Jeff Rubin has a message for all the economists and central bankers out there, waiting with bated breath for rock-bottom interest rates to kick the world economy into high gear: it’s not going to happen, and the sooner you realize that, the better.
As the straight-shooting former chief economist of CIBC World Markets argues in his new book, The End of Growth, triple-digit oil prices are here to stay -- a reality that will make it impossible for developed economies to return to the glory days of rapid expansion built on cheap credit and affordable fuel.
But as Rubin sees it, that’s not all bad news. Though he predicts permanently tepid growth will push Greece and Portugal into default, he also says it will reverse globalization, stop climate change in its tracks -- and put a limit on oil sands expansion.
It’s a view he concedes might not be very popular among those in the financial industry where he made a name for himself. But he says that’s because they’re still using a playbook that no longer makes sense.
As he told The Huffington Post Canada, “We’re trying to fuel our growth, because we feel that the economy has to grow. But that’s not recognizing that the economy’s speed limit has changed.”
HuffPost: What is the relationship between high oil prices and economic downturns?
Rubin: Oil impacts the economy in a whole lot of ways, almost all of which are not bullish unless you happen to be Fort McMurray. In the short run, the demand for oil is inelastic so when the price of oil goes up, people spend a greater percentage of their budget on energy and they have less to spend on other stuff.
But the real fatal impact of oil on growth has always been the inflationary fallout, because it induces a rise in interest rates that is growth-ending. As I argue, what really pricked the subprime mortgage market was ... the 35 per cent rate of energy inflation in the U.S. [consumer price index], and the U.S. inflation rate going from one percent to five and a half. The Fed had to follow [by raising interest rates], then all of a sudden the subprime market blew up.
That’s always the way that oil has deep-sixed our economies -- the ’73 recession, the ’79 recession [see 1973 oil crisis and 1979 energy crisis]. In ’91, when Saddam Hussein invaded Kuwait and left half its oil fields on fire, all of a sudden inflation spiked to six per cent, the Fed funds rate spiked to six per cent, and boom, we had another recession.
HuffPost: We’ve been able to recover from the other recessions you say were induced by high oil prices, so why not this one?
Rubin: All other oil-induced recessions were created as a result of an oil shock. Somebody closed the spigot. But then after the shock was over, oil came down to whatever the regular trading range was.
This time the increase in oil prices, which even in real terms was double the OPEC oil shock, wasn’t a shock. Nobody closed the spigot. On the contrary, the world never produced more oil. It was a basic imbalance between demand and supply. Oil prices plunged [during the recession], but the minute the economy started growing, boom: We’re facing those very same triple-digit oil prices.
We are now living in a permanent world of triple-digit oil prices, whereas in the past, those were temporary, transient shocks because somebody arbitrarily cut off supply. Nobody is cutting off supply. We’re getting oil from places we’ve never gotten it before.
But for me, peak oil ain’t what you can drill, it’s what you can afford to burn. Who gives a fuck what you can drill if you can’t afford the price? The oil industry is great at tapping the Bakkens and the tar sands, but if oil is $40 a barrel, then guess what? Nobody is in the Bakkens and nobody is in the tar sands because that stuff don’t flow at $40 a barrel.
So it’s not that we’re ever going to run out of oil in the absolute geological sense, but we’ve probably already run out of the kind of oil that we can afford to burn, because to get to that supply, we need prices that our economies can’t grow at.
HuffPost: What will the end of growth look like in Canada?
Rubin: I don’t think it’s the end of the world. What we’re going to see is probably pensioners continuing to stay in the labour force as they are already starting to do. We’re probably going to see young people staying at home longer and big increases in post-secondary education as double digit youth unemployment rates [persist].
We’ll obviously see a lot less immigration in countries like Canada the U.S. and Europe. We’re going to see a return of the local economy, a resurgence in manufacturing and agriculture. We’re going to see a shrinkage of the financial sector.
In terms of jobs, the German job-sharing program is the kind of thing the government should be focusing on instead of trying to keep interest rates at one per cent. Because in this new world, we may have three or four jobs as opposed to one job. Instead of firing one person, four people get 70 per cent of their income. I think that’s going to make a whole lot of sense in the economy, and maybe that’s not such a bad thing.
[If you lose] a quarter of your income pre-tax, you’ll buy less stuff but maybe you already have enough stuff. I think that we may find a lot of blessings in that. We may find that job sharing actually improves our quality of life.
HuffPost: Losing a quarter of your pre-tax income might not really hurt if you’re at the upper end of the income distribution, but what about those at the bottom?
Rubin: In today’s world, labour has no bargaining power because companies can just arbitrage differences in regulatory regimes and differences in wage rates by moving production to whoever offers you the best deal. But in a world where oil costs $120 a barrel, freight costs matter and all of a sudden it’s not so easy to separate production from markets.
The closer production is tied to markets, the more empowering it is to local governments, the more empowering it is to local suppliers and the more empowering it is to local labour.
We’re going to see the return of a lot of high-paying jobs [like] steelworkers, tool and die workers, chemical workers. Maybe there will be job-sharing at the steel plant but guess what? Two years ago those jobs were in China.
HuffPost: That sounds promising, but we don’t have a huge market in Canada. So if we’re only producing steel and cars for domestic consumption, then how many jobs are we really talking about?
Rubin: What you’re saying is that world markets give us tremendous economies of scale and those economies of scale give you such a cost advantage that that’s where production [is profitable]. That’s certainly the model behind China becoming the factory of the world. But I don’t think these economies of scale are that important in the world that I’m talking about because of transport costs. Those transport costs will eat up those economies of scale and a good chunk of the wage advantage.
HuffPost: We are facing a significant imbalance in Canada, with growth increasingly concentrated in the west. How will the end of growth affect this great divide?
Rubin: The fault lines in our country are going to be over energy -- not east-west, French-English -- it’s going to be between who has energy and who doesn’t.
Already, Ontario, which used to be the banker of equalization, is now a have-not province because it’s the largest oil-consuming province. Newfoundland, a perennial basket-case, is now a have province because of the offshore oil. That’s what oil has already done.
But it’s also creating a situation where Alberta might be able to reduce its corporate and personal income taxes while Ontario has to raise [taxes]. How long would CIBC or Stikeman Elliott be in Toronto if there weren’t Alberta income taxes? Those bank towers could just as easily be in Bow Valley Square or the Encana building. Those are the kinds of tensions that energy is going to create.
HuffPost: But I thought you said that we’re no longer going to be able to afford to pull oil out of the ground in Alberta.
Rubin: I question whether tar sands production will ever get to the levels they’re forecasting, not because it cannot be done in an engineering or geological sense and not because they don’t have a pipeline. But for a supertanker to come across the Pacific and schlep oil that comes from tar sands and has to be pumped over the Rockies and coastal mountains, there’s got to be a lot of economic growth happening to make that circuit make sense.
But just as triple-digit oil prices change the speed limit for Canada, they change the speed limit for China, too. What happens when China is growing at four to five per cent instead of eight to 10 per cent? Will it make economic sense for them to schlep oil across the pacific and have it pumped from the tar sands? Maybe not.
So maybe we won’t see the tar sands producing more than three million barrels a day, and not because any regulator tells them that they can’t. There’s a whole lot of global economic growth that underlies the platform of the tar sands doubling its production.
HuffPost: You say that the environmental implications will be the biggest silver linings of the end of growth. What do you mean by that?
Rubin: We’re going to find that like everything else, even our inexorable path to self-destruction is going to run out of fuel. We don’t need to burn oil or coal that the Intergovernmental Panel on Climate Change is forecasting that we’re going to burn in the next 20 or 30 years, not because the oil or coal does not exist as an absolute resource, but it doesn’t exist in bodies where we can extract at reasonable costs.
The notion of China doubling its coal consumption in the next 20 years when it’s already consuming 3.2 trillion tons a year is nonsensical. I’d like to know where those climate change modelers think that China is going to be getting that coal from and at what price.
I once forecast that oil was going to get to $200 a barrel. We can’t even run at $120 a barrel. If you think that emissions and climate change are linked, then that’s a fairly major silver lining.