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…)