The spike in oil prices to US$147 a barrel last winter helped trigger the global recession.
And soon after a global economic recovery, the inevitable return to triple-digit oil prices will lead the world right back into recession. So argues Jeff Rubin, who was until recently the chief economist at CIBC World Capital Markets, the investment-banking arm of the Canadian Imperial Bank of Commerce.Rubin says we need look no further than recent history for the evidence. Four of the last five global recessions were due to oil shocks. And the latest oil spike saw prices rise three times as steeply as previously.Germany, New Zealand and Japan were already in recession well before the sub-prime mortgage crisis broke.
Rubin is controversial, but has a penchant for being right on oil matters. He predicted oil’s rise to US$50, US$100, and most recently US$150. He is no lightweight, having been the top-ranked economist in Canadian financial markets for more than a decade.
It would seem logical that with a (hypothetical) recovery, commodity prices in general and oil prices in particular would rise as well, probably even rise substantially. It seems also clear that this would limit the size of any recovery if not totally counteract it.
Where do we think oil will be trading when economic recovery and oil demand returns? The price may be volatile but the trend will be ever upwards. Have we learnt the lesson that global Gross Domestic Product is inextricably linked to cheap and abundant oil? As prices rise, global GDP falls.Robert Hirsch is an energy consultant to the US Department of Energy. His studies of the link between past oil shocks and global GDP suggests there is roughly a one to one ratio – ie, for every 1 per cent decline in global oil production, there is a commensurate 1 per cent fall in global GDP.New Zealand governments have always treated the oil projections of the OECD’s International Energy Agency as gospel. The agency’s chief economist Fatih Birol has issued a stern warning that there is now a real risk of a crunch in the oil supply after next year when demand picks up because not enough is being done to build up new supplies. .
Even at US$70 a barrel, Birol is concerned about its impact on inflation and interest rates. And he warns that many governments appear to be oblivious to the fact that oil is running out far faster than predicted.
How come our Government has not responded to this advice from its most trusted adviser? If Jeff Rubin and the IEA are correct, we are moving into a relentless cycle of economic shocks triggered by oil restraint and ever-increasing oil prices.
What are the implications for New Zealand of a return to triple-digit oil prices?Rubin’s central argument is that expensive oil will force a reversal of globalisation. Long-distance trade will become increasingly expensive and impractical, and protectionism will become rife as nations ramp up domestic production.
Interesting argument. So globalisation has killed itself because it was successful in wrecking the planet, impoverishing billions and enriching a few.
I think it is high time that this nightmare called globalization ends.