Sunday, May 17, 2009 0 comments

Conventional oil production to peak?

I'm not a Peak Oil Theory supporter but it's always useful to pay attention to what others are saying. Total, the French supermajor, recently said it thinks conventional oil production will peak within a decade so the Peak Oil Theorists shouldn't be dissmissed easily (but do note that people have been saying that for many years now—in fact, according to some of what was said a few years ago, the peak should have been in 2007 or 2008, yet that didn't happen.) The Toronto Star has an article interviewing former CIBC economist Jeff Rubin about his upcoming book, Why Your World Is About to Get a Whole Lot Smaller. The book is slated to be released on May 23rd and, given how Rubin is very outspoken and often has off-the-wall views, it will probably be a good read. If anyone wants to get an opinion of someone from the mainstream who thinks oil production will peak, check out the article:

Its basic premise is simple: Nearly everything we do, purchase and eat is "inextricably bound" to oil, and as the price of black gold increases, so too does the cost of growing, manufacturing, processing, packaging and transporting the goods we consume – whether they be apples from Australia or dollar-store trinkets from China.

In other words, the higher oil prices get, the more expensive distance becomes. And oil prices, argues Rubin, are going nowhere but up.

"The world's oil wells are running out of the stuff that keeps the whole system going," he writes, adding that the only supply available to replace it is dirty, hard to find, and for that reason increasingly expensive. The oil sands are a case in point. "We are getting closer to the bottom of the barrel."

Eventually, he says, the transportation costs of importing products from far-off countries will erase other advantages, such as low-cost labour. It will become, he argues, "the largest barrier to global trade."

This will lead to more dense communities, less driving, and a reliance on what we produce locally. World trade will revert back to the patterns we saw in the 1970s, when tariffs slowed the global movement of goods and trading was more regional. Economic growth will come to a crawl and inflation will rise.

Look no further than the current recession for proof, he says. In chapter 7, Rubin lays out in detail how high oil prices, which peaked near $150 in July 2008, led to inflation and rising interest rates that triggered the U.S. mortgage crisis and sent the economic dominoes, including global trade, falling.


The last paragraph is a bit weak. Although I have seen it being mentioned by a few others, I don't really think oil prices played the key role in the current economic collapse. Yes, the higher energy costs started harming consumers and producers but what really caused the economy to collapse was the credit crisis--essentially a run on investment banks. Higher oil prices would have caused a recession at some point but it didn't get enough time in this case, in my opinion.

"You can liberalize trade all you like, but it won't make a difference if no one can afford to ship the things you want to sell," he writes.

His prediction: Manufacturing jobs are going to return to North America over time. There will be a revival in regional agriculture. Urban farmers' markets will become more plentiful. Travel will be local and certainly not by plane. Dining out will be replaced by cooking in.


No one can predict the future but we all try to. So, it remains to be seen how many of these predictions come true. Some of these predictions seem kind of extreme. As investors, what I would do is to think about these possibilities and simply avoid getting surprised by them. If you are macro-oriented, you may want to give it deeper thought (maybe even buy the book) and see if there is an investment thesis here.

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