The Big Flatline: Oil and the No-Growth Economy
By Jeff Rubin
(Palgrave Macmillan, 272 pages pages, $27)

In February 2010, this august journal published some musings of mine titled “The Great Recession of 2011–2012,” with a subhead, “And that’s only the beginning of a new Dark Age.”

The article attracted a bit of attention. The ubiquitous tocsin Sean Hannity mentioned it on both his radio and cable shows. A man named Mitt Romney shook my hand in the lobby of the National Press Club and said he had read it too. And three years later, I have to say there are large parts of it I would not change.

But I did err. I both overstated some parts of my conclusions, and understated the even more critical forces that make the years ahead so problematic, uncertain, and ominous.

I was correct in arguing that the real proximate cause of our ongoing economic malaise was rooted in the “new certainty…that the era of cheap resources is over. The plentiful and extremely profitable supplies of everything—petroleum, metals, minerals, water, yes, and even air—have been exhausted.”

While the economy did plunge into a decline in growth in the last October-December period, I cannot congratulate myself about my prescience. The 3.2 percent contraction probably had more to do with the Three Stooges pie fight among the White House (Mo), the Senate Democrats (Larry), and the House Republicans (Curly) over the fiscal cliff threat overhanging us all. Still, while the economic patient manages a few shuddering breaths of life and then lapses back, we are still way too far from the Great Recovery that our current president promised us.

I observed the last presidential election campaign with increasing alarm. Mr. Obama’s open shift away from historical coalitions of the middle class in favor of old machine-politics bribe-’em-and-herd-’em “hot button” issue groups scared me and does still. Yet when my lonely eyes turned to Mr. Romney, I found a hologram of an alternative; a man repeating old nostrums that had become increasingly disconnected during the last three decades of a changing world.

I wondered what was really going on. It was plain that the Keynesianism that had morphed into ludicrous Krugmanite spend-and-be-damned stimulus was wrong. But was it also true that Reaganomics—or Milton Friedman’s prescriptions—were equally unresponsive to reality?

I believe I found a key that unlocks the conundrum. I recently picked up a book written by the Canadian energy economist Jeff Rubin, titled The Big Flatline: Oil and the No-Growth Economy. I knew about Rubin. For 20 years he had been chief economist for the powerful CIBC World Markets investment bank and a respected prognosticator for the Toronto-Wall Street-London nexus.

But Rubin kicked over the traces in 2009 once the financial crisis was upon us in earnest. He left CIBC and published Why Your World Is About to Get a Whole Lot Smaller. Now he has refined his worrisome conclusion with more recent data that make his early forecasts even more troubling.

Rubin challenges the pervasive myth that a return to growth is an inevitable consequence of one side or other winning the current policy wrangling. His argument boils down to the assertion that when careerist economists, the politicians they serve, and the journalists who (out of idle ignorance) feed off them, argue about which nostrum—free markets versus more government intrusion—will return us to the halcyon days of euphoric prosperity, they are both wrong.

We are not entering, as I suggested, a “New Dark Age,” which would, after all, be dramatic enough to spark some radical economic-social experimenting either in free markets or a new New Deal. Instead Rubin sees us mired in a world where most national economies essentially flatline, along with a bump of recovery here and there. But overall the global environment will be of lassitude, constraints, increasing inequalities of outcome, and dangerous increases in popular unrest on an international scale.

In short, a Gray Age of multiple shades of diminished expectations, shifting relative advantages, and dangerously unexpected crises where war comes to be a palliative response by the world’s leadership elite.

OIL, AS IT WAS THREE YEARS AGO, remains the linchpin factor in the industrial world’s economic future. And, as Rubin emphasizes, it is not the supply of burnable petroleum-based fuels that matters so much as the cost of its transfer into usable energy—in a word, the price:

Just how unique is oil? Oil can be stored. It doesn’t spoil. It can be easily moved through pipelines, trucks or tankers. It’s found all over the world. It’s used to make pop bottles and to power fighter jets. Most critically, it packs an unparalleled amount of energy into a tiny package. Given the same volume, oil contains more energy than natural gas and roughly twice as much as coal.

The price of oil is the single most important ingredient in the outlook for the global economy. Feed the world cheap oil and it will run like a charm. Send prices to unaffordable levels and the engine of growth will immediately seize up.

 From a historical perspective, Rubin’s argument is unassailable. From 1948 through 1970 world crude oil prices remained at or below three dollars a barrel. The exuberance that extended American power abroad and promised an endless menu of social “entitlements” at home was subsidized by the addictive rush the economy got from cheap oil. Even import-dependent Europe used the cheap oil subsidy to create its socialist paradises.

Simple arithmetic should be enough to convince one that at the current $90-plus price, or at the $120 price widely forecast by 2015, or at the near $150 price likely a decade hence, that economic subsidy of cheap oil has vanished.

While the new rush toward fracturing of tar sands will release huge supplies of convertible oil and natural gas, it’s ultimately an economic stopgap solution that raises as many future problems as it solves. No one is sure just what the per-barrel cost of “fracking” oil will turn out to be; the costs of each project vary wildly, from the easy oil coming out of the Bakken deposits to the vastly more expensive projects in the Ohio Valley. And that does not consider the unforeseen environmental costs of drilling itself or the inevitable waste management. But one thing is certain: “fracking” oil will not be cheap. Nor will drilling ever deeper into the offshore deposits bring us another boom in cheap energy.

This will require extremely delicate policy responses from our political leaders. Yet when one surveys the current crews lined up on either side of the ideological divide, a sense of despair ensues. We have a president content to both curtail our development of admittedly expensive domestic hydrocarbon resources, while gaily pouring billions of dollars into “alternative” energy sources which, when realistically costed out, cannot produce a foreseeable energy boost greater than the energy expended by their development.

As I observed three years ago, when one reaches the point in a coal mine that the cost of raising a ton of coal to the surface exceeds the energy the ton of coal will produce, some painful choices must be made. Closing the mine has its own costs, but keeping it in operation (to save jobs or for other political considerations) requires that a portion of the true price that must be paid come from some other part of the economy.

This is where “fracking” could be used as a dodge by both sets of Washington ideologues to avoid making the hard choices that confront us in the New Gray Age. I am not calling out just the “hot button” entitlement issues involving taxpayer-funded pensions or health care. Our whole lifestyle of entitlements, which includes universal college education, universal home ownership, and pervasive consumer gluttony, is now open to question. Personal issues involving marriage, the family structure, and work are all up for reexamination.

THE BIGGEST UNDENIABLE THREAT to our future is the wasteful mountain of debts that governments (ours and others) run up under the guise of stimulating a return to a prosperous era that is long gone for good.

Devotees of smaller government will find much in Rubin’s analysis to cheer. Noting that the government spending accounts for about one-fifth of GDP in North America, Rubin predicts, “Whether that’s too big or too small to suit your ideological preferences, governments in Europe and North America are facing a diminishing capacity to spend money.”

But Rubin also cautions that turning many suspect government services over to the private sector may not be such a good idea either. The sad reality of the impending sequestration mandate is that the easiest government responsibilities to cut—foreign affairs, national defense, domestic infrastructure for transportation, the electrical grid, or education—will be decimated while the social-improvement lobbies prevail. Do we really want Wall Street Unchained?

I tend to agree with Rubin’s final argument: “We can still shape the future we want, but only if we’re willing to relinquish the past we’ve known. As the boundaries of a finite world continue to close in on us, our challenge is to learn that making do with less is better than always wanting more.”

I strongly urge you to buy your own copy of this book, read it, and think about Rubin’s arguments. And then look at the current power elites now in charge and ask yourself whether you want any of them—on either side—to be making the hard choices that must be made from now on.

We can do better, I say. We must.