Small World Thesis: An idea gaining traction.

Posted on 10 August 2009

This short article is the first we’ve seen in the general media of a trend that was highlighted by Jeff Rubin in his book, ”Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization.”

His thesis: the era of cheap oil (light, low sulfur, conventionally extracted) is over.  Depletion rates are accelerating, replacement rates are not keeping up. What is being found is not crude oil but natural gas.  The marginal barrel of oil is high cost: tar sands, heavy, deep water, shale, etc.  The stage is set for oil to return to triple-digit levels that will make many global supply chains uncompetitive, shifting the advantage to regional supply chains with less transportation costs.

As an example, over the longer term, we would expect Mexico will displace China in many supply chains as a supplier to US-based operations because it is closer.  The FT’s Richard Milne focuses on the European business beat, but we think his observations apply globally, particularly when you consider how cheap energy was the real reason the Chinese labor arbitrage made economic sense.

Rubin enhanced his reputation significantly with an early call on recent rise in oil prices.  We expect to see more stories of the “Smaller World” idea finding their way into the press.