More Localization Ahead?
Conventional thinking over what caused the worst recession in modern memory was shattered here today during the Opening General Session of the CoreNet Global Summit in Las Vegas.
Economist and author Jeff Rubin’s assertion that the most recent oil price spike caused the global downturn turned some heads, especially within an industry group so impacted by the repercussions of subprime lending.
“CDO’s, CLO’s and CMBS were symptoms, not causes, of the recession,” Rubin insisted.
Corporate real estate (CRE) executives and their outsourced service partners – many of whom have staked their current business models on what CoreNet Global defined as the “globally networked enterprise,” had better realize that the future likelihood of even more extreme oil prices will result in more localization long term, according to Rubin.
It would mark a complete reversal of contemporary business modeling, in other words.
Price of Crude
The price of crude per barrel may have settled back into the $70 range for now, but there’s a key reason it will double again, or go yet higher than it did this past year, when it topped out at the $140 level, Rubin observed. “The depletion of conventional oil sources versus higher-priced sources of oil” is at the nexus of the impending threat – one that could take us beyond $140 per barrel.
Rubin went on to explain that lower-cost sources in places like west Texas are being replaced by higher-cost sources, especially in deep water and sand fields.
Layered on top of this key factor, Rubin continued, is the inevitable shift in oil consumption away from the industrialized or mature economies of the West. The developing world, including Latin America, China, India and even the Arab Emerites will soon consume more oil than the developed world.
Another driver will be the cost of transporting or shipping goods. Those costs will grow so considerably if oil prices spike again and again that it will force less exchange of raw materials and finished goods across global regions. “Distance costs money,” is how Rubin termed the situation, and it’s only going to get worse.
For example, China is realizing it can make more money by supplying its own considerable domestic growth base along with neighboring regions in Korea or Japan. So it will eventually stop shipping manufactured goods to the U.S. or Europe, just like the Chinese will one day step away from financing our deficit spending.
Conversely, the U.S. would realize the higher costs of shipping raw materials as exports to China, then importing finished products back into the West. The “only way” to prevent incursion of triple-digit oil prices is to move from a global to a local economic model,” Rubin concluded.
Return to Simpler Times?
In some respects, this would mark a revival of localized agriculture, or the return of the furniture industry to the U.S. But Rubin was quick to point out, it won’t be a “green” influence. It will be sheer economics. There will even be a migration back into the urban core, leading to higher property values in central cities once again but also resulting in property devaluation and the opening up of more land in suburban areas more distant from the employment bases of cities.
But the automotive industry will not be part of the solution, either, at least in North America. Yet it could force communities to one day reconsider transit, rail, street cars and other alternative ways of getting around.
Supply and demand principles are also part of the dynamic. Take labor arbitrage for example. Companies seek lower wage markets in more remote or developing areas of the world, but that practice will change as oil becomes so expensive that it offsets the advantage of arbitrage.
In the end, it could actually be “a smaller world could be more desirable than the bigger world we’re about to leave behind.”