Whatever Happened to $200 Oil?

Posted by Jeff Rubin on May 23rd, 2012 under SmallerWorldTags: , ,  • 22 Comments

Four years ago, when I was still chief economist at CIBC World Markets, I forecast that global economic growth was on pace to send oil prices to $200 a barrel by 2012. In short, the argument was based on a supply-driven analysis that weighed the sources of future oil supply against the prices that would be needed to make the extraction and processing of that oil economically viable.

Since that call (which clearly hasn’t come to pass) received some attention at the time, it feels fitting to spend a few words discussing what happened to derail the projection. That particular analysis, unfortunately, didn’t adequately address the stifling impact that rising oil prices would have on economic growth. At the time, a constrained outlook for global production growth against a backdrop of runaway demand meant prices had nowhere to go but up. As subsequent events would dramatically demonstrate, though, triple-digit prices had a much more critical affect on demand than supply.

By the time oil reached $147 a barrel, the economic drag was more than sufficient to trigger a chain reaction of events—including spurring higher interest rates which pricked the US sub-prime mortgage bubble—that ushered in the deepest global recession of the post-war era. Instead of marching towards $200 a barrel, oil prices abruptly reversed course and plunged all the way to $40 a barrel.

The return of low prices was taken, by some, as proof that oil will continue to be as cheap and abundant as ever. As a quick return to the triple-digit range for oil prices indicates, however, that’s clearly not the case. My call for $200 oil was designed to underscore the massive cost of supplying the world with more than 90 million barrels a day. Then, as now, I stand by the analysis. Pumping out ever more barrels will require ever-higher prices. Just look at what happened when oil prices plunged. In Alberta’s tar patch alone some $50 billion in spending was either cancelled or postponed. The story was much the same offshore Brazil and in Venezuela’s heavy oil belt, a pair of locales that will play a vital role in meeting the world’s future oil needs.

If a mea culpa is in order, its roots can be found in the decision to underplay the demand side of the equation. Oil prices plunged to $40 a barrel after economic growth collapsed, taking global oil demand along for the ride. And that same movie is about to play out again. Recessions are already rolling across Europe. Economic growth in North America is lackluster, at best. Meanwhile, the specter of sovereign debt defaults in the euro zone continues to hang over global financial markets. Added up, it spells another sharp drop for oil prices not because fuel is abundant, but because once again the world can’t afford to stay out of a recession.

What happened to my forecast for $200 oil? Quite simply, the end of growth.

  • justanotherguy

    That tends to happen when committing to a hard number. But your reasoning was (and still is) rock solid imo.

  • RigPigPetey

    oil will drop to $70 – $90 barrel and maintain for a 3 – 5 year run on that, economies will sputter and idle along while gaining traction. our differential spread will close.

    the oil production we base our economic models on has flipped over with the new horizontal fraccing technology. those books that teach / forecast economics based on the old model are currently being re-written due to our technological advances in our production increase form the same wellbore concept

    wells we drilled in the (conceptually here) past produced 100 barrels a day for a year ( remember I’m trying to use simple math) and went into steady decline

    NOW,…wells we drill can hit 3000 barrels a day for a year while being choked back and then go into steady decline and then average out,………

    My point is,…..we have become efficient”er”,.. with better technology. The world is not running out of oil, we are getting better at getting it out. Methods,………..well consider the cost of any success, there is always a price.

    And another thing,…based on our our older technology, we typically figured that we were able to extract about maybe about 10% of “oil in place”. With the new fraccing technology estimates we “think” we are able to get about 20-30% of “oil in place”. More reservoir studies that are producing with the new technology are required to understand that number at this time,……..

    Question is, what will our kids figure out that we missed? Things never stay the same, except for the fact that our world runs on oil, that,.. i totally agree with you Jeff.

    Hopefully those kids get it right, we’ve gotten them this far,………

  • Jean

    Your other prediction as to a “world getting a whole lot smaller” is happening as pointed out in a GaveKal research published today

    Recent reports have pointed to manufacturing jobs
    “trickling back home” to OECD countries, from washing machine production in the
    American rust belt to the ramp-up of niche textile mills in bombed-out northern
    English towns. This makes a certain sense in jobs-scarce economies, where wage
    demands have muted, and governments are often willing to throw in regulatory
    and tax incentives, thus narrowing the cost gap with offshore production

  • Instincts


    Congratulations and thank-you for being such a strong and influential spokesperson for what’s essentially both inevitable and necessary, which is to grill into people’s stubborn heads that continued infinite growth in economies is not necessary, sustainable, or possible in this ever increasingly constrained finite world.

    You touched on this somewhat in your first volume, but you drive this point home much more strongly in you newest volume and in your associated interviews/talks (e.g., CBC’s ‘As it Happens’).  Hopefully, several of us who agree with and have voiced our supporting views have helped to inspire and ‘fuel’ your efforts to keep these issues in the public spotlight.

    It would be a pleasure to someday meet and speak with you in person sometime.

  • TrueNorth960

    I thought an economist would get the facts right on Equalization (not perfectly on point here but you wove this in in your discussion on this point with Allan Gregg).  You said Ontario went from being the largest cheque writer to the biggest receiver.  But this is based on half a story, half the truth.  The cheque writing is done by provincial taxpayers.  On that point Ontario was the largest gross cheque writer and remains so: Ontario wrote and writes a $6 billion cheque to Equalization.  Earlier Ontario received nothing back, making it by far the largest network cheque writer…net $6 billion.   THIS year Ontario will receive about $3 billion back, for a net of $3 billion-more about than Alberta with less than $3 billion gross and net. 

  • http://twitter.com/TheVeganarchist dwdeclare

    nothing like a good recession to allow a fella to be able to breathe cleaner air again as people consume less oil.

    p.s. loved your last book and am looking forward to reading your new one.

  • David_Vancouver

    I attended your talk in North Vancouver last week. I wonder why the Hovensa refinery in the US Virgin Islands shut down earlier this year? It was a modern refinery designed to process heavy Venezuelan crude with interesting ownership: 50% Hess oil (USA) and 50% Venezuelan State Oil company. Actually, why are refineries being shut down on the East coast of North America?

  • Zack

    Just ordered both your books on Amazon.  The new one had to be ordered from a special shipper, so I had to pay more.  Look forward to reading them.  It’s the end of the world!

  • Dave

    With inflation running at about 2 percent a year (at a low) Jeff will be right eventually..as using base 100 dollar oil, inflation adjusted oil will be about $150 in 20 years and the price will have stayed the same in todays dollars..What Jeff seems to be missing is that world deman is HIGHER now than it was in 2008..but anything to sell a book or, is his degree a from a matchbook college

  • Instincts

    Wow! Check this out:


    Greece has gone from situation critical to situation hopeless.  Will they get yet another bailout to prolong the inevitable??

  • Todd

    Hi Jeff:
    Love your books.
    So if we’re talking end of growth is here to stay, and oil prices are low,
    the kind of lives we’re used to shouldn’t be too effected right.
    I mean more people out of jobs which sucks.
    But for those with work, same houses, food costs, oil costs, etc.
    Is this accurate or not at all?

  • Mac-holmes

    growth or not, as oil becomes more costly to recover, oil will hit $200 and more. we must keep in mind that our thinking is very very short range and this whole wonderful ride we’ve been on has only lasted (counting coal) about 150 years. in the past generation gas prices (at the pump) have risen nearly 4 fold. we are not showing the mental resilience required to shift proactively to a new economic regime

  • DaveinDundas

    Jeff’s conclusion that higher oil prices will prevent runaway climate change is misplaced. He refers to 450 parts per million of CO2 as the safe level and suggests we won’t exceed it because of oil at $100+ a barrel. Firstly, the safe level has been reassessed to 350 ppm and we have already exceeded that, currently around 395 ppm. Secondly, Jeff notes that the majority of US oil consumption is for transportation. Look to Europe, with much higher gasoline prices/taxes and see how much people still drive and fly. The love of personal freedom, not gas prices, will mean we will continue to consume gasoline even as the prices go up.

    Any of the published charts of CO2 increase in the atmosphere shows significant rises back in the days of 30 – 40 million barrels a day consumption; now we are at nearly 90M barrels a day.  The optimism that oil prices will fix climate change is a bad message; it removes everyone’s responsibility to do something about fossil fuel’s impact on the climate.

  • Instincts

     Low oil price?  Well, perhaps relative to the $150 – $200/barrel that some thought we’d be at in NA by now.  But look at how the ratio of what fuel at the pumps compared to world oil prices is now compared to even only a few years ago in 2008, has widened.  Prices at the pump, by the barrel are only at what they are right now because that’s all the global market can bear; Big Oil has widened the gap between these as much as the global economy can bear.  If Big Oil could push those prices higher, they most certainly would.  People aren’t spending near what they used to even a few years ago, because even the modest increase in energy and food we’ve seen in the past little while has pinched the vast majority of consumers wallets such that most have been forced to reduce discretionary spending in various ways.  But that’s not such a bad thing.

    So yes, a lot of people are still able to get by, but there are a lot of things out there that do and will continue to cost society a heck of a lot to maintain the lifestyles we have enjoyed.  All that public infrastructure has to continue to be maintained/improved, and the money to do that has to come from somewhere.  Our governments have largely come to the end of being able to ‘pull rabbits from their hats’ in that regard.  So any inflationary pulse in global economy that might come from some corner of the globe (i.e. China, etc.) that might put higher demand on energy and food resources, will have rippling effects elsewhere, especially in economically mature or devoloped nations like ours where there is little room for growth.  Just look at what a default/exiting of the Euro in Greece would do to an already depressed global economy.

    Regardless, the key limiting factors here are 1) finite resources that ‘fuel’ the global economy, and 2) global human population and associated economies that draws on such resources.  Environmental and economic sustainability are NOT mutually independent phenomena that a lot of capitalist minded people would otherwise think (or wish) these were.

    And this is precisely why we see the likes of people like Jeff Rubin, David Suzuki, and others coming to join forces to relay such messages to broader society, whether or not society wants to hear what they have to say.

    For now, a lot of us can continue to plug along at low- or mid- idle and continue to somewhat enjoy lifestyles that some have enjoyed in more developed economic societies.  But simple arithmatic (human population growth and depletion of finite resources) and physics (Earth is only so big and there is only so much non-renewable fossil resources available, and we can deposit only so much carbon into the atmosphere at accelerated rates until drastic effects occur) tells us that humanity as a whole cannot avoid the resulting physical, chemical, economic, and social ramifications that is already happening right now.  But again, that aint necessarily such a bad thing.

    As Mac-Holmes states above, we need to experience some wide-scale mental resilience and willpower to proactively shift to a sustainable economic regime that much more closely reflects a sustainable environment that nature so naturally and blindly would do anyway in the absence of the multitute of human derived stressors.  One way or another, it will mean that there will have to be fewer of us in order to achieve that. Either that, or find a ‘twin earth’ to spill over onto — and how likely is that to occur in time?

  • dave houston

    The spike to 150 that we say was a blow off spike and is usually only seen once every two or three decades. The world economies can not function on such a price hence my prediction that we won’t see prices that high for many years to come. That doesn’t mean oil can’t stay at relatively high levels but not 150

    and also

    Funny thing about these oil and commodity booms. Just when you think
    they will never end they do and the cycles tend to run in 10 to 15 year
    cycles which means this particular one, which started in 2001-2002 is
    getting a bit long in the tooth. Alberta should be preparing accordingly

  • Calvin


    I also attended the North Van talk.  Can you affirm at what price approximately oil sands refining becomes profitable?  I keep reading that it costs roughly $27/barrel to produce but if that is the case, why hasn’t it been ramping up far fast for far longer and why the postponement when prices dropped to $40/barrel after the sub-prime crash?  of course i also realize that $27 isn’t a real cost since compared to conventional crude, the externalized costs are MUCH greater, but for some reason I thought the cost was higher and prices really had to stay above 80 to make it economically viable.



  • Jim sarjeant

    Can I trade your first book for the new one?  Hoping the new one has more accurate predictions…Jim

  • gettafngrip

    2008 WAS peak oil. I have been saying that for some time. It is nice to hear from an expert for once. I believe that we are witnessing the decline now. Just the begining of the downward slope. Oil will continue to be the limiting factor of economic growth until practically everything grinds to screeching halt. I love how some still prefer sticking their  head in the proverbial tar sands assuming that we will somehow figure out how to outsmart a finite resource. Like we can just will it to happen. People do not realize the scale of the current human population. 7 Billion is a lot.

    For instance: Did you know that if you put every man woman and child head to toe we would reach to the moon something like 20 times! That is some visual! Do the math if think I am kidding. Our height would equal something like 5 million miles. That is a really long food line people!! Think about waiting in a 5 million mile line to get food 3 times a day.

    Here is another stat to consider which is probably more relevant. 

    Current Global Oil Production is around 95 Million Barrels/ Day.
    Aprox 20 gallons of gas/ barrel = 1.9 Billion gallons of gas/ day is available or less than 1/3 gal. per person/ per day. What can you do with 1/3 gal/day? Not much!! Mow the lawn is about all I can think. So say we somehow could miraculously double supply overnight that would still only be 2/3 gal/day/person. Wow! Big woop! You could mow your neighbors lawn too but you would both starve and have no plastic, medicine, etc.that day.
    I say the reason oil hasn’t gone to $200 is because the world economy couldn’t handle $200 just like it can’t handle $100. That WAS the catalyst behind the crash. The MSM will never say that though.Until about 2 weeks ago gas prices were already back up to $4.60 a gallon, oil was around $80. That is the same price as when oil was $145 in early 2008. So what gives? Perceived demand/shortage. I’m willing to bet that if by some miracle we somehow we do pull out of the recession we will see $150 oil and $8-10/gal. within 2 years which will send us right back down into a tail spin and maybe then people will finally wake up. Honestly though I don’t really see that happening. It will already be too late anyway. We are going to keep hitting the wall until everything stalls out everywhere and grinds to a halt for lack of profit. Greed is going to destroy us. We will suck the wells dry sooner than later if at all possible. There doesn’t seem to be any other option at the moment.

  • LMiller

    Whether at $200 or $40 a barrel, it is time we came to terms with the fact that oil is indeed a finite resource.  That means taking some difficult measures to curb our use, as well as to determining ways to more effectively tap into all available domestic oil & natural gas. The US should be leading the way with such innovation. I have noted that Halek Energy Partners, headquartered in north Texas by Jason Halek, is utilizing some groundbreaking techniques to recover more of this valuable resources than others in the industry ever dreamed possible.

  • bitterbaldguy

     if you accept that the resource is finite, it is a short sighted to invest what little capital we have at our disposal (ballooning gov’t debt) to develop new ways to extract a resource that has a serious decline in the EROEI.  not only does this make little economic sense long term, but the externalized impacts of horizontal drilling and fracking, tar sands mining etc to the environment dwarf any short term economic benefits.  currently we are willing to sacrifice everything that sustains us simply to keep energy costs ‘affordable’.  at 0.8 degrees C already gobbled up of our 2.0 degree C warming budget gobbled up, burning all available hydrocarbons for the sake of cheap energy is a death sentence, pure and simple.

  • http://www.OilsandsExpert.com/ Allan MacRae

    “Prediction is very difficult, especially if
    it’s about the future.”

    - Niels Bohr

    does $200 oil mean now? All the major global currencies have been printing
    money to buoy up their faltering economies.


    anyone predict that the USA would TRIPLE its monetary base, which happened quickly
    starting in late 2008?



    many predicted natural gas in North America would now be priced at less than 20%
    of the price of oil? I didn’t, and I bet Jeff didn’t either.


    cheap gas provides an enormous competitive advantage for North America to rebuild
    our manufacturing industry, provided we can stop our politicians (e.g. Obama,
    McGuinty) from tinkering with the energy business and foolishly driving up electricity
    costs to consumers and industry.


    There ARE a few successful predictions out there. Sallie Baliunas,
    Tim Patterson and I published an article in the PEGG in 2002, and here is what
    we predicted a decade ago:


    Our eight-point Summary* includes a number of predictions
    that have all materialized in those countries in Western Europe that have
    adopted the full measure of global warming mania. Canada was foolish enough to
    sign the Kyoto Protocol, but then wise enough to ignore it.



    Full article at



    Kyoto has many fatal flaws, any one of which should cause
    this treaty to be scrapped.


    1. Climate science does not support the theory of
    catastrophic human-made global warming – the alleged warming crisis does not


    2. Kyoto focuses primarily on reducing CO2, a relatively
    harmless gas, and does nothing to control real air pollution like NOx, SO2, and
    particulates, or serious pollutants in water and soil.


    3. Kyoto wastes enormous resources that are urgently needed
    to solve real environmental and social problems that exist today. For example,
    the money spent on Kyoto in one year would provide clean drinking water and
    sanitation for all the people of the developing world in perpetuity.


    4. Kyoto will destroy hundreds of thousands of jobs and
    damage the Canadian economy – the U.S., Canada’s biggest trading partner, will
    not ratify Kyoto, and developing countries are exempt.


    5. Kyoto will actually hurt the global environment – it will
    cause energy-intensive industries to move to exempted developing countries that
    do not control even the worst forms of pollution.


    6. Kyoto’s CO2 credit trading scheme punishes the most
    energy efficient countries and rewards the most wasteful. Due to the strange
    rules of Kyoto, Canada will pay the former Soviet Union billions of dollars per
    year for CO2 credits.


    7. Kyoto will be ineffective – even assuming the overstated
    pro-Kyoto science is correct, Kyoto will reduce projected warming
    insignificantly, and it would take as many as 40 such treaties to stop alleged
    global warming.


    8. The ultimate agenda of pro-Kyoto advocates is to
    eliminate fossil fuels, but this would result in a catastrophic shortfall in
    global energy supply – the wasteful, inefficient energy solutions proposed by
    Kyoto advocates simply cannot replace fossil fuels.


    [end of excerpt]





    In a separate article in the Calgary Herald, also published
    in 2002, I (we) predicted imminent global cooling, starting by 2020 to 2030.
    This prediction is still looking good, since there has been no net global
    warming for about a decade, and solar activity has crashed. If this cooling
    proves to be severe, humanity will be unprepared and starvation could result.
    This possibility concerns me.




    For those of you who are sympathetic to the environmental
    activist movement, please read the enviros candid views, in their own words, at http://www.green-agenda.com

  • UniverseWeAre

    Doubters will see this as another unrealized prediction. Those who think it through will understand that the prediction was unrealized in the scariest way possible.