Will High-Priced Oil Kill Globalisation?
Will High-Priced Oil Kill Globalisation?
In his recent book, Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization, former CIBC World Markets chief economist Jeff Rubin suggests that while the world isn't running out of oil, it is running out of cheap oil.
Rubin predicts an era of triple-digit oil prices that will fundamentally change the way we do business. The economic repercussions of expensive oil, he says, will be the end of and the eventual reversal of the trend towards globalisation.
The days of shipping raw materials halfway across the world to be processed by cheap labour will be over. Flying food from where it is in season to where it is not will be a thing of the past. Locally sourced products will move from being a trendy buzzword to an economic necessity.
We asked our oil analyst Riccardo Fabiani to take a close look at Rubin's theory and offer some expert commentary.
"Jeff Rubin has some very good points, particularly as he highlights the role of cheap labour and energy in boosting global trade and fostering globalisation.
Unfortunately, his overall theory is based on the premise that oil prices are likely to hit triple digits in the years to come, which, in our view, is unlikely.
Rubin anticipates a new era of oil prices around US$200-300 per barrel, which, I agree, would have a devastating impact on world trade and thus on globalisation in the near future.
However, while our team here at D&B Country Risk Services do expect oil prices to increase above US$80 per barrel over the next two years, we don't see prices getting anywhere close to US$300. Simply put, Mr Rubin's premise does not take into account a series of factors which could exert downward pressure.
First of all, as oil prices are going up again, oil exploration is also resuming and is opening up potential new sources of petroleum. Iraq, for example, has ambitious plans to increase production capacity to 10 to 12-million barrels per day by 2017, up from the current 2.5-million barrels per day, making it, along with Saudi Arabia, the most important producer in the world.
Secondly, high oil prices have already encouraged many states and companies to switch their consumption to petroleum substitutes. This is raising the demand for coal, natural gas and renewable energy sources. For example, the recent commercial exploitation of previously untapped "shale gas" reserves has substantially raised supply and suppressed prices in the natural gas market and is likely to boost the use of natural gas-fuelled cars and power plants, among others.
Finally, we cannot discount the positive impact of technological progress on energy efficiency in the medium and long term.
Taken overall, all these factors are likely to exert downward pressure on oil prices. Without skyrocketing oil prices, Mr Rubin's scenario of high oil prices causing the world economy to become less globalised is unlikely to occur."
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