Will Soaring Prices Crush Globalization?

Will Soaring Prices Crush Globalization?

Jeff Rubin was, for years, a lonely voice among economists when it came to predicting the price of oil. In 2007 - when crude began the year at a relatively modest $50 a barrel - Rubin, then the chief economist at CIBC, all but staked his reputation on a prediction that oil was about to hit triple-digit prices and never look back. In his reports, speeches and even addresses to skeptical oil executives, he preached the end of the era of cheap fossil fuels. "The bottom line is, we're in the bottom of the ninth inning of the hydrocarbon age," he declared at a conference that year. Like any economic soothsayer, he had flubbed some calls in the past, but this, it seemed, was different. Oil prices kept rising just as he said they would until last summer, when the big spike hit and oil surged to over $140 a barrel. Rubin's star rose right along with the price of crude.

This concept became Rubin's preoccupation, and in his spare time - unbeknownst to his bosses at CIBC - he started writing a book about how the era of soaring oil prices would change the world profoundly and forever. This winter, Rubin told CIBC about the project and his plans to promote it, and the two decided to part ways. "I don't think the message of this book is necessarily a message that any particular investment bank would want to be associated with," said Rubin in an interview.

It's easy to see why. Oil has since fallen back to about $60 a barrel, but Rubin is as certain as ever about the future of fossil fuels. In Why Your World is About to Get a Whole Lot Smaller, he argues that the current cool-down in prices is merely a brief respite before the next, even more severe spike. When the recession ends, "demand is likely to pop back up like a jack-in-the-box," he writes. And, because "our whole way of life depends on the price at the pumps," the disappearance of cheap oil could mark the end of life as we know it. Rubin subscribes to the notion of "peak oil" - a long-held hypothesis that production will soon max out and begin a long, slow descent, one that will bring about the end of cheap food, air travel, car culture, the potential disintegration of our tolerant society, and most importantly, the breakdown of the system of GLOBALIZATION.

But there is a problem with the premise to which Rubin has attached his career and his reputation: a growing number of economists, and even environmentalists, say this dark scenario is flat-out wrong. It obsesses with counting how many barrels of oil are left in the ground. It also oversimplifies the powerful force of globalization, all the while ignoring some dramatic changes now unfolding; changes that could significantly reduce the world's reliance on oil. New technologies, new forms of energy, and a new focus on conservation and efficiency are shifting us onto a dramatically different energy path. Your world is not about to get smaller, they say, but it is about to get a whole lot leaner.

Two years ago, Peter Tertzakian, the chief energy economist for ARC Financial Corp., appeared as a guest on The Daily Show with Jon Stewart. Talking about a future energy crisis, Stewart posed one of his trademark, over-the-top questions: "How long do we have before masked madmen roam the cities with AK-47s, Mad Max style?" Tertzakian, who looks like a brainy version of Stewart with glasses and flecks of grey hair, cracked a lopsided smile. "It may not come to that," he deadpanned. "The good news is that although these transition periods in energy are uncomfortable, usually we come out for the better." Just as whale oil was replaced by kerosene, which was eventually replaced by today's fossil fuels, another shift will come.

In his latest book, The End of Energy Obesity, Tertzakian goes even farther, arguing that escaping the energy trap may not be as difficult as it's made out to be. Some relatively painless changes in our everyday behaviour could radically, and quickly, reduce the amount of oil we need, he says. Many of Tertzakian's arguments actually closely parallel Rubin's. Both authors trace the same historical problems with society's oil addiction and how closely energy consumption has always been tied to wealth creation. And both see problems with past efforts to create energy efficiencies - ironically, past gains have only prompted people to use more energy. But Tertzakian sees the world heading off on a very different trajectory than Rubin.

Too often, says Tertzakian, writers and economists who subscribe to the doomsday scenarios are "trapped into thinking about energy in the energy realm." He argues you first need to flip the problem on its head. The amount of energy we use is actually much less than the amount that's extracted at the source, he says. For instance, of every 100 barrels of oil produced at the wellhead, only 15 barrels are ultimately used by the consumer. All the rest - 85 barrels worth - is frittered away, whether in the refining process or in gas engines (where most of the fuel is burned off as heat, not power). The losses are even more dismal when it comes to electricity. For every 100 lb. of coal used to produce electricity, only two per cent reaches the light bulb in your house - 98 lb. are lost, either escaping as heat in power lines and transfer stations, or wasted by inefficient appliances. That means small changes in behaviour to limit the amount of energy we use (or waste) ripple up through the system exponentially. "For every unit I don't use at the wheel, I don't have to find six units at the wellhead," says Tertzakian. And for every unit of electricity that isn't used, there's a 50-times savings at the power plant. These inefficiencies are "our biggest failing when it comes to energy, but also our biggest opportunity," he says.

Of course, the idea of cutting back energy use has long implied cutting back on our standard of living. But for the first time ever, that may no longer be true. New technologies emerging, not from the energy business, but out of California's Silicon Valley, could make all the difference, says Tertzakian. Take Cisco's new virtualization technology - a kind of futuristic version of Skype - that could dramatically reduce the need for people to travel and commute in the near future. Or "intelligent buildings" that can automatically monitor where people are and cut back unnecessary energy use. Other technologies have already started to change our habits, from the way we buy music to the way we get our news. These "very small changes in the way we live, work and play can amplify up into big changes in not needing energy at the source," says Tertzakian.

Oil demand is already falling. The International Energy Agency said demand this year will fall by over 2.5 million barrels per day, the steepest drop since the early 1980s. Much of that is because of the recession - business is cutting production and people are buying less and therefore we're consuming less energy. But there is also some evidence of these early technological changes at work, argues Tertzakian.

The Rocky Mountain Institute, an NGO led by the energy scientist Amory Lovins, has been advocating for several years that not only is it possible to wean ourselves off of oil in the next few decades, but that it can be done almost entirely through changes in transportation. Some of the biggest savings can be found simply by making cars lighter and continuing the shift toward hybrids and electrics, says Lionel Bony, a director at the institute. "You can probably get rid of about half the oil we need through efficiency" and do it in the next 20 years, he says.

That such savings can be found within the current energy system is crucial in an age when big bets are being made on new technologies like electric cars. Those like Rubin are quick to pour cold water on the idea that we can wean ourselves off of gas-powered vehicles and switch over to electric power. Big cities, like Toronto, barely have enough power to keep air conditioners running all summer, he points out. But energy officials say a shortage of generating capacity isn't the obstacle it once was. This spring, the chairman of the U.S. Federal Energy Regulatory Commission, Jon Wellinghoff, said the U.S. may not need any more nuclear or coal plants "ever," adding that wind, solar and biomass could supply enough energy to meet demand. The technology is all there to make a much more efficient power grid, he said.

Besides, ending the dependency on oil doesn't mean replacing every car on the road with an electric vehicle, but just enough to cool demand for crude. We may be nearing that point already. Last month, Exxon Mobil said that the U.S. consumption of gasoline has peaked, and predicted that demand for auto fuel will shrink by more than 20 per cent by 2030. Companies like the California-based Better Place are already building the necessary electric car infrastructure. Last month, it unveiled the first station where drivers can drop off exhausted batteries and grab charged ones in the time it would take to fill a tank of gas. "It's not that big a hurdle," says Sean Harrington, who manages the company's Canadian arm. "It can be done."

Like Rubin, Tertzakian sees another oil spike on the horizon as the economy recovers - likely a return to triple-digit oil prices. But he argues that spike will be the next important catalyst that leads some of these new technologies to be even more widely adopted. Tertzakian points out the speed with which technologies like the Apple iPhone have been snapped up - one million were sold in the first three months it was on the market. Today's energy-saving technologies are a lot like colour TVs in the 1950s, he says. They exist, but people don't have a compelling reason to rush out and buy them - at least not yet.

When oil prices soared last summer it was hard to be optimistic about our ability to cut our addiction to cheap fuel. Almost overnight, siphoning gas from parked cars became the crime du jour. People were suddenly spending more on gas than groceries. It was during this crisis that Rubin was constructing his thesis and the warning that this was just a taste of what lies ahead.

High oil prices don't just hit you in the pocketbook, he explains. They threaten to unravel an entire economic system that relies on shipping goods around the world. Those cheap electronics you buy at Walmart are only cheap because they're made in China and hauled across the ocean in massive container ships. When the cost of shipping those goods more than doubles, as it did last year, then this system starts to look very vulnerable. At the very least, high oil prices will turn the clocks back 40 years to a time when nations lay "safely cocooned within huge tariff walls," says Rubin.

It's a terrifying scenario, if for no other reason than the fact that globalization has spread economic benefits around the world. Erasing 40 years of that kind of progress would be a catastrophe. By Rubin's definition, globalization is little more than a "fancy word" for "moving your factory to the cheapest labour market in the world." But that's just one element of a much more diverse system, says Karl Moore, the co-author of The Origins of Globalization. "It's not just economics," he says. "It's also how interlinked we are as societies." More than cheap consumer goods, globalization has underwritten unprecedented improvements in the standard of living the world over, fuelled massive amounts of immigration, driven political change, as well as advances in technology and the spread of ideas. Does such a vast global system really teeter, like an upsidedown pyramid, on oil prices?

Moore says globalization simply isn't that fragile. It will not get thrown into reverse, but it will continue to evolve, as it always has. "Twenty years ago we didn't talk about [outsourcing to] China or India very much at all. If you had said those are two big trends, we would have scratched our heads and said, 'I don't see it.' " Short of truly extreme oil prices (in the range of $500 a barrel), globalization will "continue to go in new and surprising directions," he says.

Alarmists tend to portray affordable oil as the precondition for global trade, when it is really just one variable among many. Jagdish Bhagwati is a professor of economics at Columbia University and the author of In Defense of Globalization. He says there is a basic flaw in this end-of-globalization argument. It assumes that rising oil prices will affect only transportation costs. But that's not the case, he says. Oil prices also affect the production costs of traded goods. If those production costs go up more in the importing countries than exporting ones, that makes trading more profitable, which offsets the added transportation costs, explains Bhagwati.

Fears of China's rising energy demand pushing up oil prices - and wrecking globalization - also tend to be overstated, argues Lovins, the head of the Rocky Mountain Institute. Much has been said about U.S. President Barack Obama's ambitious new energy scheme, but already China is on pace to become the world leader in fuel cell technology and electric motors and has far surpassed the U.S. when it comes to developing and building cleaner coal plants. "China's leadership is deathly afraid of falling into the oil trap that we did," said Lovins, speaking at a recent conference on energy security.

As fuel costs eventually begin to rise again, some trade will inevitably dry up. Indeed, as Rubin outlines, that's already happened with steel shipments from China to North America and the trade of bulky furniture. But for all the panic of last year's oil spike, the changes it prompted haven't been overly dramatic. It turns out there's a lot of low-hanging fruit that can be picked off by rising oil prices before society starts to crumble. Rubin highlights a few, from lamb shipped from New Zealand to salmon that's caught off the coast of Norway, shipped to China for processing, then finally to North America for consumption.

Rubin argues that if you add up enough of these seemingly minor changes, the world will eventually be unrecognizable. But this isn't necessarily a bad thing, he says. "I don't think this book is apocalyptic in any sense," he says. There are upsides to the story: manufacturing jobs will come home, far-flung suburbs will be reclaimed by farms for local food production, he argues. And while Rubin disagrees that the world will be able to sidestep future oil spikes through new energy policies and new technologies, he doesn't completely buy the dark prophecies of the peak oil theorists. "We may be energy poor, but we are innovation rich and necessity is the mother of invention," he writes in the book's conclusion. "I wouldn't write off our economies just yet." Luckily for the doomsday set, the people now shaping our energy system have not.

See also ENERGY POLICY; PETROLEUM INDUSTRIES.

Maclean's June 8, 2009