The New York Times had a great piece today called “Insiders Sound an Alarm Amid a Natural Gas Rush,” which quotes from among hundreds of industry e-mails and insider documents suggesting that shale gas isn’t as easy or inexpensive to extract from the ground as claimed. Some of the e-mails compare the current shale-gas lovefest to a dot-com bubble destined to burst, or to a giant Ponzi scheme because the economics don’t work. I’m sure the economics do work on a certain percentage of wells, but when companies talk generally about the productivity of shale-gas wells or the size of their reserves are they exaggerating reality? Are they pumping up their stocks and duping investors? And if so, are we grossly overestimating the true contribution — environmental problems aside — shale gas can make to our energy future?

This reminds me of some comments Jeff Rubin made during a chat we had in December. Rubin, former chief economist at CIBC World Markets and author of Why Your World Is About to Get a Whole Lot Smaller, compared the current path of the shale-gas industry to what we saw with the sub-prime mortgage market. Here’s what he had to say, taken from a Q&A that ran in the Toronto Star:

The debate is about the real cost. If you exclude the natural gas liquids that come with most shale projects, is the real cost $4 per Mcf (1,000 cubic feet) or is it $8? If the real cost is $8 then a lot of people, like Chesapeake Energy, the biggest gas producer in the U.S., have a big problem. Is shale gas the sub-prime mortgage market of the natural gas market? Is this one giant con and investors are being conned into thinking there’s a huge supply of gas at $4 when it really costs $7 or $8 to bring it to market? In the fullness of time economics will assert itself, just as it did in the sub-prime mortgage market.

The question is, when will that time come?

Oil prices are at a two-year high, and a big part of this is surging demand from China. Platts reported this week that China’s oil demand surged to an all-time high in November and demand for the first 11 months of 2010 is up nearly 11 per cent over 2009. The Chinese government has even moved to raise the price of domestically refined oil to keep demand (and inflation) in check. Expect prices to rise into triple-digit territory in the first quarter of 2011, says economist-turned-writer Jeff Rubin, author of award-winning Why Your World Is About to Get a Whole Lot Smaller. He also believes that in 2011 we’ll surpass the $147-a-barrel mark that we reached in July 2008.

It has been about 18 months since Rubin’s book came out and since that time a lot has happened around the world, including the BP oil spill. I figured I’d get an update from the former chief economist of CIBC World Markets. My Q&A with him, which I had a chance to do last week, can be read here in the Toronto Star.

I found his thoughts on shale gas most intriguing: “Is shale gas the sub-prime mortgage market of the natural gas market? Is this one giant con and investors are being conned into thinking there’s a huge supply of gas at $4 when it really costs $7 or $8 to bring it to market? In the fullness of time economics will assert itself, just as it did in the sub-prime mortgage market.”

The International Energy Agency is getting a bit worried. It sees that low oil prices — or at least low compared to last summer — have led to under-investment in energy infrastructure, particularly exploration of oil and gas. It also knows that when the economy shifts into recovery mode demand will pick up fast and supply will be slow to respond. It predicts there will be a supply crunch by 2012, and of course that means oil prices will be rocketing back up.

This scenario, of course, may be understating the problem about to hit world economies, says former CIBC chief economist Jeff Rubin, whose new book Why Your World Is Going to Get a Whole Lot Smaller hit the market today. I’ve got a feature book review here, but in a nutshell Rubin believes conventional oil production has already peaked and unconventional production won’t be able to keep up with demand once global economies recover, and not just because of the incredible appetite the Chinese have for oil. Rubin argues that excessive consumption in the Middle East, massive local subsidies there for oil, and the use of oil-fired power plants to run energy-intensive desalination facilities will shrink the amount of oil supply that OPEC puts on the world market. Ultracheap cars to appear in India and likely to spread around the world, thanks to Tata Motors, will mean even more demand for oil products.

Oil prices are destined to once against skyrocket into triple-digit territory, and the impact will be inflation on everything, including our food and the fuel we use to drive our cars and heat/power our homes. In fact, gas prices will become so high that people will be forced to ditch their cars, housing prices in the suburbs will plunge, urban areas will grow more dense, and there will be a renaissance in local agriculture and urban farmers’ markets. The high cost of transporting goods from far-off markets will lead to the re-emergence of domestic manufacturing. High oil will override any labour-cost benefits that countries such as China can offer.

What Rubin is describing is essentially a deathblow to globalization and a return to regional economic trade, similar to what world trading patterns were like in the 1970s. (more…)