Economist-turned-author Jeff Rubin is once again telling the world to brace for triple digit oil prices, a scenario that would have major implications for key commodities and the Canadian dollar, which could easily hit US$1.20 against its U.S. counterpart, he says.
After topping $147 per barrel, prior to the global financial crisis in July 2008, the price of oil sank to $32 in December of that year, a move that Rubin likely didn’t forsee when he predicted that the commodity would be headed to $200 a barrel in 2012.
But as he prepares to discuss the connection between oil and commodity prices at the Business without Borders mining conference in Vancouver on January 18, Rubin’s message remains the same.
He said there is a very good chance that prices will return to pre-recession highs this year.
“Maybe it will be US$126, or maybe it will be US$152, but I think that we will be comfortably in triple digit oil prices by the first half of the year. And by the second half of the year, prices will be getting close to [$147], maybe even above.’’
If he is right, triple-digit oil could have the kind of grim economic and social ramifications that he has already outlined in his best-selling book Why Your World Is About to Get A Whole Lot Smaller.
It would likely push the global economy back into recession, sinking the price of key commodities such as copper, potash and zinc. “Oil has had its finger prints over every major global recession since the first OPEC (Organization of the Petroleum Exporting Countries) oil shock in 1973 and I see no reason why that is going to change,’’ Rubin said.
Fortunately, not everyone believes that his forecasts are accurate.
Patricia Mohr, a vice-president, and commodity market specialist at Scotiabank Group in Toronto is among the doubters. She sees West Texas Intermediate (WTI) oil prices averaging only US$95 a barrel this year and US$98 in 2012.
That would mark a healthy increase from the 2010 average of US$79. But it is still a long way from what Rubin has been predicting.
Mohr said her forecasts are based on what she sees as a largely balanced market, with demand running slightly in excess of OPEC output. Any short-term surge in prices will likely be met by production increases in Persian Gulf countries such as Saudi Arabia, the United Emirates and Kuwait, she said.
A return to $147 is largely out of the question, she predicts. “The market just isn’t that tight.”
Still, Mohr says the outlook for oil remains slightly clouded by uncertainty about supply in the U.S. Gulf of Mexico as a result of last year’s massive oil spill and subsequent ban on deep water drilling.
She said the lack of transparency in relation to Gulf production makes it difficult to determine how much production has fallen off. “If you don’t have development drilling, you don’t get the production the following year,’’ she said.
Still, the rising price of oil and other commodities is going to take the Canadian dollar to places that it has never been before, Rubin says. “I think that we are going to see the Canadian dollar as high as US$1.20 against the U.S. dollar and that is going to have a very profound effect on the Canadian economy.”
Meanwhile, he says the U.S. dollar will continue to lose ground against the Japanese Yen and Chinese Yuan.
“The only currency that the U.S. dollar may not lose ground against is the Euro,’’ he said. “But I don’t think that the Euro will even exist in a couple of years, at least not as it is presently constituted.”
In the next couple of years, Rubin says countries like Greece, Ireland Portugal are going to bring back their old currencies, a move that will result in a very significant devaluation of the Drachma, the Escudo and the Irish pound against what will be left of the Euro.
What will be left of the Euro will be France, Germany, Luxembourg, Belgium and the Netherlands, he said.
“At some point French and German taxpayers are going to say, we have written enough cheques [to prop up faltering economies in weaker European nations].’’
Rubin said a US$1.20 Canadian dollar will be great for a company like Teck Resources Ltd. (TSX: T.TCK.B, Stock Forum) and (TSX: T.TCK.A, Stock Forum) as it rides higher and higher commodity prices. Oil at US$147 will also be great for Suncor Energy Inc. (TSX: T.SU, Stock Forum). “But how long do you think that Ontario is going to be North America’s single largest producer of motor vehicles at US$1.20 exchange rate,’’ Rubin said. “I would say not for too much longer.’’
Rubin said the contents of Why Your World Is About to Get A Whole Lot Smaller is the sum total of what he learned while working as chief economist at the Canadian Imperial Bank of Commerce and CIBC World Markets for nearly 20 years.
He decided to leave the bank in March 2009 to publish the book, mostly because the bank would not support what the book has to say. “It probably was a message that they didn’t want to be associated with,’’ he said.
A native of Toronto, he now makes his living as a speaker and blog writer for the TheGlobe and Mail and Huffington Post.