Why Your World Is About to Get a Whole Lot Smaller - Softcover

9780307357526: Why Your World Is About to Get a Whole Lot Smaller
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What do subprime mortgages, Atlantic salmon dinners, SUVs and globalization have in common?

They all depend on cheap oil. And in a world of dwindling oil supplies and steadily mounting demand around the world, there is no such thing as cheap oil. Oil might be less expensive in the middle of a recession, but it will never be cheap again.

Take away cheap oil, and the global economy is getting the shock of its life.

From the ageing oilfields of Saudi Arabia and the United States to the Canadian tar sands, from the shopping malls of Dubai to the shuttered auto plants of North America and Europe, from the made-in-China products on the shelves of the Wal-Mart down the road to the collapse of Wall Street giants, everything is connected to the price of oil

Interest rates, carbon trading, inflation, farmers’ markets and the wave of trade protectionism washing up all over the world in the wake of various economic stimulus and bailout packages – they all hinge on the new realities of a world where demand for oil eventually outstrips supply.

According to maverick economist Jeff Rubin, there will be no energy bailout. The global economy has suffered oil crises in the past, but this time around the rules have changed. And that means the future is not going to be a continuation of the past. For generations we have built wealth by burning more and more oil. Our cars, our homes, our whole world has been getting bigger in the cheap-oil era. Now it is about to get smaller.

There will be winners as well as losers as the age of globalization comes to an end. The auto industry will never recover from this oil-induced recession, but other manufacturers will be opening up mothballed factories. Distance will soon cost money, and so will burning carbon – both will bring long-lost jobs back home. We may not see the kind of economic growth that globalization has brought, but local economies will be revitalized, as will our cities and neighborhoods.

Whether we like it or not, our world is about to get a whole lot smaller.
From the Hardcover edition.

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About the Author:
JEFF RUBIN is the author of Why Your World Is About to Get a Whole Lot Smaller, a #1 national bestseller and the winner of the National Business Book Award. His second book, The End of Growth, was also a #1 bestseller and made multiple best-book-of-the-year lists in 2012. Rubin was the Chief Economist at CIBC World Markets, where he worked for over twenty years. He is a Senior Fellow with the Centre for International Governance Innovation (CIGI) and lives in Toronto.
From the Hardcover edition.
Excerpt. © Reprinted by permission. All rights reserved.:
Introduction

REDEFINING RECOVERY

BEING AN ECONOMIST CAN RUIN YOUR APPETITE.

It is probably not the only job that has that effect. I’ve never worked as a taxidermist, but I can see that it might turn me off fish. My job, though, gets me worried about fish in a whole different way.

I like salmon — who doesn’t? Salmon consumption has risen about 23 percent each year for the last decade or so. There are a number of good reasons to eat more fish: we all want food high in omega-3s, we want to eat less saturated fat, we want healthy protein for our low-carb diets. But here’s the key reason for the amount of salmon on your dinner table: cheap oil has been subsidizing the cost of fish. Just like Wal-Mart and Tesco and big-box retailers around the world have been able to cut prices on almost everything by taking advantage of cheap shipping and cheap Asian labor, salmon went from being delicious local seafood to being another global commodity. Cheap oil gives us access to a pretty big world.

In the global economy, no one thinks about distance in miles — they think in dollars. If oil is cheap, it really doesn’t matter how far a factory is from a showroom or a farmer’s field from a supermarket. It’s the cost of other things, like labor or tax, that determines what happens where. An Atlantic salmon caught off the coast of Norway is destined to be moved around the world just like a ball bearing or a microprocessor.

First the fish is taken to port in Norway, where it is frozen and transferred to another vessel, which will take it to a larger port, probably Hamburg or Rotterdam, where it will be transferred to another ship and schlepped to China — most likely Qingdao, on the Shandong Peninsula, China’s fish-processing capital. There the whole salmon will be thawed and processed on a sprawling, neonlit factory floor where squads of young women with nimble fingers skin, debone and fillet the fish. It will then be refrozen, packaged, stowed on another container ship and sent to a supermarket in Europe or North America. Two months after it was caught, the salmon will be thawed, displayed on crushed ice under gleaming halogen lamps and sold as “fresh.”

Still, if I’m sitting in a nice restaurant and I’m enjoying a good conversation over a glass of wine, that is not what I am thinking about. And anyway, the shipping news doesn’t normally appear next to a menu item. But if that conversation turns to energy and oil prices (and I confess it does fairly regularly), then when I glance at that fish I know I am looking at the past.

In the near future there is going to be less salmon on our tables — and probably fewer restaurants to eat in, too. Because the cheap-oil subsidy that makes Norwegian salmon affordable is about to disappear.

And as it does, your world is about to get smaller — much, much smaller.

To get that salmon from the ocean to your plate takes a ridiculous amount of energy. Think of the fuel for the fishing boats, container ships and just-in-time delivery trucks; the energy to freeze and process the fish, to sell it in a supermarket (retail stores use almost as much energy per square foot as factories do, just on heating, cooling and lighting). We invest a lot more energy to get that salmon than we get out of it when we eat it, which in itself makes the fish a bad energy deal. Economics calls it a “diminishing rate of return.”

But it gets worse. A lot worse. All of that energy costs money, and energy gets more expensive just about every day. Not quite every day, of course — the recession that seemed to catch everyone by surprise in 2008 brought oil prices down in spectacular fashion. But even the deepest recessions last barely over a year. Those prices will be on their way back up soon enough. And however you want to measure the energy in that fish — calories, miles, joules, barrels of oil — it is inevitable that the price of fish is going to go up as well.

The seafood on your plate depends on cheap energy. And what is true of salmon is true of just about everything else. All you have to do to find an example is look around. Every morning when I head out to go to work, I see thousands of examples: the commuters making their way downtown from far-flung suburbs. The city I live in happens to be intersected by one of the busiest highways in North America — half a million cars make their way through its most heavily trafficked interchanges every day. Are those commuters going to be living or working where they are today when oil prices inevitably soar again? And if they are, will they still be driving cars? Either our living arrangements or our transportation options are going to have to change. In other words, our whole way of life depends on the price at the pumps, and that price depends on an uninterrupted supply of oil.

Think about that as you drive to work. Have a look at all those car dealerships, the gas stations and garages, the drive-thrus and big-box stores surrounded by huge parking lots. Try to imagine your life — picking up dry cleaning, taking your kids to hockey, going to Home Depot on the weekend, heading to the cottage in the summer — without a car. If you are like most people in North America or Australia, or even a less car-dependent country like the UK, you probably can’t do it. And if you can’t, you now have a small sense of what depends on the price of what comes out of the pump.

I say a small sense, because not only does your car burn energy, it is made from energy. Just building your car requires as much energy as it burns in several years. Add to that the fact that the plastics and paints and interior elements are made from petrochemicals derived from oil, and the picture becomes clearer. The house you live in is probably powered by electricity generated, at least in part, from hydrocarbons, and is almost certainly heated with natural gas or oil. The clothes you wear to work were probably made in some distant land and shipped here using relatively cheap oil, just as the coffee beans that went to make your latte were grown in a far-off country where the sun shines brighter and the labor is much cheaper, and then were shipped here.

So you see, it’s not just your salmon. Despite the steady barrage of climate-change news and a growing sense that our affluent lifestyle may have unpleasant consequences for the environment, few of us stop to consider how just about every facet of our lives is built around our energy consumption. Nearly everything we do is inextricably bound to our use of energy.

And by “energy” I mean oil. Yes, we use natural gas and some coal to generate electricity; but the world’s car and trucks and ships and planes run on oil. That means that the global economy runs on oil, because the global economy is about moving things around the world. And the reason the global economy has put all its eggs in one basket is that there is no other basket. As of right now, everything — from the salmon on your plate to the entire model of a global economy — depends on keeping the oil flowing.

Now, what happens when the price of salmon goes up? You buy less of it. And when the price of gasoline goes up, you drive less. When the price of clothes or computers or anything else goes up, everybody buys less.

And when everybody spends less, you have a recession.

It’s not all that complicated. High energy prices cause recessions. A recession is not the end of the world, of course, though if you are one of the many people who has lost a job or seen your investments melt away, it can seem that way. Still, history keeps showing that the economy recovers, usually after a few quarters, and life goes on. Markets pick up, factories ramp up production, and eventually you’re back to eating all the salmon you want.

But the history of the modern global economy is not all that long, and it is worth asking whether the patterns we have seen in past decades are ones we can expect to go on repeating into the future. We have seen high oil prices trigger recessions before, and in each case the medicine to cure a sick economy has been ready at hand: cheap new supply.

It’s simple — as long as you have a ready supply of that oil.

But if you don’t, the whole idea of recovery from a recession has to be redefined — because it’s not going to look like it used to.

Right now, you need oil to make money and you need money to buy oil. If oil is too expensive, it becomes harder and harder to make money, whether you do that by driving a cab or by selling pineapples. And if there is no money to buy oil, the price of oil goes down. When it goes down, all of a sudden it’s easier to make money again. But as long as you need oil to make money (and as chapter 7 will show, you do), the price of oil is going right back up once the money starts flowing again.

Sure, oil prices collapsed from record highs toward the end of 2008, but not before bringing down the global economy. It may be a record decline, but that says a lot more about where oil prices are coming from than it does about the price oil fell to. After all, oil prices have averaged over $40 per barrel since the recession was announced in the US in 2008. It wasn’t that long ago that prices like that would have been considered pretty expensive.

But even more importantly, there is no way that oil prices are going to stay at these levels. As soon as the economy picks up, so will oil prices. That’s because the fundamental causes behind triple-digit oil prices in 2008 won’t have changed at all during the recession. In fact, they will likely have worsened.

As we will see in part 1 of this book, the reason the price of a barrel of oil hit record highs was that there is a deeply rooted imbalance between supply and demand. This doesn’t mean speculators don’t help push prices higher as well. Of course they do. But you have to ask why speculators got attracted to oil prices in the first place.

The answer is that they saw demand for oil rising relentlessly and they saw supply plateauing. It looked like a one-way bet, and in speculation, every day you’re right, you’ve made money. Well, if you thought the price of oil could never fluctuate downward, you were wrong. Huge oil price increases have always caused recessions, so why wouldn’t the recent record rise have the same effect? If you didn’t see that, you probably lost some impressive sums of money. But if you figured there was a lot of demand chasing a relatively fixed amount of supply, you were right. And you still are.

What that means is that the moment the economy stops sputtering and comes back to life, oil prices will resume their upward trajectory. And all the sooner, since much of the new high-cost supply we were counting on in the near future has been canceled because of the decline in oil prices during the recession. The price of crude will keep going up until it triggers another downturn. As long as it takes a particular amount of oil to make a fixed amount of money or GDP, we are going to see our economies choked by rising prices almost as soon as they get back on their feet after each recession.

But it doesn’t have to happen this way. One way to reduce the amount of oil we need to keep the economy running is to make your world smaller. And that is exactly what is going to happen.



I’ve got some good news and some bad news. Which do you want first?

That’s what I should have asked the crowded dining room of oil executives in Calgary’s Petroleum Club. As the chief economist at CIBC World Markets, a North American investment bank, I had come to talk about a subject very close to my audience’s hearts: the future price of oil. I had something to say that should have improved their mood. But all they heard was the bad news.

The room was full of big personalities — anyone in the oil business had a plate full of the best Alberta prime rib money could buy. They were all there, from the big multinationals like Exxon, which owned much of the Canadian oil patch through its subsidiary Imperial Oil, to the small independents and aggressive entrepreneurs trying to make a living outfoxing the world’s biggest oil companies. The one thing they all had in common that night was that one way or another they were all counting on producing more oil in the future, and they figured they were the guys who knew how it was going to happen.

Well, I figured they were wrong. I had just read an obscure but alarming study of the world’s oil reserves called The Coming Oil Crisis, by Dr. Colin Campbell, a Cambridge-educated retired senior geologist who had spent the better part of his life exploring the world for new reserves. The title of the book pretty much gives away the ending.

What Campbell was suggesting was so contrary to the conventional wisdom about oil supply, and so staggering in its implications for the world economy, that I had decided to go see him. After a lifetime of oil exploration around the world, he had settled in a tiny Irish hamlet called Ballydehob, not far from Cork. I was in fact following in the footsteps of my wife, Deborah Lamb, who had recently led a Canadian Broadcasting Corporation film crew to do a documentary on oil depletion. There, in a tiny village along the Irish coastline, the world’s most famous geologist explained to me what I was about to explain to Calgary’s oil executives.

Campbell’s argument was, and still is, that global oil production follows pretty much the same pattern as any individual oil well. Production at each reservoir accelerates until roughly half of the oil has been exhausted. Then it inexorably falls due to declining well pressure. A graph of oil production looks like a bell: a short, relatively horizontal line that steepens as it rises then flattens to a short peak before tracing a mirror image of its rise as it goes down the other side. The resulting curve — called the Hubbert curve, after the American geophysicist M. King Hubbert, who seems to have been the first person to figure out that there is only so much oil in the ground — gives us a pretty good visual impression of what we can expect from a finite resource: a peak, followed by a decline.

In 2002, Campbell first helped convene a loosely connected organization called the Association for the Study of Peak Oil to take an objective look at world oil supply. Pooling the experience of lifetimes in the field, the group of largely retired senior geologists who had explored the world for Shell, BP, Total, and all the other big majors built a massive database that tracked the depletion of every major producing oil field in the world. And when they added it all up, the composite picture that emerged about the growth of world oil supply was very different from the one their former employers were conveying. The rate of discovery was falling steadily and the rate of field depletion was rising just as inexorably. Run that model for very long, and pretty soon world production starts declining as well.

In other words, global production would soon be on the backside of the Hubbert curve. Campbell wasn’t saying that the world was going to literally run out of oil. It never will, at least not in a time frame that matters to anyone reading this book. But daily world production, which had grown linearly until then, would soon peak, plateau and then begin its irreversible decline.

That struck me as a pretty important piece of news.

As an economist, I had been trained not to worry about resource limits – the question is not whether there is enough of something to go around, it’s how much it will cost to get it out of the ground. And as someone whose job it is to forecast the economy, I knew how important oil — cheap oil — is to our economy’s future heal...

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  • PublisherVintage Canada
  • Publication date2010
  • ISBN 10 030735752X
  • ISBN 13 9780307357526
  • BindingPaperback
  • Number of pages336
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