Why your world is about to get a whole lot smaller: oil and the end of globalization

 

The failure of the recent Climate Change discussions in the U.S. Congress sent me scurrying back to some of the books I read in the last year.  After all, did I miss something?  Were all those countless Climate Change articles, books and research reports wrong?  Am I the only one feeling an immense sense of urgency to act “now”? 

Since Prime Minister Harper is continuing to tell us that the economy must take precedence at this critical point in history, I returned to the first book I ever read written by an economist, “Why your world is about to get a whole lot smaller: oil and the end of globalization,” by Jeff Rubin, former Chief Economist at CIBC World Markets.  Here is my review of this book.

Global market meltdowns, boom/bust cycles, spiking and falling gas prices, abnormal weather patterns – it’s getting harder and harder to make sense of the world.  But Rubin’s book just might offer us something to make sense of it all – an opportunity to read our world through the lens of cheap oil.  A quintessential systems thinker, Rubin weaves together the impact of the dwindling cheap oil supply with rapid increases in oil demand, climate change, population growth, and increasing energy use per capita in OPEC countries. Just as cheap oil led to globalization, world-wide economic booms, and climate change, Rubin says, the disappearance of cheap oil will mark the beginning of a new era, one that is more local than global.

Unlike many economists, Rubin understands the issues of oil “stocks” and “flows” and the impact of this dynamic system on the global economy. Over the last 30 years we have constructed a global economy that runs on cheap oil. If you are like me, you might have forgotten that crude oil was a mere $20 per barrel in 2000.  Today, if oil drops to $50 or $60 a barrel, three times more than it was a decade ago, we think it’s cheap.  Somewhere along the line we hit a “new normal” for oil prices – and someone forgot to send us the memo. 

Rubin makes a compelling argument for the decline of cheap oil, rather than the onset of peak oil.  This means that we are not likely to run out of oil any time soon, but we will see less and less of the oil we can afford to buy.  He cites public sources, such as the 2008 report of the International Energy Agency, which confessed, to everyone’s surprise, that world’s oil wells are declining by 6.7% annually, not 3.7% as previously indicated.  He identifies the falling production of wells in the North Sea, Mexico, Russia and Indonesia, referring to data which only industry insiders would know.  Meanwhile, as production is falling, new discoveries are slipping down the negative slope of geophysicist ‘King’ Hubbert’s 1950s curve, showing the rate of oil production rising, peaking and then falling.  Much of the new oil is far more costly to extract, either miles below the ocean floor or tightly bound in sand deposits or shale.  These supplies won’t be coming out of the ground unless oil prices are $70/barrel or higher, making this the new base price.

The scarcity of cheap oil is only half the problem, according to Rubin.  Globally, we are demanding more oil than ever – just as supply is slackening off.  Using the analogy of a bathtub, we are draining oil faster than we can fill it.  Rubin says most economists believe that the law of supply and demand will bail us out –  theoretically, as supplies dwindle, the price rises and demand falls.  But Rubin opts for our track record of consumption over mere theory.  He points out that between 2000-2008 prices rose from $20 per barrel to nearly $150/barrel.  As prices increased 600%, world demand didn’t shrink, but doubled.  Rubin cites numerous reasons for this phenomenon, including increased domestic use in oil-producing countries, spurred by growing populations, higher living standards and generously subsidized oil prices. 

But, you might ask – what’s this got to do with shoving globalization off the shelf in favour of local products?  In a nutshell, “distance costs money”.  Rubin explains that all those Chinese- manufactured, “freight sensitive” (low value, high weight) goods will be slapped with an 8 to 13% increase in transportation costs.  All gains in trade liberalization and tariff reductions over the last 30 years, will be wiped out.  What’s more, he suggests that the Wal-Marts of the world will be looking for a cheaper place to source these goods in the future, and may bring manufacturing back to North America.  In a world with triple digit oil prices, the closer you manufacture to the market, the better.  He argues that the coming price on carbon will also allow North American manufacturers to capitalize on their comparative advantage in carbon intensity (carbon emissions per unit of energy used) and energy intensity (unit of energy required to produce a unit of GDP).  This is great news for our flagging manufacturing sector and labour markets.

And for those who think that conservation, new energy efficiency technologies, and ethanol will ensure “business as usual” for globalization, Rubin calls these strategies “head fakes”.  For instance, he thinks that ethanol production is a “really bad thermodynamic deal”.  Aside from the food-for-fuel debate, he submits that the energy return for ethanol is so negligible that without massive subsidies no one would consider it a viable fuel source.  As evidence, he cites that about three-quarters of the energy in a gallon of corn-based ethanol comes from the combustion of natural gas (mostly to produce fertilizer), diesel and coal used during the various stages of growing corn, transforming it into ethanol and then transporting it.  He also introduces us to the “efficiency paradox”, which has afforded North Americans the opportunity to own larger homes and more powerful vehicles, fly more often and use more gadgets, from electric driveway heaters to a multitude of electronics, all the while improving the efficiency of energy utilization. Here’s the catch: While oil use per unit of GDP in the US has fallen over 50% since the 1970s, total oil consumption has risen by 20% – we haven’t saved our savings, but spent them on more and more stuff made from fossil fuels and on powering this new stuff. 

Deglobalization is only one radical notion put forward in this book.  Rubin also makes a compelling argument for a countervailing carbon tariff on Chinese and Indian exports to North America, if these countries do not sign onto a carbon reduction scheme.  Essentially, if carbon pricing puts industries in participating countries at a disadvantage, mechanisms to level the playing field will increasingly receive support from voters, then politicians.  This idea may not be so far fetched, July, 2009, the concept received support from the U.S. Commerce Secretary.

Rubin devotes the last third of his book to the implications of cheap oil’s demise.  The news is good and bad.  A return to local jobs, community and a world anchored in local significance and local customs could be good for all of us.  The new world just might be a kinder and gentler place – cooler too, with far fewer of those scarce fossil fuels being incinerated to get goods to market from afar.  The bad news: it will be a world that is a lot more expensive.  Rubin makes a compelling case for rebounding inflation as the recession fades, and predicts an end to the “barista (service) economy”.  Essentially we will see higher prices for just about everything. 

Critics suggest Rubin doesn’t give us enough detail in this final section of the book.  Perhaps he is saving a more detailed analysis for his next volume, or maybe he doesn’t want us to lose sight of the big picture.  If resulting government policies end up focusing on our hue and cry over the escalating price of avocados, they will probably miss the mark.  We need to learn to love local.

This book is essential reading for anyone in business – or for that matter, anyone on the planet.  People who have a tendency to predict the future by looking backward may find Rubin’s propositions somewhat extreme.   However, some experts suggest that we are on the cusp of a new Axial Age – a deep global transformation.  There are many signs of this. If you aren’t seeing them, and certainly our Prime Minister and the folks in the U.S. Congress aren’t) this book is just what you need.  After reading it, the world is going to look a whole lot smaller – and action on climate change a great deal more urgent for an economy that depends on the planet.

Rubin, J. (2009).  Why your world is about to get a whole lot smaller: oil and the end of globalization.  Random House Canada:Toronto. 286p.

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About Kathryn Cooper

Kathryn Cooper is a committed sustainability practitioner and educator moving companies toward “green” profitability and sustainable competitive advantage by unlocking human creativity and technical innovation. Over the last two years she has had the privilege to work with companies like Dupont, Zerofootprint, WWF Canada, and Partners in Project Green on sustainability issues, best practices and renewable energy. Kathryn is a graduate of York University with a Master of Education specializing on Sustainability and the Environment. She holds an MBA from Wilfrid Laurier University, and a Bachelor of Science from the University of Guelph.
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