Economist Nouriel Roubini shored up his reputation as a prophet of doom and offered a lot to worry about in the global economy in an almost contrapuntal interview with financier and philanthropist Michael Milken.
The two economics celebrities packed a large room on the final day of the Milken Institute Global Conference in Beverly Hills on Wednesday, and formed an odd couple of an optimistic Milken, who heads the economic think tank hosting the conference, and pessimistic Roubini, who heads a namesake economic consultancy.
Roubini identified the Middle East as a key source of trouble for the global economy in the near term, citing a risk of military confrontation between Israel or the U.S. with Iran. In addition, he said “the entire Middle East is a mess,” and warned “the Arab Spring is going to become an Arab Winter.” The result of all this instability is a continuing rise in oil prices that is spiking on the basis of a “fear premium” more than supply-demand fundamentals.
Optimist Milken responded with statistics about the opportunities stemming from vast oil and gas shale deposits, nearly all of which lie outside of the Middle East in politically stable places like the U.S. and Canada. In what became a theme of the session, Roubini poured cold water on the shale trend, saying it will take a long time, perhaps 20 years, before shale-based resources come on line in sufficient quantity to alter an energy landscape dependent on Mideast-based oil.
Shale boosters are “too optimistic,” Roubini said, noting the supply has outpaced demand, leading to a collapse in the price of natural gas. Milken said the fact of South Koreans paying eight times as much for a gallon of gas as Americans was a “wake-up call” to the private sector. But Roubini countered that prices alone were insufficient to boost demand. “Do we give subsidies to convert [infrastructure]?” he asked, noting it costs $50,000 per truck to convert to a natural-gas run system and $20,000 for a car, and the costs of converting gas stations across the country are even more substantial.
The U.S. talks a lot about revamping energy policy but takes few concrete actions, Roubini said, noting all the talk following the 1973-74 Arab oil embargo through the present-day discussions amid the war against the Libyan leader Muammar Gaddafi.
Another key challenge to the global economy identified by Roubini is the troubled euro zone, where he said peripheral Europe suffered from “reform and austerity fatigue” at precisely the time the euro zone’s core suffers from “bailout fatigue.”
This divergence promotes instability, he said, and he predicted “things will get worse rather than better” over the next 18 months, with Greece, Portugal and possibly other countries exiting the euro.
“Let’s differentiate between countries and companies,” Milken (left) retorted, citing statistics about the piles of cash corporations are sitting on, including Banco Santander, whose assets exceed the GDP of its country of origin, Spain. Milken added that corporate cash balances were high enough for companies to finance their customers and suppliers without the need to turn to weak financial institutions.