Can globalization survive $200-barrel oil?

“The world’s not running out of oil and probably never will.”

So began renowned Canadian economist Jeff Rubin in a keynote address at Transportation & Logistics 2030, a forum hosted by PricewaterhouseCoopers (PWC) in early March in Toronto, Ontario.

“What we have run out of is the oil you can afford to burn.”

This, he argued, is because extraction methods used to source oil for gas, diesel and jet fuels are becoming increasingly expensive—the Alberta tar sands are just one example.

Furthermore, as Organization of the Petroleum Exporting Countries (OPEC) nations like Saudi Arabia and Iran steadily increase domestic consumption, the rest of the world will have to look to other sources. “Chances are we won’t get supply from OPEC, and chances are where we do get it from, it won’t be cheap,” Rubin predicted.

For these reasons, he believes fuel prices will inevitably rise, and quickly—he anticipates the price of a barrel of oil could reach $200 within a year.

At the same time, he thinks there will be a price placed on carbon emissions and tariffs imposed on carbon generated elsewhere.

These factors, he said, will challenge the entire notion of an interconnected international economy.

The global supply chain model used by many companies in efforts to capitalize on cheaper wages overseas “implicitly assumes that moving product around the world…can be moved around at trivial or marginal costs,” he said. “What made sense in organizing our economy at $20 a barrel doesn’t make sense at $150 to $200 a barrel.

“In a world where distance costs money, I believe we will change our economic modus operandi.”

How will things change? Rubin predicts more local production, driven mainly by the high cost of transportation. He used the example of perishable food, which requires refrigerated transportation, which consumes particularly high volumes of fuel. In a $200-barrel world, the cost of imported fruit, for example, would be too high for most consumers to bear, and as such, there would be increased demand for local farm production.

In his view, companies may find that a shift to more localized economies may be beneficial to both the environment and the bottom line. Ultimately, he said, industry may find that "a little small world may be better than a big oily world.”

Research findings

Immediately following Rubin’s bold predictions, representatives of PwC riffed on his theme by presenting highlights from a recent global survey about how energy scarcity will affect the transportation and logistics industry in the next 20 years.

The survey revealed insight into the issue across several areas—not all of which matched what Rubin had to say.

For instance, the survey found that while oil price volatility will be a risk for the industry, prices are unlikely to rise in the order of magnitude needed to trigger major changes in behaviour. Similarly, panellists foresee no reversal of globalization.

According to the survey, reducing emissions will be a greater challenge to transportation and logistics companies over the next two decades than obtaining a sufficient supply of energy.

“Energy conservation will be critical, but I think it will happen at the micro level faster than at the macro level,” explained Gerry Brown, an associate partner with PwC.

Survey participants did say they expect to see growth in the renewable energy sector, as alternative energy starts to fill the gap caused by diminishing oil reserves.

Respondents also found that larger means of transport—such as large ocean vessels and longer and heavier vehicles (LHVs)—will become more prevalent as a means to offset rising transportation costs.

The survey participants also agreed that supply chains will continue to become more efficient through the development of continuous real-time control of the flow of goods—but this will not be enough to create supply chains that are resistant to external shocks.

The survey gathered expert consensus using a version of the Delphi technique. Participants were polled from 20 countries around the world.