Energy shock and oil myths

Jeff Rubin was, for years, a lonely voice among economists when it came to predicting the price of oil. In 2007—when crude began the year at a relatively modest $50 a barrel—Rubin, then the chief economist at CIBC, all but staked his reputation on a prediction that oil was about to hit triple-digit prices and never look back. In his reports, speeches and even addresses to skeptical oil executives, he preached the end of the era of cheap fossil fuels. “The bottom line is, we’re in the bottom of the ninth inning of the hydrocarbon age,” he declared at a conference that year. Like any economic soothsayer, he had flubbed some calls in the past, but this, it seemed, was different. Oil prices kept rising just as he said they would until last summer, when the big spike hit and oil surged to over $140 a barrel. Rubin’s star rose right along with the price of crude.

This concept became Rubin’s preoccupation, and in his spare time—unbeknownst to his bosses at CIBC—he started writing a book about how the era of soaring oil prices would change the world profoundly and forever. This winter, Rubin told CIBC about the project and his plans to promote it, and the two decided to part ways. “I don’t think the message of this book is necessarily a message that any particular investment bank would want to be associated with,” said Rubin in an interview.

It’s easy to see why. Oil has since fallen back to about $60 a barrel, but Rubin is as certain as ever about the future of fossil fuels. In Why Your World is About to Get a Whole Lot Smaller, he argues that the current cool-down in prices is merely a brief respite before the next, even more severe spike. When the recession ends, “demand is likely to pop back up like a jack-in-the-box,” he writes. And, because “our whole way of life depends on the price at the pumps,” the disappearance of cheap oil could mark the end of life as we know it. Rubin subscribes to the notion of “peak oil”—a long-held hypothesis that production will soon max out and begin a long, slow descent, one that will bring about the end of cheap food, air travel, car culture, the potential disintegration of our tolerant society, and most importantly, the breakdown of the system of globalization.

But there is a problem with the premise to which Rubin has attached his career and his reputation: a growing number of economists, and even environmentalists, say this dark scenario is flat-out wrong. It obsesses with counting how many barrels of oil are left in the ground. It also oversimplifies the powerful force of globalization, all the while ignoring some dramatic changes now unfolding; changes that could significantly reduce the world’s reliance on oil. New technologies, new forms of energy, and a new focus on conservation and efficiency are shifting us onto a dramatically different energy path. Your world is not about to get smaller, they say, but it is about to get a whole lot leaner.

Two years ago, Peter Tertzakian, the chief energy economist for ARC Financial Corp., appeared as a guest on The Daily Show with Jon Stewart. Talking about a future energy crisis, Stewart posed one of his trademark, over-the-top questions: “How long do we have before masked madmen roam the cities with AK-47s, Mad Max style?” Tertzakian, who looks like a brainy version of Stewart with glasses and flecks of grey hair, cracked a lopsided smile. “It may not come to that,” he deadpanned. “The good news is that although these transition periods in energy are uncomfortable, usually we come out for the better.” Just as whale oil was replaced by kerosene, which was eventually replaced by today’s fossil fuels, another shift will come.

In his latest book, The End of Energy Obesity, Tertzakian goes even farther, arguing that escaping the energy trap may not be as difficult as it’s made out to be. Some relatively painless changes in our everyday behaviour could radically, and quickly, reduce the amount of oil we need, he says. Many of Tertzakian’s arguments actually closely parallel Rubin’s. Both authors trace the same historical problems with society’s oil addiction and how closely energy consumption has always been tied to wealth creation. And both see problems with past efforts to create energy efficiencies—ironically, past gains have only prompted people to use more energy. But Tertzakian sees the world heading off on a very different trajectory than Rubin.

Too often, says Tertzakian, writers and economists who subscribe to the doomsday scenarios are “trapped into thinking about energy in the energy realm.” He argues you first need to flip the problem on its head. The amount of energy we use is actually much less than the amount that’s extracted at the source, he says. For instance, of every 100 barrels of oil produced at the wellhead, only 15 barrels are ultimately used by the consumer. All the rest—85 barrels worth—is frittered away, whether in the refining process or in gas engines (where most of the fuel is burned off as heat, not power). The losses are even more dismal when it comes to electricity. For every 100 lb. of coal used to produce electricity, only two per cent reaches the light bulb in your house—98 lb. are lost, either escaping as heat in power lines and transfer stations, or wasted by inefficient appliances. That means small changes in behaviour to limit the amount of energy we use (or waste) ripple up through the system exponentially. “For every unit I don’t use at the wheel, I don’t have to find six units at the wellhead,” says Tertzakian. And for every unit of electricity that isn’t used, there’s a 50-times savings at the power plant. These inefficiencies are “our biggest failing when it comes to energy, but also our biggest opportunity,” he says.

Of course, the idea of cutting back energy use has long implied cutting back on our standard of living. But for the first time ever, that may no longer be true. New technologies emerging, not from the energy business, but out of California’s Silicon Valley, could make all the difference, says Tertzakian. Take Cisco’s new virtualization technology—a kind of futuristic version of Skype—that could dramatically reduce the need for people to travel and commute in the near future. Or “intelligent buildings” that can automatically monitor where people are and cut back unnecessary energy use. Other technologies have already started to change our habits, from the way we buy music to the way we get our news. These “very small changes in the way we live, work and play can amplify up into big changes in not needing energy at the source,” says Tertzakian.