Peak Oil: the end to globalization?
Published Friday April 16th, 2010
Jeff Rubin in his recent book Why Your World Is About to Get a Lot Smaller and in his many public appearances has made a very passionate and compelling case for the concept of "peak oil."
The thesis he and others expound is quite straightforward and is based on the simple laws of supply and demand. In short, the rising demand for oil from the many emerging economies cannot be met from the existing known reserves nor is there any likelihood of major new discoveries to meet the shortfall.
Certainly the growth of China, India and others as major economic players in the world economy has led to dramatic increases in demand, not just for oil, but many other resources needed to sustain their growing manufacturing base.
The growth of middle classes has also led to increased demand for housing and consumer durables, particularly cars and travel. So while the world will face the increasing issue of climate change from the increased emissions, Rubin gives us another worry that we can take to bed with us - unprecedented increases in the price of oil.
This would lead to fundamental shifts in the existing global supply chains. As cheap transportation, a key element in the business case for out sourcing production disappears, we could expect a return to more regional/local supply networks and thus an end to the "forces" of globalization.
It would also produce changes in the rural/urban environment as urban areas expand and a need for greater access to local supplies of in-season food.
However, Rubin's thesis does not go unchallenged on both the supply and demand fronts. On the supply side there are the optimists who point to the prospects for new oil reserves.
The recent sabre rattling by Argentina over oil exploration off the Falkland Islands is illustrative of the potential for new, but expensive sources of oil. In the U.S., the ban on offshore drilling has been lifted in selected areas. Additionally recent announcements from the scientific community on the advantages of converting the world's vast coal reserves into oil products at around $30 a barrel may also change the predicted supply imbalance.
On the demand side, the much respected global columnist, Gwynne Dyer, points to the fuel efficiency measures for automobiles in the BRIC countries. Indeed the failure of GM to sell its Hummer brand to China is reputed to be because of its gas guzzling prowess.
Dyer also points to moves in the U.S. to cut oil consumption by 25 per cent over 10 years and imports by 50 per cent. If we look at the European countries, particularly the Scandinavian, we see they have policies to reduce dependence on fossil fuels. In the case of Sweden, its vision is a fossil free country
The jury is still out on which side to take. Certainly if Rubin is correct, then we are in for a rude awakening as oil prices and with them home heating and gas prices could quadruple. This would certainly produce the sort of dramatic shifts in transportation networks, manufacturing and living patterns. Globally it would hit the export based economies such as China and potentially cause huge social dislocation.
If Dyer is right and demand does not continue its historic upward trajectory and if we find new reserves of recoverable oil, then while there will still be some upward pressure on oil prices, it will not have the seismic economic and societal effects that Rubin is predicting.
News of the end of globalization is still premature so do not sell your oil stocks yet if you favour the Dyer viewpoint; or dig up your lawns to plant potatoes if you go with Rubin. There is still time to see how things unravel.
J. Colin Dodds is president of Saint Mary's University in Halifax and professor of finance at the Sobey School of Business. He can be reached at colin.dodds@smu.ca.
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