Oil to revisit triple-digit prices next year: Rubin

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Author Jeff Rubin wonders if the lure of shale gas is the "subprime mortgage market of the natural gas market. Is this one fiant con...?"

Colin McConnell/Toronto Star

By Tyler Hamilton Energy and Technology Columnist

Nearly two years ago Jeff Rubin, former chief economist of CIBC World Markets, left Bay St. to focus on spreading a simple message: oil scarcity and higher energy prices are going to make our world smaller.

He wrote a book, embarked on a global speaking tour, won awards – including this year’s National Business Book Award – and now writes a blog that is picked up by the Huffington Post, among others.

Rubin has always been a maverick, and during his time at CIBC never hesitated to tell Canada’s oil and gas industry what it didn’t want to hear. A Cassandra of sorts, Rubin’s book, Why Your World Is About to Get a Whole Lot Smaller, talks about a coming age of triple-digit oil prices and how it will throw the machinery of globalization into reverse.

The Star recently sat down with the economist to find out if our world has, in fact, started to get smaller.

The Star: What’s your assessment of the latest oil supply and demand data coming out of the International Energy Agency?

Rubin: If you look at the world energy outlook from the IEA two things really stand out. About 80 per cent of the oil they expect the world to be consuming by 2035 hasn’t been found or developed. About 70 per cent of the oil being produced today will be depleted by then. The second interesting thing is that for an organization that’s always denied the existence of peak oil, they’ve basically acknowledged it by saying that conventional oil production – that is, the type we can afford to burn – peaked in 2006. I think that’s quite a ways for this agency to come.

The Star: What, in your view, does that mean for oil prices in the short term?

Rubin: The reality of this for prices is that we’re going to be at triple-digit oil prices within the first quarter of 2011. We may even be taking a run at the $147-high watermark (per barrel) before 2011 is over. The question is whether the world economy is any better prepared to operate at that level of fuel cost than it was in 2008. If it isn’t, we’re going right back into a recession, which is really the point of my book. It’s about how do we grow with triple-digit oil prices. That requires going from a global economy to a much more local economy. That hasn’t happened yet. It will happen. Certainly, that will happen if we have another oil-induced recession.

The Star: How much has the blowout of BP’s Macondo well in the Gulf of Mexico this past spring changed the dialogue around offshore drilling? Is the $40 billion that this is expected to cost BP sending chills throughout the sector?

Rubin: It’s taken the Gulf of Mexico, which was America’s great white hope of growing domestic production, off the map. BP has had to sell assets all over the world to pay for that, and this is the real moratorium on Gulf of Mexico drilling. It’s not the moratorium that Obama has extended to November 2011; it comes down to how many companies have $40 billion? If you look at how many are drilling in the Gulf of Mexico, how many of them can afford to lose $40 billion? BP can and survived, but if you’re a BP shareholder you’re taking a haircut. Exxon could survive too, and so could Chevron, but how many other guys can afford to take a $40 billion haircut? And even for Exxon and Chevron, do they really want to risk it? All of a sudden, this disaster changed the risk-reward scenario. People like to say BP was a rogue operator, which is wrong. BP was the most technologically sophisticated oil company in the world. If BP messed up, believe me, that’s the real embargo. If you’re the board of Exxon or Chevron, you’re saying look, “Those guys at BP just messed up, they were the No. 1 at deep water drilling, and they lost $40 billion—is this really worth it to us? Let’s go to Edmonton. Let’s go to Fort McMurray.”

The Star: What has the impact been on talk of offshore drilling in Canada?

Rubin: The toughest speech I ever had to give in my life, including my 20 years at CIBC World Markets, was last June when I was the keynote speaker at the Newfoundland and Labrador offshore oil and gas drilling convention. The president of Exxon was at the head table. Chevron was at the head table as well. I’m speaking in June and the Macondo well is leaking 50,000 barrels a day. And at this conference the talk is about drilling a well twice as deep as the Macondo well 400 kilometres northeast off the St. John’s Coast. And they’re all going, oh, it could never happen here. That’s bull. Over there, the people in St. John’s say we don’t have hurricane season. They say 400 kilometres northeast of St. John’s the hurricane season is 12 months of the year! Any day on the North Atlantic is equivalent to hurricane season in the Gulf of Mexico.

The Star: To what extent has the BP spill focused more attention on oil sands and other unconventional plays?

Rubin: It has certainly made people go one step down the bottom of the barrel, and the next step down from deep water is tar sands. All of a sudden China has invested $28 billion in the Orinoco tar sands (in Venezuela) and all of a sudden Fort McMurray is once again in the limelight, and on a scale never thought of before. We’re going to go to about four million barrels a day out of there. What would be next after Fort McMurray? That would be oil shale, and in a world of $200-a-barrel oil that becomes a real possibility. As we get closer and closer to that price we’ll see more capital spent developing oil shale technologies.

The Star: What will this renewed focus on the Alberta tar sands mean for the Canadian economy?

Rubin: Alberta is going to have Middle Eastern-type cash flows in this world. But the polarization, the impact of that, the mirror image of that is a $1.20 Canadian dollar against the U.S. dollar. That exchange rate is not going to deter Alberta’s bitumen exports to the U.S., but how many motor vehicles will Ontario be producing at $1.20 exchange? So we’re going to have a hell of a political fight over energy. Maybe the way that fight takes place is through pricing carbon emissions. You just put a lid on carbon emissions. The Harper government won’t touch that right now, but last time I checked Quebec and Ontario had more seats than Alberta. Right now people don’t see it in those terms, but believe me, they’ll start seeing it. They’ll see a few things happening together: higher oil prices, bigger exports form Alberta, higher exchange rate, more plant closures in Ontario and Quebec. When the Canadian dollar is trading at $1.20 U.S. and they’ve just announced Exxon has taken out Imperial Oil and plans to double their investment in the Canadian tar sands, this will get on the radar screen.

The Star: What’s your take on shale gas? Has it truly changed the fortunes of the natural gas sector, as much as many experts claim?

Rubin: The debate is about the real cost. If you exclude the natural gas liquids that come with most shale projects, is the real cost $4 per Mcf (1,000 cubic feet) or is it $8? If the real cost is $8 then a lot of people, like Chesapeake Energy, the biggest gas producer in the U.S., have a big problem. Is shale gas the sub-prime mortgage market of the natural gas market? Is this one giant con and investors are being conned into thinking there’s a huge supply of gas at $4 when it really costs $7 or $8 to bring it to market? In the fullness of time economics will assert itself, just as it did in the sub-prime mortgage market. But let’s, for the sake of argument, say shale gas is sustainable at $4 and that we don’t really care about the ground-water contamination or we’ve figured out a way to manage that in some sense, the question is, what has it done? It certainly hasn’t pulled down the price of oil. Boone Pickens aside, we can’t use natural gas to substitute for oil as a transit fuel. So if shale gas is real at $4 all it means is oil is going to be increasingly used only as a transit fuel around the world, though gas will be able to substitute for oil entirely as both a feedstock for petrochemicals, as a home heating fuel, and as a power generation source.

You can follow Rubin on his blog at www.jeffrubinssmallerworld.com.

Cheers; Scott