Jeff Rubin argues in The End of Growth that central bankers must focus on high energy prices
The End of Growth
By Jeff Rubin. Random House Canada, 274 pp, hardcover
Former CIBC chief economist Jeff Rubin isn't lacking in self-confidence.
When he worked in the investment business, he gained a great deal of attention for making what appeared at the time to be outrageous predictions.
In 1989, he said there would be a 25-percent reduction in Toronto real-estate prices. He based this forecast on rising interest rates and a slowing economy.
After being widely condemned by people in the housing industry, Rubin turned out to be right. It was a gutsy call.
Twenty years later, he forecast $225-per-barrel oil by 2012. A couple of months after this prediction, oil prices peaked at $147 per barrel, before dropping through the floor in the wake of a global economic meltdown.
For a while, Rubin became a bit of a pariah to his employer, leaving CIBC for reasons that weren't made clear at the time. During this period, he also wrote his first book, Why Your World Is About to Get a Whole Lot Smaller, which suggested that higher oil prices would eventually curtail transcontinental trade and revive domestic manufacturing.
But a curious situation has developed since then: oil prices have been creeping higher, at times puncturing the $100-per-barrel threshold. And the global economy appears to be stuck in neutral—giving credence to Rubin's oft-stated claims that higher energy prices are an underappreciated factor in choking economic growth.
In the meantime, Rubin has written a provocative new book, The End of Growth, which again focuses attention on petroleum prices.
The new book also explains his departure from the bank. According to Rubin, he was quietly working on Why Your World Is About to Get a Whole Lot Smaller for a while before he decided to reveal its existence to the CEO, Gerry McCaughey, on a flight from Montreal to Toronto.
"After hearing my pitch, McCaughey replied curtly that I would need to get permission from the legal department," Rubin writes. "His icy look alone was enough to get me second-guessing my future at the bank."
Four months later, the bank's lawyers denied permission, and Rubin parted ways with his employer.
End of Growth looks at the big picture
Whereas his first book looked at the impact of rising oil consumption in oil-producing countries, The End of Growth examines the failure of economists, central bankers, and the environmental movement to consider the ramifications of higher energy prices over the medium to long term.
Rubin notes that in 2000, approximately 76 million barrels of oil per day were consumed. At the time, the average price of Brent crude was $28.50 per barrel, which meant that the world spent about $791 billion on oil that year.
By 2010 with Brent crude averaging $79.50 and consumption rising to 87 million barrels per day, $2.5 trillion was spent on oil.
"When the world's annual fuel bill was less than $800 billion, oil-importing nations like the United States clocked healthy economic growth year after year," Rubin writes. "Now that the world is spending more than $3 trillion a year on oil, those same economies are floundering. This isn't a coincidence."
The bottom line, he suggests, is that slow or no growth is a reality. And he criticizes central bankers' attempts to stimulate spending in this environment with quantitative easing (i.e. the central bank dumping more money into the system by buying more bonds and treasury bills) to try to re-create the economy of the past.
Rubin is also not a fan of artificially lowering interest rates to stimulate borrowing, which only increases debt levels that are harder to repay in slow times.
In many respects, The End of Growth provides an economic education that you won't find in daily newspapers. And it's written in a lively style. Who knew that a former Canadian bank executive could keep readers fully engaged over 250 pages with a treatise on macroeconomics? Rubin accomplishes this through the use of relatively short, declarative sentences written in an active voice, unburdened with too many dependent clauses. It's an approach that other economists would be wise to emulate.
Unlike Nobel Prize–winning economist Paul Krugman, who writes in the New York Times, Rubin is no fan of governments going deeply into hock to trigger an economic revival. Rubin only sees this as creating difficult debt burdens for future generations.
However, Rubin's focus on energy prices also sets him apart from another Nobel Prize winner, the free-market ideologue Milton Friedman, whose disciples continue to beat the drum for rampant economic growth. According to the former bank economist, those days are over for good.
Instead, Rubin zeroes in on the value of pricing energy at market levels. He points out that in Denmark, this has helped reduce greenhouse-gas emissions, enhanced livability by promoting cycling and walking, and turned the manufacture of wind turbines into a lucrative export industry.
Some will question Rubin's optimism
At times, Rubin sounds almost ridiculously cheerful about the future—particularly when he argues that a sustained period of slow economic growth has the potential to solve the world's climate-change problem.
To support this perspective, he points to the sharp decline in greenhouse-gas emissions in Russia after the economy collapsed in the 1990s. He also notes another steep drop in 2009 after the global financial crisis.
"The world won't burn anywhere close to all the fossil fuels needed to realize the IPCC's [Intergovernmental Panel on Climate Change] dire climate change predictions," Rubin writes in a sentence that will draw shudders of disbelief from some. "That's undoubtedly good news, yet environmentalists are unlikely to embrace the potential salvation offered by expensive energy. If higher commodity prices spare us from the worst consequences of global warming, the environmental movement could be marginalized."
He pins his hopes on countries like China and India being forced by economic reality to slash energy-price subsidies. But that might not happen to the degree that's necessary to curb greenhouse-gas emissions, notwithstanding what happens in the rest of the economy.
If the U.S. can subsidize its military producers to a monumental degree, what's to stop China from doing the same with coal prices? And how are politicians around the world going to convince the public to reduce the number of births, which is at the root of the climate-change conundrum?
Rubin's last book pointed out that energy producers, such as Venezuela and Saudi Arabia, are sharply increasing consumption by setting the domestic price far below the international price. That's not likely to change, further contributing to the climate problem.
However, Rubin appears to believe that Climate Armageddon will be stymied because of the cost of fuel, notwithstanding the enormous coal reserves around the world. It's a nice idea to contemplate, but based on rising emission levels, I'm more inclined to accept Straight columnist Gwynne Dyer's prediction that the only solution, in the end, will be geo-engineering the climate.
It's also unfortunate that Random House Canada and Rubin chose a title identical to that of a new book by California-based peak-oil researcher Richard Heinberg. It's published by New Society.
Good points on pipelines
Notwithstanding these concerns, Rubin's book is well worth reading, particularly for those interested in political debates over the Enbridge, Kinder Morgan, and Keystone pipelines. Currently, Canadian producers are being shortchanged by more than $20 per barrel, he writes, because of the pipeline bottleneck in the Midwest.
He clearly demonstrates that big winners in this scenario are the giant oil companies that own refineries in the U.S., and not American motorists.
Rubin also points out how the Obama administration's decision to delay the Keystone project to the U.S. could jeopardize B.C.'s coastal waters by making it more likely that the Enbridge pipeline from the tar sands to Kitimat will be completed.
"It's an open secret in Canada's oil patch that members of the Asian market are part of the group that's already secured space on a potential new line to the Pacific Coast," Rubin writes. "Turn back the clock only five or six years and the thought of Alberta oil headed directly to China would have been unthinkable."
In the zero-sum world of energy, one country's gain comes at the expense of another. And because oil is so important to the economy, Rubin shows how this gain imposes an economic cost on the loser.
After reading The End of Growth, it's easy to understand why the Americans and Chinese are so interested in Canadian energy these days.
Follow Charlie Smith on Twitter at twitter.com/csmithstraight.