The newish Terminal 1 at Toronto's Pearson International Airport - light, bright, and cavernous in size - is a monument to the power of debt and to grand visions of the future. Five years ago, when phase one of the $3.6-billion facility received its first passengers on an Air Canada flight from Vancouver, its promoters rhapsodized about how wonderful it was, then turned their attention to the next step of their expansion scheme. Pearson, they boldly predicted, would need to be big enough to handle 50 million people a year by 2020. (It's at 32 million today.)
Forget it, Jeff Rubin says. Stop building and stop worrying about a wave of travellers that will never come. Long before 2020, we'll see airlines shutting down, Boeings being mothballed, airports closing. The gleaming glass palace of Terminal 1 is a "mausoleum to the past age of energy," he says. It would be a nice place to play a floor hockey game, though, and if Mr. Rubin's forecast comes true, will certainly be empty enough for one.
Commercial air travel, like many other industries, is lubricated by cheap oil. Mr. Rubin, the former chief economist of CIBC World Markets, has now bet his career on a single idea - that the cheap oil era is dead and globalization is about to wither along with it. But the most fascinating part of his thesis has nothing to do with geology or Hubbert's peak oil theory. It's about the reindustrialization of North America. Those unemployed airline workers could be looking for work - and finding it - in the revitalized factories of Southern Ontario.
This, for some, could be expensive energy's upside. It will render foreign manufacturers (read: China) less competitive. We saw a glimpse of this as oil climbed to its peak of nearly $150 (U.S.) a barrel last year. Shipping costs rose so much that North American steel plants began to claw back the advantage over Asian exporters. They were increasing their production, until the U.S. economy imploded.
At $150 or $200 oil, the same shift happens in other manufacturing sectors, Mr. Rubin says. That's especially true if the United States, under President Obama, is able to add a price cost to carbon emissions, because so much of China's industrial production is driven by cheap-and-dirty electricity.
"Believe me, the big loser is not going to be Canadian oil sands," Mr. Rubin says. "It's going to be Chinese steel and manufactured exports that are being powered by coal plants. Because that's not going to be on." It's the old-fashioned trade tariff, but wrapped in green. "For once, all of a sudden, saving the environment is bringing jobs home, not sending them away."
Somewhere, the head of the steel workers' union is smiling. But then, so is David Suzuki. "The whole idea of Archie Bunker getting into bed with Al Gore is a whole new political paradigm for us than in the past," Mr. Rubin says. "And while, yes, you could say this is protectionist … all I'm saying is there is absolutely no point to the U.S. or Canada and anybody else in the OECD taking any measures to reduce their own emissions if the Chinas of the world are free to emit at will."
So the U.S. is going to force Chinese exporters to clean up? Really? Mr. Rubin believes it. "They're going to be raising the bar [on carbon costs]for their trading partners, whether their trading partners want to or not."
Maybe. But nothing's free. It will come at a heavy price for the United States (and, by extension, for Canada). For many years, the driving force of the global economy has been a tacit bargain between the world's largest economy and Asia's most dynamic one. It's a trade - American factory jobs for Chinese money. The U.S. provides a ready market for cheap Chinese goods and (mostly) keeps a lid on gripes about the way China manages its currency and despoils its environment to sustain growth. China, in turn, helps finance America's bulging deficits.
"They take that risk because they believed that their economic growth rates were all about Wal-Mart," Mr. Rubin says. "That's not true any more." In his mind, the Chimerica pact will come apart, eventually. China will focus more attention on trading with Asia and developing its own internal market - so its need to keep the yuan artificially low compared to the U.S. dollar will also diminish.
Thus the Chinese will be less interested in financing America's debt, and U.S. interest rates will have to rise to attract investors to replace that money, Mr. Rubin says. They might have to rise a whole lot. Any business that relies on cheap financing would take a huge hit. ("There will be no recovery in auto sales. You're looking at a market of 7 to 8 million auto sales [annually]") Double-digit mortgage rates seem far from impossible. "This is an inflationary world coming on so many different fronts," Mr. Rubin says.
No wonder CIBC wasn't keen on his book. What he's describing, on balance, is a poorer world, though a greener one. That's not an easy message for an investment bank to sell. But it happens to be what Jeff Rubin is staking his reputation on.