Globalization will soon be over, and it's the rising price of oil that will fuel this change. So, at least, argues Jeff Rubin, former chief economist at CIBC World Markets, the investment banking arm of the Canadian Imperial Bank of Commerce, in his new book, Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization. Rubin recently spoke with U.S. News about the future of the world's energy habits and the implications for the globalized economy. Excerpts:
What's the central argument of your book?
That triple-digit oil prices will reverse globalization and bring about the re-emergence of local economies. In the kind of world that we'll soon be facing, distance costs money. In many cases, not in every case, moving your production to China and then importing those goods back to Western Europe or North America will be foolish. In other words, what you will save on labor costs you will more than lose on transport costs. Are your views controversial?
I guess they're controversial in the sense that I'm saying the world we're soon going to face isn't just about one variable—the wage rate—and that when you stop to consider what's really required to have a globalized economy, it's very cheap oil prices and very cheap transport costs. The controversial part of that is, in part, my argument that triple-digit oil prices are going to become a permanent feature of our economy and not just a blip. How will the new economy change global politics?
A lot of long-lost jobs are going to be coming home. Triple-digit oil prices in a perverse sort of way is going to breathe new life into the rust belt. We already started to see that just before the recession hit with a whole renaissance in industries like U.S. furniture and U.S. steel, where transport costs were starting to make domestic producers competitive again. On the political front, what we're going to see in the future is something that would have been very difficult to envision here in North America, and that's the Archie Bunkers getting in bed with Al Gore. Blue-collar jobs are soon going to become green-collar jobs, and when unions go through the math and understand that the industries that their members work in emit one third to one half less carbon than the factories overseas that are stealing their jobs, they're going to want as high a price on carbon emissions as possible. How will this affect China's global standing?
Exports to the United States or Europe isn't going to be the engine of Chinese growth anymore. Now, you can argue that it maybe hasn't been for the last couple of years, and certainly hasn't been since the recession hit, but between triple-digit oil prices and the prospect of a carbon tariff that may be $40 to $50 a ton, I don't think China will be Wal-Mart's supplier in the future. That doesn't mean that the Chinese economy can't continue to grow at a robust rate. It's just not going to be led by exports to Wal-Mart. When will globalization end?
We're already starting to see that world trade has basically halted in its tracks. What we're going to find is very early into an economic recovery, within the first year, we're going to see triple-digit oil prices again, and we will already start to see shifts in trade. One of the biggest shifts will be from faraway, distant suppliers. It will probably be trade deficits with economies like Mexico that will become a lot more prominent in the world I see. What's going to keep oil prices so high?
The real legacy of this recession is going to be on [diminished] supply. There's already been about one-and-a-half million barrels of planned production that has been canceled because it's not economically viable at today's prices. And there have been similar cancellations all around the world because most of the supply that the world is counting on doesn't make any economic sense at today's oil prices. What we're going to find very early on in an economic recovery is that while demand will spring back like a jack-in-the-box, the world will be producing less oil, not more, than it was a year and a half ago when oil prices got into triple-digit range.