Economist: Pricier Oil Means Less Globalization In his new book, Why Your World Is About to Get a Whole Lot Smaller, economist Jeff Rubin says rising oil prices will lead to a major restructuring of our economy and lifestyles.
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Economist: Pricier Oil Means Less Globalization

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Economist: Pricier Oil Means Less Globalization

Economist: Pricier Oil Means Less Globalization

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Gasoline prices have been creeping up again, and a prominent economist expects them to go up much further as soon as the economy recovers. Economist Jeff Rubin believes we got a glimpse of our future in 2008 when gas exceeded $4 a gallon and oil soared well beyond $100 per barrel. Jeff Rubin wrote a book called "Why Your World Is About to Get a Whole Lot Smaller."

Mr. JEFF RUBIN (Author, "Why Your World Is About to Get a Whole Lot Smaller"): The whole model of a globalized economy - in other words, by separating where you produce things from where you sell things - is really based on cheap oil, cheap energy. It's a very energy-intensive way of organizing the world economy. And unfortunately, what we're going to find is it's not going to make sense to produce things on the other side of the world no matter how cheap labor costs are there, when it's so expensive to transport things in a world of triple-digit oil prices.

INSKEEP: Somebody listening to this is going to say, there aren't triple-digit oil prices anymore.

Mr. RUBIN: Well, that's true. And we're in the deepest recession in the post-war period. And if we stay in the deepest recession in the post-war period forever, we won't see triple-digit oil prices. But the fact of the matter is we are going to see triple-digit oil prices very early in the next recovery.

INSKEEP: You're saying that as soon as the world economy starts growing again, even a little bit, that we will very quickly exceed the supply of oil and prices will soar?

Mr. RUBIN: That's exactly what I'm saying. And that the very places that we were expecting to get a new barrel of oil from, it isn't going to flow at 50 to $60 a barrel because it costs a lot more to get that barrel out of the ground or out of the sand.

INSKEEP: But I thought oil companies think five or seven years or 10 years or even 20 years in the future. Aren't they seeing this increased demand that you're talking about? And aren't they moving now to deal with it?

Mr. RUBIN: Well, they are, but they're moving in places like, for example, the Canadian oil sands or deepwater wells, 10,000 feet under the floor of the Gulf of Mexico, where, yes, the oil is there, but it's not economically viable to extract that oil at today's oil prices.

INSKEEP: And when you think about the five-to-10-year future, is 100-plus per barrel oil where you think the oil price is going to be?

Mr. RUBIN: That's exactly where I think it's going to be, and that's precisely why the model of globalization is not going to be an economically viable model. And that has some huge implications. I mean, you know, who would dream that triple-digit oil prices would breathe new life back into the rust belt? But that's precisely what it's going to do because it's not going to make economic sense to move that steel factory to China when the cost of driving ships across the ocean to carry that steel is more important than a difference in wages.

INSKEEP: What about things like just-in-time delivery, where you have a business that may depend on products or even components of a product that are delivered instantaneously from several places across the country or the world? Does that go away?

Mr. RUBIN: That goes away as well. So what we have is we have larger warehouses and larger inventories. And that, of course, leads to higher prices. Perhaps the one thing that will be affected the most is food, because food has to be refrigerated when it's shipped. You know, last year China exported something like $6 billion worth of food exports to the United States. So that means we're going to have to go back to growing our own food. And that's going to be a very dramatic change to the trends that we've seen in the last 30 years. Some of those far flung exurbs and suburbs that are being abandoned right now are going to be ultimately reconverted back into farmland.

INSKEEP: You're talking about some of the farther lying housing developments where prices have fallen especially far in the last couple of years?

Mr. RUBIN: That's right. Now, people would say, oh, but that's because of the subprime mortgage crisis. But I would argue more fundamentally that when gas costs $4 a gallon like it did last Memorial Day weekend, that means commuting back and forth from those far flung suburbs no longer is economically viable.

INSKEEP: Well, let me ask about another part of that because if you're saying that people are going to live closer together in a denser community, that means living in a different kind of home. It used to be that a suburban house typically was 1,000 or 1,100 square feet, then it became 1,500, 1,800, 2,000, 2,500, even more. You're saying it's going to go back the other way.

Mr. RUBIN: And I'm also saying that we're going to have to rezone our cities for a much greater urban density because if all of those people living out in the suburbs and the exurbs start coming back into the inner cities, there's got to be accommodation for them. And we're going to have rezone that.

INSKEEP: Let me ask a few questions about whether this scenario that you lay out could really come to pass. Here's the first one that comes to mind. I thought that if you're producing a product in China and shipping it to the United States that transportation is actually a very small percentage of the cost right now. So if you doubled that or tripled that, it still wouldn't be a very high percentage of the cost.

Mr. RUBIN: That depends very much on the goods that you're selling. Before the recession hit, China was already losing its share of the U.S. steel market because the added costs from bunker fuel were adding as much as $90 to the cost of a ton of hot rolled steel which was then about $600.

No, if you're shipping diamonds from South Africa to the United States, it won't matter because transport cost as a percentage of the selling price of a diamond is too small. But for many manufactured goods, from furniture to steel, that's not going to make any economic sense when oil doesn't just cost over a $100, but when we put a price on burning oil.

INSKEEP: Why wouldn't we meet this problem of supply being greater than demand with greater efficiency like the higher fuel economy standards that the Obama administration announced just the other day?

Mr. RUBIN: Because efficiency does not lead to conservation.


Mr. RUBIN: It's probably the biggest head-fake out there. Efficiency in car engines have improved by about 30 percent since the second oil shock. Yet, your average American driver consumes just as much gasoline as he or she did 30 years ago, because the cost of driving has fallen and we've consumed those efficiency gains in ever more consumption. Efficiency can only lead to conservation if we don't allow the price to fall.

INSKEEP: Well, if economies become more local, if cities shrink in geographic size, if jobs stay at home, if people use less energy, is that actually a good thing?

Mr. RUBIN: I think there's a lot of silver linings to this. I mean, in solving our energy problem, we're also going to solve our carbon emission problem because they are, after all, twin sides of the same coin. And I think that, in many respects, the new smaller world around the corner will be a more enjoyable world to live in.

INSKEEP: Jeff Rubin is author of "Why Your World Is About To Get A Whole Lot Smaller." Thanks very much.

Mr. RUBIN: My pleasure.

INSKEEP: And you can read an excerpt from that book at our Web site,

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