Maverick economist says markets will lead us to be greener
By LYNN MOORE, The GazetteOctober 8,
2009
Resource depletion is a factor that runs counter to
ingrained thinking in economics, Jeff Rubin says.
Photograph by: Phil Carpenter, The Gazette
With this article, we begin a new
feature in Business Observer that we're calling Question Period. A couple times
a month, we'll corral a notable person and sit them down for a question and
answer session on the hot-button topics of the day.
- - -
Economist Jeff Rubin cemented his
reputation as a maverick when he left his position as chief economist at CIBC
World Markets, and a 20-year-career there, to publish a book about the end of
cheap oil and the end of globalization, as we know it.
In 2000, Rubin had told Calgary's
Petroleum Club that oil - then at an alarming 10-year-high of about $30 per
barrel - would rise to $50 within five years. In 2005, he was among the first
to correctly predict $100 oil.
Now, he says oil will break $200
as the economic recovers.
Triple-digit oil prices - not an
overextended financial system plugged into subprime mortgages - caused the
current recession, according to the McGill University graduate and Toronto
resident.
A Canadian bestseller, Why Your
World is About to Get a Whole Lot Smaller, has been sold to U.S. and British
publishers. It is soon to be published in French in Quebec by Éditions
Hurtubise.
Q: You say the work of geologist
Colin Campbell got you to question the conventional wisdom about oil supply.
How so?
A: Dr. Campbell was the first
person to open my eyes to oil depletion and that is not a concept that
economists digest easily because it just runs counter to some deeply ingrained
thinking in economics.
Economics is not really concerned
about finite resources. Economics is more concerned about what the cost will be
of getting this resource out.
One of its foundations is
something called the upward sloping supply curve which means that the higher
the price, the more of the good will be supplied. Of course, it tacitly assumes
it physically exists. Dr. Campbell's work first acquainted me with (the idea)
that depletion is a real factor, a growing factor.
Where I guess I refined it
slightly is that I don't think it really matters whether we are at peak oil in
some absolute geological sense; what matters is whether we have exhausted
affordable oil.
The very prices that we will need
to be able to tap these unconventional reserves of oil - the (Alberta) tar
sands, for example - are the very same prices that are going to take us right
off the road because we simply will not be able to afford to consume oil in the
(same) fashion.
Q: What about human ingenuity and
resourcefulness or technological advances that will allow us to lessen our draw
on oil or fast-track alternative energy sources?
A: I have no doubt that in the
fullness of time, give us 10 to 20 years of triple-digit oil prices, and we
will develop technologies to harness new sources of energy and wean ourself off
our carbon dependency. Unfortunately, our rendezvous with triple-digit oil
prices is not in 10 or 20 years (it's) in 10 or 12 months.
And the solution - instead of
trying to figure out how to convert cow dung into rocket fuel - is to find a
way of using less energy, more specifically less oil.
I think the single most important
way of lessening the economy's dependence on oil is to go from a global economy
to a local economy.
Q: Your book points to a North
America with fewer gas engines, smaller homes, more public transit, locally grown
food and the repatriation of manufacturing from low-wage countries with
relatively little environmental protection to a carbon-sensitive West. It
sounds like the vision of a dyed-in-the-organic-wool environmentalist, no?
A: An environmentalist, in the
true sense of the word, would see it more as a political or philosophical
choice. I see this as an economic necessity. The market mechanism can lead us
to some very green places.
I'm not saying that we are all
going to go through this philosophical conversion to ecologically sustainable
forms of economy. I'm saying that ... the price mechanism will force us to go
there because our current way of living will not be affordable.
In some areas, we are going to
need legislation ... to put a price on carbon emissions ... on water ... but
the broad outlines of what i'm talking about the market will take care of.
Q: Why doesn't mainstream
economics currently recognize and include the cost of finite natural resources
such as water?
A: For the same reason why
economics didn't recognize oil depletion. Economics is a very rigid discipline.
I'm an economist. I think it is a very powerful tool of analysis but I think it
can often be accused of tunnel vision.
Would we be polluting 250 gallons
of fresh water to produce every barrel of synthetic oil from the tar sands ...
if Suncor had to pay for that water? I bet that if we put a price on that
water, all of a sudden the shareholders of Suncor would be calling up ... the
CEO and saying: 'Can't you find a way of using less water?'
My training as an economist tells
me that Suncor would find a way of using less water if it had to pay the price
of the water it is polluting.
An online supplement to the
Business Observer Question-and-Answer session with Jeff Rubin.
Q: The price of oil is
notoriously hard to predict but your reputation has, in part, been made by your
oil price predictions, right?
A: In 2000, I called for $50 oil
by 2005 and in 2005 I called for $100 oil by 2007 and I'm calling now for $200
oil by 2012, maybe sooner, providing of course - and this is the whole key to
my book - that we don't fall back into another recession because I believe that
the true underlying cause of the recession that we are coming out of is not
subprime mortgages but was triple digit oil.
Q: A U.S. government projection
points to $130 a barrel by 2030, although the Energy Information Administration
is quick to give it a range of between $50 to $200, citing uncertainties in
projections. What makes you think you've nailed it and the U.S. government
hasn't?
A: Check out what the U.S.
Department of Energy was saying in 2000 about where oil prices would be in 2005
or 2010 and I'll think you will find that the answer was a fraction of today's
price. so I'd go, 'What makes you think their forecast for 2030 prices is going
to be any better than their forecast of oil price in 2000? ...(Also suspect) is
their forecast of oil supply.
Back in 2000 the DOE believed
that underwater oil from the Gulf of Mexico was going to be the huge area of
supply growth. They thought that production would double from one million to
two million by 2010 and then double again. The fact of the matter is that here
we are, more than three years after Katrina and the Gulf of Mexico isn't even
producing what it was back in 2004.
Q: What do you think skewers
their vision - political imperative, wishful thinking....?
A: I think it’s this concept that
I spoke to you earlier about, the upward sloping supply curve. It’s among the
first principles of economics. - the higher the price, the more of a good will
be supplied. I think that that underscores a lot of Cambridge Energy Research,
U.S. DOE, International Energy Agency forecast. I think that up until recently,
they have been very reticent to recognize depletion , at least to the extend that
it occurs. I think that is beginning to change.
But the simple fact of the matter
is that, I think, most people don’t appreciate that in the world of oil
production, you gotta run faster to stand still. You hear all kinds of press
announcements (about new fields and new finds) but what you never hear about is
this field that's been producing for 50 years but now its depleted. You don't
hear host companies make press announcements over that and you certainly don’t
hear companies make press announcements over that. But if you were to add up
what we loose from the loss of production in existing fields, i.e. depletion,
that is four million barrels a day every year.
When you consider that, as a
benchmark, we - the world - consume roughly 85 million, 86 million barrels a
day, then that implies that by 2014, we are going to have to find 20 million
barrels a day of new production just so that in 2014 we will be able to consume
the same amount of oil as we did in 2009, ignoring any demand growth.
And even if we are able to do
that -- and believe me that is hardly a lay-up, - even if we are able to do
that what we are doing is replacing light Arab sweet crude -- that's the
conventional oil that’s depleting at $3 to $5 dollars a barrel cost-of-
production -- with deep water or synthetic oil from tar sands which costs
upwards of $100 per barrel.
So even if we are able to replace
it we are replacing it with something that costs 20, 30 times as much to
produce.
Q: What would be a good action
plan at this point?
A: “What you got to understand is
that 60 or 65 per cent of oil is consumed in the form of gasoline or diesel as
a motor fuel, a transportation fuel. In North America, very few people burn oil
for electricity, in the Middle East that is a different story ....
If you want to wean the world off
oil, the best way is to find alternative fuels for cars.
People can say, ‘oh what about
electric cars?’ Well, there are two issues there. Maybe GM makes 50,000 Volts,
at tops. There are 247 million cars in the U.S..
The second issue is, even if, by
some miracle, GM was able to transform itself and pump out 50 million cars, we
try to plug in 50 million electric cars right now and guess what? The lights go
out... The battery needs to be charged and we don’t’ have that kind of excess
capacity on our power grid.
Hell, I remember in 2003, in
First Canadian Place (a Toronto office tower), having to walk down 18 flights
of stairs because one air condition too many and the whole grid between
Detroit, New York and Toronto went off line in Toronto for 18 hours. Try
plugging in 50 million cars and see what happens. Give us time, a couple of
decades and okay ,but we don’t have time...
The solution has to be on the
demand side, not the supply side. The solution is get off the road. It’s real
simple what we gotta do and that is exactly what we gotta do because I’m
economist and I believe in the power of prices. When you look at what happens
in countries that pay the gasoline prices that I’m talking about (such as
Europe)... rates of car ownership ... are significantly lower than in North
America...
And if we behave like Europeans,
having the same ratios of car ownership to household, something like 50 million
Americans will be taking the exit lane over the next decade. So out of 247
million vehicles, something like 40 to 50 million vehicles will be abandoned.
The question is when something like 40 to 50 million north Americans take the
exit lane, will there be a bus to get on? In Europe, there is a bus to get on.
If, all of a sudden, 20 per cent
of the people in Toronto decided to take the TTC and not their car -- guess
what?-- we don’t have room for them. The subways in Toronto now run 1.5 minutes
apart. That is the legal minimum requirement for safety, there is no excess
capacity... and Toronto's system is as good if not better than most North
American cities. If there is no excess capacity in Toronto’s (public) transport
sector, there isn’t in North America.
That's why I would argue instead
of spending billions of dollars bailing out an auto industry that is doomed to
obsolescence by triple-digit-oil prices (TDOP) anyway, why didn’t we invest
that money in public transit...
Q: Why wasn't that done, given we
were already in a carbon-sensitive era?.
A: Well I guess those people are
looking at the U.S. Department of Energy's oil price forecast, right? But I
think the DOE...has a hard time explaining why oil is already 70 a barrel in a
deep recession...
Q: It is rather amazing that it
is still feasible to ship things like wood from Canada to China and have it
shipped back as a consumer product.
A: It isn’t feasible at $150 oil.
it isn’t even feasible to send steel from China to the U.S. or Canada. Y have
to consider what China has to do to export steel to North America. They have to
import iron ore from Brazil, schlep it across the Pacific Ocean, process it
into steel, ship it back across the ocean. When oil was $140 a barrel, those
shipping costs, the bunker fuel added $90 to the cost of a ton of hot rolled
steel. There is only an hour and a half labour time in producing that steel.
What you burnt in bunker fuel more than blew away the wage advantage that China
has over the U.S. or Canada in steel wages.
Next thing you knew, Chinese
steel imports are plunging, North American production is up and for the first
time in 20 years it was cheaper to produce steel in North America. That's
steel.
What about food? Last year, china
exported $6 billion worth of food to the U.S.. Steel doesn’t have to be
refrigerated, food does. What do you think is fueling that refrigeration unit
on the boat? The same thing that is driving the boat's engine, bunker fuel.
There is no way we are going to be importing $6 billion of food from China
(with triple-digit-oil prices )... We are going to have to grow our own...
When I grew up something like 45
per cent of all the food consumed in Ontario was grown in Ontario. Wow it’s
less than 20 per cent. And I don’t think Ontario would be any different from
Ohio or Quebec . The distance from farm gate to table is now an average of 2,000
to 3,000 miles. That doesn't work in a world with triple-digit-oil prices.
Q: You are a top economist, how
is it that it was only well into your career that you started calculating the
true costs of natural resources?
A: For me it started with reading
(Colin) Campbell's work in 1998 and I have sort of been on this for the last 10
or 12 years. I viewed this as a fundamental issue in our economy ... and that
the true culprit of this recession we we coming out of is high oil prices, not
subprime mortgages.
For me, it has been a natural
progression, first to forecast oil then later to understand some of the broad
ramifications of increasing scarcity and rising prices on the way that we
organize our economy. I think that most people don't understand globalization,
most think of it as a sort of wage arbitrage, in other words moving the factory
from Hamilton to China where wages are one-tenth or whatever. Most people don’t
understand that implicit in that model, transportation costs are trivial to
marginal. That's true in the cheap oil era in which the global economy emerged,
in the era of $15, $20 a barrel oil but I don't think people understand how
that model of the economy is challenged in the era of triple-digit-oil prices
from everything from steel to food.
I guess for us, the good news is
that a lot of the jobs we thought were gone forever will pretty soon be coming
home.
The bad news is that whatever we
are going to make now that we used to import from far away places like China is
going to cost us a lot more.
Q: Isn’t there an emerging and
growing notion among economists, especially subfields like environmental
economics, that says the price of finite resources has to be factored into the
equation?
A: I definitely believe that we
are not only going to pay triple-digit-oil prices to buy oil but we are soon
going to pay a price to burn oil, that we are soon going to put a price on
carbon emissions and that by putting a price on carbon emissions we are going
to bring jobs to Canada....
What I think is going to happen
now is we are going to see a whole revolution in the attitudes between labour
and the environment. as I put it in my book, I think Archie Bunker is going to
get in bed with Al Gore. In other words, I think you are going to see a
political alliance between organized labour and the environmental movement much
like Blue Green Alliance between the U.S. steel workers and the Sierra
organization because all those carbon spewing industries have moved to places
that are not the most efficient. They are just the cheapest.
Emissions from China has already
surpassed the U.S.'s because all the heavy industries have moved there. But the
fact of the matter is, to return to steel, we can produce a ton of steel in
North America with one-third less the Co2 emissions than they can in China.
That is of absolutely zero economic significance if the price of emission is
free. Who cares if we produce one-third less because emissions don’t cost
anything? What happens all of sudden if emissions cost $60 a ton? Then if we
emit one-third less that (factor) goes right to the bottom line. It becomes,
conceivably more important than the wage difference.
The next obvious question is ...
‘But will the Chinese ever put a price on carbon? Not voluntarily, but I'm
saying that they don’t have to because we will just slap a tariff on them and
we will make sure that they end up paying the same price for their Co2
emissions as we do for ours. They can do whatever they want in their domestic
economy but when they start exporting, we have leverage over them. The Co2
emissions from China's export sector, just its export sector, is second only to
the U.S..
to pay the same carbon prices.
Q: Do you see this happening in
the foreseeable future?
A: Yes but only if and when we
put a price on our emissions because you can’t apply a countervailing duty on
somebody else’s emissions if you are not charging the same rate to your own
emitters.
Q: As you point out, Co2
emissions have been considered what you economists call an externality,
something that is not borne by the producer, not a cost of production. How
wrong is that?
A: That in itself is a market
failure. It’s a market failure that we haven't charged a price for water just
like it is a market failure that we don’t put a price on Co2 emissions. And just
because we don’t put a price on Co2 emissions ... we kid ourselves into
thinking it has no cost and not only that ... we misallocate resources because
we put those carbon-spewing industries in the very places they shouldn’t be, in
the least carbon efficient places just because of their wage rate because we
recognize the wage rate as a true economic cost but we don’t recognize the
emissions as a true economic cost and that is a market failure.
Q: Is it not also a failure of
economists not to insist on recognizing and counting those costs?
Some would say so.
Q: Would you?
I would say so. I would say that
economists should be playing a leading role in addressing those market
failures. Ultimately, it is not about economists, it is about voters. But
certainly economists had a potential role to educate voters and I’m not sure
that they have done a very good job on that because I think the majority of
economists don’t understand why they have to put a price on water or carbon
emissions. Maybe that is less true today but certainly four to five years ago
that was considered to be interventionist, to be stymying the market mechanism
but I don’t think they recognized that what it is addressing is a fundamental
market failure because these are real economic costs, whether they are to be
recognized or not by economists or more importantly, the market.
字體：小 中 大
