November 2009

Let’s talk about oil a little…

Some experts believe that the price of a barrel of oil will soar over the next few years. And would stay high for good.

What will happen when we don’t have enough oil? Wrong question, says economist Jeff Rubin.  What we should be asking is: what will happen when we don’t have enough cheap oil? And, in his opinion, the answer is: that could change everything.

A society built on cheap oil

We all remember when a barrel of oil hit $150 US and motorists were infuriated over gas prices. This type of reaction is not surprising. In his recent work, Why Our World is About to Get a Whole Lot Smaller: Oil and the End of Globalization, Jeff Rubin explains how our society is completely dependent on cheap oil, for its modes of transportation, its urban planning and even its food supplies. 

Take a look at the graphic below to understand what he’s talking about. Despite the noteworthy highs of the 70s and 80s, early in the 2000s, oil was being sold at essentially the same price as in … 1946, taking inflation into account.


And then suddenly … $200 a barrel

After prices plunged as low as $32 in December 2008, oil is now selling at between $70 and $80 a barrel. But, according to Jeff Rubin, as soon as the recession is behind us, two factors will cause prices to rise.

  • a recovery in consumer spending;
  • and insufficient production due to a contraction in oil industry investments during the recession.

The result: increasing demand and a rapid rise in prices to over $100 a barrel during the 12 months following the end of the recession…  and no less than $200 a barrel by 2012. By then, gas will likely be selling at around $2.00 a litre.

A recent prediction by Nobuo Tanaka, Executive Director of the International Energy Agency, gives weight to Rubin’s assumption. In his opinion, as of 2013, the spare production capacity of oil will begin to dwindle, for the first time in history. If this is the case, we can kiss cheap oil goodbye.

Towards a new society?

According to Jeff Rubin, the resulting changes will go far beyond motorists’ fits of anger.
They’ll include:

  • The way we shelter ourselves
    Homes in the city will become more attractive and house prices in the suburbs will decline because of transportation costs.
  • The way we travel
    This could be the beginning of a golden age for mass transit. In 10 years, there will be 20% fewer cars on the road. And that two-week trip to Europe every year will become a luxury most of us can hardly afford.
  • The way we manufacture
    We’ll go back to producing locally; production plants will be closer to cities and will become less focused on service and more on manufacturing.
  • The way we feed ourselves
    Imported foods will be priced out of the market. No more winter strawberries and Australian wine for $12 a bottle. Food production will also become local and closer to city centres.

Come to think of it … have you heard your local politicians talk about agriculture recently? If not, it’s because they haven’t read Jeff Rubin’s articles.

Because, if he’s right, our cities and countryside might see major changes!