Get set for $200 oil, says CIBC economist

Geoffrey Scotton, Calgary HeraldPublished: Friday, September 19, 2008

The fundamentals for oil are enormously strong, outspoken analyst Jeff Rubin told international business leaders Thursday -- warning those fundamentals may in fact be too strong as high energy prices spark inflation globally and a reordering of the world economy.
Speaking to the Global Business Forum in Banff, Rubin also argued indicators show the underlying cause of the crisis gripping U.S. and world financial markets linked to the credit crunch -- weakening U.S. home prices -- is close to an end.
"The underlying problem is about to be remedied," said Rubin, chief economist and strategist of the Canadian Imperial Bank of Commerce. He warned that amid global financial uncertainty, investors and corporate leaders need to be careful not to make poor decisions based on what he believes are fleeting conditions. He forecasts U.S. house prices will bottom and begin to rebound by the beginning of 2009, while oil prices could hit $200 in four or five years.
"What's happening out there is a giant head fake . . . that could easily put you running in the wrong direction," Rubin told about 200 senior corporate and government leaders at an invitation-only gathering at the Fairmont Banff Springs.
Rubin's comments came as central bankers pumped or promised $180 billion US of injections Thursday into world financial markets to ensure liquidity amid continued fears about the solvency among major U.S. investment banks and the repercussions of a potential failure.
Nonetheless, while the financial market turmoil will work itself out over time as home prices begin to regain lost ground, there are other spectres on the horizon as the global economy begins to revive, said Rubin.
"By the first quarter of next year the word's really going to change, because instead of deflation and Wall Street we're going to be talking about inflation and energy," Rubin said.
He predicts the world oil price will hit $200 in four or five years, but that will just be a signpost marking a longer ascent.
Other analysts and experts at the Banff event warned the global economy is about to slip into as long as three years of recession.
"We're taking the froth off, but it's going to hurt," U.K.-based Institute of Directors chief economist Graeme Leach said, referring to a downturn in the wake of credit tightening worldwide.
"You ain't seen nothing yet. The economy is going to get significantly worse before it gets better. (We're going to have) much weaker economic growth, much weaker employment growth," he said.
"The bigger the party, the worse the hangover," noted James Bond, chief operating officer at World Bank Multilateral Investment Guarantee Agency. "I think we're in the hangover phase right now. This may be Wall Street, but Main Street is going to hurt."
Rubin argued oil supply has effectively not risen over the past three years and existing, low-cost conventional supply is being replaced with uncertain, high-cost non-conventional supply -- either deepwater or oilsands. Deepwater sources, such as the Gulf of Mexico, face dramatic and substantial rates of decline.
"Every year the marginal cost of the new barrel of oil goes higher and higher," Rubin said. "The U.S. is going to be facing an enormous oil crunch."
At the same time, Rubin explained that due to consumer and industry prices that are far below world market prices for oil in many countries in the Middle East and the Third World, demand there is soaring. He noted for the first time, demand and consumption from countries outside the Organization for Economic Co-operation and Development is about to overtake OECD demand and overall demand will inevitably ratchet higher.
In the wake of dramatically higher energy costs, sharply heightened transportation charges are set to remake the world economic order, Rubin said.
"We're going back to a world where distance costs money," said Rubin, noting the phenomenon has already been seen in the return to competitiveness of U.S.-produced steel, which for many years could not stand up to Chinese imports.
In turn, returned competitiveness is likely to spark wage inflation as workers demand some of the returning profit in industries where transportation costs have made them newly competitive.
In that type of environment, Rubin said, policy-makers will be forced to react.
"That's the world where interest rates are going up, not down -- and it doesn't matter what happens to Goldman Sachs in the next three months because there's nothing the Federal Reserve can do to change that world."