Jeff Rubin puzzles me

By Stephen Gordon - Thursday, September 6, 2012 at 7:27 PM - 0 Comments

I don’t understand this at all. As far as I can make out, this is Jeff Rubin‘s argument:

1. Refineries’ margins are paper-thin, and have been so for decades; that’s why North American oil companies stopped building them long ago and have been shutting them down. This is true.
2. The West Texas Intermediate (WTI) crude oil price set in Cushing, Oklahoma is currently trading at a significant discount from the Brent price set in the North Sea and which is used as the reference price everywhere where supplies are available by tanker, such as Eastern Canada. This is also true.
3. Refineries buying WTI oil are more profitable than those buying Brent oil. Market pressures being what they are in the market for gasoline, this is also true.

From this, Rubin concludes that the path to prosperity is for Canadians to get in on the business of refining WTI-priced oil – namely, the oil produced in Canada.

This makes no sense to me:

1. If refining WTI-priced crude was the path to long-term prosperity, oil companies would be building refineries without any encouragement from Ottawa (or Washington, come to that).
2. The WTI-Brent spread opened up sometime around January 2011. The economics of refining have been dodgy for decades.
3. The WTI-Brent spread is an opportunity for arbitrage: buying in the low-price market and selling in the high-price market. Ordinarily, arbitrage is a cheap and riskless way of making money. As long as the price differential exists, demand will increase in the low-price market, and supply will increase in the high-price market. The reason why the Brent-WTI differential has persisted is that it was difficult and costly to buy oil in Cushing and transport it to the Gulf Coast, where the Brent price prevails.
4. Unsurprisingly, the private sector is falling over itself to take advantage of this arbitrage opportunity. The Seaway pipeline reversal has already begun to ship oil from Cushing to Houston, and the southern part of the Keystone XL project is under way. It makes no sense at all to make policy based on the assumption that the WTI-Brent spread is an immutable constant.
5. It won’t be long — a few years — before the WTI-Brent spread is arbitraged away, and we’ll revert to a world where refining is everywhere a marginal business with razor-thin margins, and in which oil production is lucrative – which probably explains why the private sector doesn’t see much point in investing in Jeff Rubin’s business plan.

Diverting capital and labour away from a lucrative industry towards a marginal one isn’t creating “value-added.” It’s creating value subtraction.

Peak water, peak fish and the end of everything

By Andrew Potter - Thursday, June 25, 2009 at 2:40 PM - 31 Comments

What do salmon dinners, SUVs, and subprime mortgages have in common? They all depend on cheap oil, at least according to the book jacket of Jeff Rubin’s bestselling new book, Why Your World is About to Get a Whole Lot Smaller.

Rubin is a former chief economist for CIBC World Markets, and a recent convert to the economics of peak oil—the supposed point at which global oil production reaches its maximum level, after which it enters a long, slow decline. The result, Rubin argues, will be a world where demand increasingly outstrips supply—and the end of the entire global economic order.

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Energy shock and oil myths

By Colin Campbell - Monday, June 1, 2009 at 12:00 PM - 33 Comments

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.

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