This was one of the feature articles for the NFSA Arbitrage Winter edition 2010. It included a feature Interview with Jeff Rubin, Former Chief Economist for the CIBC & Author of: *Why Your World Is About To Get A Whole Lot Smaller*

1. There is an assumption many on this Earth share—one that says the
world revolves around money. It doesn’t. It revolves around oil. Cheap
oil. And without it, the gears that run this current globalized economy
will come screeching to a halt.
Over the last few decades, ever since M. King Hubbert made his seminal
1956 speech to a gathering of the Petroleum Association of America, in
San Antonio, there have been some who have warned about a time when
the demand for petroleum will outpace supply, i.e. when we need more
oil than we can produce. Unfortunately, today’s experts predict that this
E
future is soon upon us.
And this future has a name: peak oil.
While our politicians shy away from discussing it and much of the
mainstream media still barely cover it, peak oil remains a reality. The
fact is oil is a finite resource (i.e. it won’t last forever). Over the past
three decades, there have been fewer and fewer oil field discoveries
made every year (ASPO). And many geological reports are also beginning
to indicate a steady decline in the absolute quantity of petroleum extracted
from the world’s largest oil producing states (World Energy Outlook 2004).
Altogether, many geologists and former oil industry employees are predicting
BY DAVID TAL, STAFF WRITER that within the next decade, production of oil will peak and oil shortages
DESIGNED BY ANDREA BARROS will begin to become commonplace. This will have serious social and
economic repercussions—effects that will need urgent legislative and
technologically innovative measures to overcome.
NFSA.ca | Winter 2010 | Arbitrage 8

2. SIZING THE ISSUE BEHIND THE OBVIOUS THE HOOK the supply of oil is really a function THE LINE IS DRAWN current deficits.
To get a sense of how important Over the past year, there has been This was but one of the insights of price. For example, when world Unfortunately, this economic “So, whereas last time triple-digit
cheap oil is, how ingrained it is in somebody who has taken these links Rubin shared during our conversation, prices of oil are $20 a barrel, the response might be something the oil prices hit, we stepped on the
every aspect of our society, let’s one step further. Jeff Rubin, the which he also outlines more 165 billion barrels of oil trapped in world will face sooner rather than fiscal accelerator by ramping up
take a look back to the waning former chief economist for the CIBC thoroughly in his bestselling book. the tar sands of Alberta isn’t really later. As of last December, the government spending [to] bail out
months of 2008. While much of the and recent author of the bestselling But what is it about the issue of an economic resource, since International Energy Agency (IEA) the home owners, the auto companies
world was wrapped up in the drama book Why Your World is About to Get peak oil, or energy scarcity, that converting tar sands into oil would placed a fairly definitive date for and the investment banks in New
of whether Obama was going to win a Whole Lot Smaller, told the attracted his attention so? Why this, cost about four times as much as peak oil at 2020, that is if no new York, this time we’re going have to
the primary, much of the world was Arbitrage in a phone interview that above all other issues in this world, what the market is offering. It may discoveries are made and if oil be raising taxes and cutting back
also rapt with worry over the price “we have mistaken this recession as such as global poverty or climate exist geologically, but for all intents demand continue to grow on a spending, and that’s going to be a
of gas (by July, 2008, it sat at $147 a financial market crisis when, in change? and purposes, it’s not an economically business-as-usual basis. When asked lot more challenging.”
US a barrel). In some places, it got fact, it was an energy shock.” “I guess it happened 10 years viable resource. if this was a sign of some kind, Rubin
to the point where talking about oil Rubin asserts that as oil prices ago,” he explained. “I read this “But in a world of $80 a barrel, was quick to reply. THE WAY FORWARD
became like talking about the rose in the latter months of 2008 obscure book called, The Coming Oil all of a sudden you’re producing one “If you’re familiar with what’s From everything Rubin thus far
weather. What you did, how you (forbes.com), pushing inflation to Crisis by Dr. Colin Campbell, who, million barrels [of oil] a day out happened with the IEA, you’ll realize shared, you might be able to see the
lived, began to depend more and ever-greater heights, it forced the as a retired geologist, worked for a there. And in a world of $200 a that every year, the IEA has dramatically overall direction he and many other
more on how high the price of gas U . S . F e d e r a l Re s e r v e B o a r d t o number of major oil companies in barrel oil, we could see [that rise reduced its estimates of future world peak oil theorists suggest that peak
rose. oil supply.” oil may actually be peak GDP (Gross
And with good reason. Rubin then made reference to a Domestic Product). This essentially
For those living in suburbia, the Guardian of London exposé, published means that the economy can only
cost of commuting became on Nov. 9, 2009, that revealed how grow when oil is plentiful; when it
unaffordable. This triple-digit rise an IEA official admitted that «many isn’t, our economy, our standard of
in gas prices led to less money in inside the organisation believe that living we’ve grown accustomed to,
people’s pockets, meaning less maintaining oil supplies at even 90 will be threatened.
money to spend on everyday goods— to 95 million barrels a day (to meet But does it have to be this way?
thereby hurting businesses, causing future demand) would be impossible, Rubin doesn’t believe so, and that’s
layoffs and ultimately bankruptcies. but there are fears that panic could the whole message of his book. “We
We saw this drawn out most in the spread on the financial markets if can’t stop oil prices from getting
crippling of the auto industry and the figures were brought down back to triple-digit levels and,
similarly, to the airline industries. further. And the Americans fear the indeed, we won’t be able to stop oil
This dip in consumer spending end of oil supremacy, because it prices from going even above the
wouldn’t have been so bad were it would threaten their power over $147 a barrel … . But what I think
not for the rabid inflation that access to oil resources. we can do, is make sure that when
accompanied this spike in oil prices. From this admission, it would that does happen, it doesn’t
In the United States, the headline seem that the world’s ability to necessarily have to have the same
consumer price inflation rate rose increase interest rates to stem that his lifetime. Basically, he talked to] three to four million barrels … . maintain low oil prices will soon kind of devastating impact on our
from around two per cent to almost rise. Unfortunately, that meant [oil] depletion … . “But the paradox of higher energy weaken. This is a conclusion Rubin economy and on our lives than it has
six (tradingeconomics.com). But homeowners with high or fluctuating “I thought he brought forth a prices is that we can’t afford to shares, as he sees triple-digit oil in our past.
why would this be so? How is the (subprime) mortgage rates saw their pretty compelling case. That net, consume the new supply that it prices returning sooner than later. “The key to that is by changing
price of oil tied into the price of monthly mortgage payments shoot we were running faster to stand still brings. The same [oil] prices that His concern however, is about the not the nature of what we burn [oil],
food and other everyday goods? through the roof and, for those who (i.e. using more oil to maintain our will lift four million barrels a day next time oil prices surge into triple- but changing the nature of the
The answer is that modern food couldn’t afford to pay, that meant current standard of living). out of the Canadian tar sands, for digit territory: when it happens, will economy. So the single largest thing
production is dependent upon the they were out of a home. Repeat “That’s what sort of got me going. example, will translate into retail “the global economy be in any better we can do to immunize the economy
use of petroleum-based pesticides this effect for a few million I’m not a geologist, but, by applying gasoline prices that will take millions position to withstand those pressures from triple digit oil prices is to go
and fertilizers. Rising fuel costs homeowners across the United States their research to my [economics] of drivers off the road.” [the effects of high oil prices] than from the model of a global economy
then translates to rising food prices. and the result was the implosion of field, it did get me thinking of some “[On the whole, that’s what] I’m it was in 2008. to a model of a local economy,
Modern globalization is largely based the financial markets, the threat of of the economic implications of peak more interested in: what the Rubin explained that “[we’ve because a global economy is an
upon shipping goods from countries a second Depression and the oil or depletion.” economic response to this will be, already] run up record deficits, extremely energy—and in particular
where labour cost is low to countries subsequent bailout of banks and other Rubin explained further that, how will a rational price-based particularly in the United States. oil intensive—way of doing business.”
where the consumers are rich. When financial institutions across the “from the economist’s perspective, economy respond to these kinds of Billions and billions have been used So when asked what can be done,
oil prices rise, so too the shipping world. energy prices when this is the one to prop up financial institutions. Rubin suggested that the government
costs involved and so too will the commodity that the whole global Now that we have those record should place a price on carbon
prices of goods reflect that. economy runs on.” deficits, what’s going to happen is domestically to encourage local
that the next time triple-digit oil producers to find ways to cut their
prices hit us, not only will there be emissions, while also placing a
no more room to stimulate the carbon tariff on countries with
economy with further deficits, but increasingly large carbon emissions,
we’ll start to have to pay back our such as China and India.
9 Arbitrage | Winter 2010 | NFSA.ca NFSA.ca | Winter 2010 | Arbitrage 10

3. “One thing is very clear, no matter more than offset by the fuel costs that they once were, because they
where you stand on the climate of getting those products to us.” collapse in suburban real estate
change debate, there cannot be “So the market is going to bring prices and the soaring increases in
anthropogenic global climate change a lot of those jobs back home. The imported food, now make it all of a
in this part of the world and not market is going to being a lot of that sudden economically viable again to
other on the other side. “If there’s production back home. Things will raise livestock (here) instead of
global climate change for everybody,” certainly cost more money— shipping it from New Zealand. It
said Rubin, “there’s no point closing everything we will make ourselves, will make it all of a sudden more
down the Nanticoke coal-fired power or from our regional neighbours, will important to grow crops, because
plant on the shore of Lake Eerie and costs us more than what it used to people aren’t living 50-60 kilometres
making Ontario pay double or triple cost in the world of cheap oil and from the city.”
for power, while China and India are cheap wages. And as for our cities, “ … where
free to build 800 coal power plants.” “But I think we’re going to find we saw in the last 50 years … urban
“ … Yo u c a n ’ t a s k y o u r o w n that tomorrow’s economy is going sprawl, we’re probably going to see
producers to pay twice. Once for to look a lot different than today’s increasing urban density, … but with
their own emissions and than to pay economy and not all of the changes less cars on the road and certainly
again as they lose market share to will be negative.” different kinds of vehicles that
countries that don’t pay for their we’re used to seeing today.”
emissions.” A BRAVE NEW WORLD
Rubin also mentioned the need With all this talk of the end of Assuming a new energy source as
for massive investments in public modern globalization, of a complete abundant and versatile as oil isn’t
infrastructure, particularly in public reorientation of our shared economy, discovered, the next several decades BIOGRAPHY
transit. When the 40-50 million our discussion then turned to what will represent a difficult transition Jeff Rubin (born August 24, 1954) is a Canadian economist and author.
North Americans are forced to give Rubin envisioned tomorrow’s world stage: one from a cheap carbon to He is a former chief economist at CIBC World Markets. He graduated from
up their vehicles over the next would actually look like. a post-carbon age. But it is in those McGill University with a master’s in economics after completing his BA in
decade, they should at least have a To start, Rubin made clear that times of crisis that we turn most to economics at the University of Toronto. He began his career as an economist
bus or light-rapid-transit vehicle to “in terms of what we eat, the diets those we love, to those closest to at the Ontario Government Treasury Department where he was responsible
get on. will come more to resemble that of us. It is also in those times when for projecting future interest rates.
“You know, what folks don’t our parents than what we’re we are most willing to reach out to In 2000, he correctly predicted that oil prices would be trading at $50
understand is that during WWII, accustomed to [today].” He then our neighbour and strengthen the US per barrel by 2005. He then accurately predicted oil would crack the
Detroit stopped making cars and related how when he grew up in the relationships we need to survive. $100 US per barrel mark by the end of 2007.
practically overnight transformed ’60s, the food people bought was With the global economy turning Rubin wrote a widely followed national column in the Globe and Mail,
itself into a munitions factory seasonal. “You didn’t see kiwis, local, this is exactly what will “Ahead of the Curve,” and he has been a fixture on network coverage of
making tanks and bombers. Well, if strawberries, raspberries and happen. the federal budget and other key economic events for almost two decades.
Detroit could transform itself into tangerines in January and February.” The world we will grow up in will He has also made numerous television appearances on ABC, CBC, CBS,
a munitions factory making tanks When it comes to vacations, look much different than what our CNN and CNBC. His opinions and insights have appeared on the front page
and bombers in the 1940s, why can’t “We’re not going to be able to fly parents were used to, just as the of the New York Times, as well as the Wall Street Journal, Washington
Detroit and Oshawa today transform like we used to before. It’s not that world our parent’s grew up in was Post, USA Today, Financial Times, BusinessWeek, Newsweek and the
themselves and make buses and there won’t be airlines, but the cost far more different than what their Economist.
light-rapid-transit vehicles instead of flying will probably go back to parent’s could have imagined. But
of SUVs?” what it was in the 1960s.” So, paradoxically, as outlined earlier,
But when asked if that is all he instead of Chiang Mai or Machu the days of tomorrow may also share
thinks can be done, Rubin also made Pi c c h u , Ru b i n e x p e c t s m o s t many of the qualities most thought
sure to point out that the government Torontonians to visit places like were lost from the days of our
isn’t our saviour or solution. Instead, Algonquin Park or Muskoka. parents and grandparents.
Rubin said, “I see the market as the With respect to suburban living, And as the world finds this new
solution, frankly. When prices get “We’re not going to be able to balance, this new way of adapting
[to three digits], we’re going to start commute 70 to 80 kilometres back itself to this new era, at least we
making our own steel again; we’re and forth to work every day in our can feel optimistic in the fact that
going to start growing our own food; SUVs,” predicted Rubin. “We’re we will be able to share our struggles
we’re going to start making our own going to have to either find a way and our joys together, as we build
furniture. to drive less or work a lot closer to ourselves a brave new world.
“Because it’s no longer going to home.”
make any economic sense for us to Because of these drastic changes
source our steel and furniture and in lifestyle, Rubin noted that “you’re
food from places like China, because going to find a lot of those far-flung
the savings that we might get from suburbs are going to return,
their labour costs are going to be curiously, back into the farmland
11 Arbitrage | Winter 2010 | NFSA.ca NFSA.ca | Winter 2010 | Arbitrage 12