The Big Flatline: Oil and the No-Growth Economy

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big flatlineThis book was highly recommended in the Financial Times. Jeff Rubin raises the question of whether the global economy can continue to expand in the face of high and rising energy prices. Rubin, an economist, notes that economists always assume growth over time is a given but he notes maybe that assumption should be questioned based on long term historical data.

Rubin makes an excellent argument that demand for crude oil and energy in general continues to expand with China’s, India’s and Asia's rapid economic growth. The ability of oil producers to meet those increasing demands are suspect according to Rubin, which means that energy prices may be much higher in the future than they have been historically since they will be needed to ration demand.

He also addresses the impact of rising debt levels for both individuals and Western governments, and the need for economic growth to meet the debt burdens. Rubin claims that the coming debt-driven European bank crisis, due to overextended lending and poor asset quality in the loans held by European financial institutions, will create some severe stresses on the global economy. Add in triple digit crude oil prices, combined with crushing debt burdens, will keep global growth very moderate for quite some time under Rubin’s thesis.

In addition to rising oil prices Rubin points out that food prices are also increasing rapidly. The stability of the Middle East and North Africa is a major concern since these regions account for such a large portion of the global crude oil export market.

Rubin claims we face “zero sum conditions” in the commodity sector, unable to rapidly increase the production of cheap energy like we have in the past in the face of skyrocketing demand, therefore growth in China and India may dictate whether other economies have access to the resources they need to continue to grow. While high commodity prices may reduce China's economic growth to 5% from double that today, Rubin argues it may force some developed countries that are heavy users of imported oil (the U.S. or Europe or Japan) into recession.

In a static economy Ruben expects the financial sector to shrink. Government expenditures will be by necessity limited due to existing debt levels, and growth will not provide the additional tax revenues to be used for public needs or consumption. Individual households will also reduce expenditures as the economy moves into a no growth scenario

High energy prices will force changes to the global economy, for the better Ruben claims. Energy efficiency, technological development, and revised social norms will mean that most households in developed countries will use less energy per capita going forward. Less energy will mean less air and solid waste pollution.

From an investment standpoint in a low or no growth, heavily indebted environment, high energy prices should make reserves in the ground in politically secure countries much more valuable. Companies that are aggressively growing production and have proven reserves should attract investor interest, or interest from larger energy firms seeking to add to their asset portfolio.

A book well worth reading whether you agree with his analysis and conclusion or not. Fact is we have faced near triple digit oil prices, rising food prices, and a low-growth economy for some time now. Whether we will continue to face these challenges in the future is anyone’s guess, but Rubin presents an excellent analysis and discussion of these issues.

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