By FS Staff
In late September 2014, oil prices were hovering around $90 and many traders thought we were close to a bottom. We conducted an interview with Jeff Rubin (author, energy analyst, and former Chief Economist & Managing Director of CIBC World Markets) who clearly did not represent the consensus view. He argued, instead, that oil prices would continue to decline and likely reach somewhere in the $40-$60 range, back at levels not seen since the 2008-2009 financial crisis.
At the time, this was a shocking call. On Wednesday, oil prices for WTI (West Texas Intermediate) hit a low of $60.43 and more commentators seem to be aligning with this view.
Given the prescience of Rubin's call (and the possibility for prices to go lower), we'd like to highlight some of his comments made at the time since they are actually part of a broader thesis in his forthcoming book, The Carbon Bubble, where he discusses many of the impacts reduced oil and gas prices will have on global markets.
Note: In 2008, as oil prices were shooting upwards towards $150, Jeff is well-known for projecting that we could see $200 oil by 2012 (he later released a mea culpa of sorts for why that turned out wrong: demand cratered sooner than he anticipated under the weight of triple-digit prices). With his current projection on the low end at $40/barrel, it is possible that he has once again overshot in the opposite direction. Time will tell. However, many of his views merit discussion and thoughtful consideration. Perhaps the most interesting is his view that oil prices, like coal presently, may not bounce back as in the past. Here are a few excerpts from his original interview made available to subscribers on our site here.
Jeff Rubin (October 9, 2014): "The bigger picture reality is that it's not Middle Eastern producers who are going to be shut in by $40-$60 barrel oil, which is where I think oil prices are heading, it's going to be these new sources of supply, shale and Canadian oil sands, which doesn't make sense at $40/barrel...and I think what we are going to find is that North American energy independence, which is really predicated on the development of non-conventional oil and gas, requires high oil prices and when prices don't meet those levels I think we are going to see a reversal of the spectacular growth we've seen in unconventional supply."
If oil prices get down to $40/barrel, are we going to see a huge pickup in oil demand that would send oil prices moving back up?
"I would argue not. I'd argue that oil prices are really throttling the path that has already been blazed by coal. As dramatic as the declines in oil prices have been, they are a fraction of what's happened in coal. We've gone from a world of $140/ton thermal coal prices to less than $70/ton, and that's shut-in coal plants everywhere from Australia to British Columbia, but coal hasn't rebounded and I'm not sure oil will either. I guess there are two issues to address: one is that economic growth, pretty well everywhere you look around the world, has downshifted into a much lower gear and since hydrocarbons are about 80% of the energy input behind global GDP, it's not a mystery while demand has slackened off. And I think the other big issue is that while investors in coal or oil stocks have comforted themselves every night before they go to sleep with the notion that there is still no global carbon agreement and unlikely to be one in the foreseeable future, that doesn't mean that actions taken by individual countries haven't been just as hurtful to those areas as a global agreement would be. And when I talk about specific countries I include the two most important coal-burning countries in the world, China and the US, both of whom would disagree vehemently about their respective roles in controlling global emissions but both of which have taken for different reasons unilateral actions that have been very hurtful to coal stocks and soon I think to high cost oil stocks like shale oil and bitumen."
Do you think we are transitioning to a world that uses less oil?
"I think we are making a transition and today's oil prices are testament to that. If you look at why oil is at $90/barrel today, it's purely demand; and it's a story of US demand, which still is the largest oil consumer being about 2.5 million less a day than it was before the recession and that's with gasoline prices falling. EU demand peaked over 15 years ago. And now we're finding that China and India, while demand is still growing, it's growing at a fraction of the pace that it was growing before the Great Recession and that of course is as true for coal as it is for oil. So I think we are transitioning. I mean part of the story is global GDP, China GDP, America's GDP, EU's GDP, which are not growing nearly at the same pace as they were before, but I think what is also happening is that oil or coal or natural gas per unit of GDP is starting to decline and that's certainly part of the transition that you're alluding to."
Jeff, long ago you had warned for many years that we'd see triple-digit oil prices. You turned out correct, but now you are warning about $40-$60 a barrel. What changed your view? Is it merely slowing economic growth around the globe?
"Right, I used to be a huge advocate of triple-digit and even $200 oil prices and given where the global economy was, before the last recession, when oil was trading at almost $150 barrel and global GDP growth was around 5%, $200 oil prices were part and parcel of that trendline. But what I think we've seen now is tremendous changes since the Great Recession as I've alluded to-global growth has certainly decelerated...but I think it's also policy changes that have moved those economies away from hydrocarbons, particularly oil. In the United States we are seeing that more and more people are moving to the inner city as opposed to the far flung suburbs. The number of miles driven per vehicle is also falling and then an increasing number of Americans aren't even getting their license. So I think there are some secular changes that are affecting oil consumption in the US and in Europe and in Japan and that is being compounded by the fact that all of these economies are now growing at a fraction of their previous rates."
What is the thesis of your new book, The Carbon Bubble, coming out next May?
"The thesis of the book, as we have touched on in this interview, is that what has happened to the coal industry is about to happen to the oil industry, or at least the high cost segments of the oil industry, which would include most of the new oil coming out of North America: shale or converting tar sands into bitumen. And I think that the goalposts are moving-that what we're seeing already is only a harbinger of what's to come and that we're going to continue to see broad disinvestment from the carbon sector not so much for reasons of saving the world but more for reasons of saving your portfolio and I think that's going to be as valid a statement in the S&P 500 about coal and oil stocks as it's going to be in the Canadian TSX as it's going to be in the Sydney All Ordinaries in Australia. We're going to see carbon stocks become more and more an albatross on index performance and we're going to see not only slower economic growth but actions taken by individual countries that will increasingly be hurtful to valuations of those types of stocks."