, all put in place with the expectation of unlimited economic growth, and that can’t happen with $100+ oil. That’s what will eventually kill off the economy, not a few dollars more for commuting.

  8. @Scott Benson – “If it goes too high, demand drops, and so does the price.” This is unlikely according to Rubin, because even though demand would fall, supply would be falling even faster.

Comments are closed.