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Tuesday, March 01, 2011 2:28 PM

Oil Prices are Double-Edged Sword; Peak Everything?

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Jeff Rubin, former Chief Economist at CIBC World Markets for twenty years, explains Soaring Oil Prices A Double-Edged Sword in the Middle East.

Why is the Arab world convulsing with social and political unrest when triple digit oil prices should be bringing enormous wealth to the region? The answer may be that the link between energy inputs and food prices suddenly makes soaring oil prices a double-edged sword in the world’s largest food importing region.

Egyptians are about to find out that it is a lot easier to eradicate your local dictator than feeding your population. The crush of poverty is felt under the weight of a population of 80 million people who live in a country where average annual rainfall is less than two inches and where only 3% of the land is arable. Aside from a narrow strip along the life-sustaining Nile River, Egypt is basically an inhospitable desert.

Yet the population of Egypt has tripled to 80 million today from 27 million in the early 1960s. While the birth rate for an average Egyptian woman has fallen from six children to just over three, it still fuels more than 2% annual growth in the population. At this pace, Egypt’s population will double to 160 million by 2050.

But the country is already importing 40% of its food supply and 60% of its grain. Even a brutally repressive regime like Hosni Mubarak’s still spent 7% of the country’s GDP on food and energy subsidies. Can a replacement regime afford to spend more?

Not likely, particularly when the country’s oil production peaked in 1996 and has subsequently declined by 30%. Oil exports are down 50% thanks to strong demand for its subsidized fuel.

The problem facing Arab countries today is higher oil prices feed directly into higher food prices. While oil may be massively subsidized in the Middle East, it’s not in major grain exporting countries such as Canada, Russia and Australia that Arab nations increasingly count on for their food supply.

From the diesel fuel that runs tractors and combines to the power needed to pump water through irrigation systems, modern agriculture is one of the most energy intensive industries. And the Middle East is the largest food importing region of the world. As the price of oil goes up, so does the price of food imports.

Egypt’s problems feeding runaway population growth is not unique to the region.. They are in evidence throughout the Middle East given the masses now out in the streets in Libya, Algeria, Yemen, Jordan and Bahrain demanding regime change. Could Saudi Arabia be next?

Population growth in the Middle East is rapidly outstripping the carrying capacity of the land. Democratic reform may be what is on the protestors’ lips but demographic reform is at the heart of the region’s problems.
Oil and the End of Globalization

Jeff Rubin left his position at CIBC World Markets to write a book and promote his ideas.

I have not yet read Why Your World Is About To Get A Whole Lot Smaller , so I cannot specifically endorse it.

However, I can say that understanding the implications of peak oil and booming population growth in the Mid-East, India, and Asia, in conjunction with aging demographics in the Western economies and Japan are crucial to understanding major investment themes and world economic growth assumptions.

I have long held the position that perpetual 7 -10% growth assumptions for China are impossible because of peak oil constraints.

Yet China bulls persist. They see the growth, but not the fraud or the malinvestment it takes for China to achieve those growth estimates.
I talked about fraud in China as well as unsustainable growth on a number of occasions.

Here are a few links.

Peak Everything?

My friend BC writes ...
If one wants to identify a single underlying causal factor for "Peak Everything" and the global intractable structural effects flowing from it, population overshoot is it. However, population growth is the last taboo subject no one dares discuss because, frankly, there is only one highly unpalatable solution.

Peak Oil is increasingly a hot topic of late (the point of mass-social recognition is nearing, or here). Yet, peak oil exports from oil-producing countries is the next milestone to await, as these countries now face exploding populations of hungry young men in need of employment from domestic investment and efforts to prevent per capita output from collapsing.

Net energy returns per capita are already collapsing for many or most of these countries at or near peak oil production, with the oil they produce needed to supply not only the US and EU but the runaway growth of demand in China-Asia and increasingly their own populations.

In Egypt, per capita oil production has collapsed nearly 50% since '96, and 33% since 2000. A similar situation occurred in the US, except it took 25 years in the US compared to Egypt's 14.

At the current trend, assuming no increasing rate of deceleration, by '16-'22 Egypt's per capita oil production will have fallen 60-70%, which puts the country on course for certain collapse.

What we are seeing today with the uprising and overthrow of the Egyptian government is just the first phase of a collapse that will likely be replicated throughout North Africa, the Mid-East, Central Asia, and eventually to parts of India, China, Indonesia, and elsewhere in the world where population overshoot is now extreme and net energy per capita is falling or collapsing.

A little known fact is that Mexico's oil production is down 25-30% from the peak in '03-'04, which is an average rate of decline of 5.4%/yr. and 6.5%/yr. per capita. This translates into a 33% per capita decline in oil production in just 6 years, a rate of decline that actually exceeds Egypt's per capita rate of decline of oil production.

This rate of decline of production has cut Mexico's exports roughly by 35% since the export peak. At the trend rate of oil production and domestic consumption, Mexico could become a net oil importer as soon as '15-'18. And Mexico is the second-largest supplier of imported oil to the US behind Canada.

Consider, then, where per capita oil production, net energy, and GDP are headed in Mexico, and what it implies for countries of Central and parts of South America, as well as potential increasing immigration to the US from Mexico.

This is grim information to ponder, which should be no surprise why few want to address it.
Those are sobering thoughts indeed. History suggests massive conflicts if the above analysis is anywhere close to being correct.

Mike "Mish" Shedlock
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