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Page added on March 25, 2015

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Heinberg: Goldilocks Is Dead

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Five years ago I wrote an article for Reuters titled “Goldilocks and the Three Fuels.” In it, I discussed what I call the Goldilocks price zone for oil, natural gas, and coal, a zone in which prices are “just right”—high enough to reward producers but low enough to entice consumers. Ever since the start of the fossil fuel era, such a zone has existed. Sometimes price boundaries were transgressed on the upside, sometimes the downside, but it was always possible to revert to the zone.

But now, for oil, the Goldilocks zone has ceased to exist. This will have staggering consequences throughout the economy for the foreseeable future.
During the past dozen years, the Goldilocks zone for oil steadily migrated higher. As conventional crude reservoirs depleted and production rates leveled off, drillers had to spend proportionally more to develop the capacity to pump the next marginal barrel. Oil prices soared from $30 in 2003 to nearly $150 in 2008, collapsed during the economic crisis, then clawed their way back to roughly $100—a price that was maintained through mid-2014. But the economy did not do well with oil prices at elevated levels. Despite massive bailouts, stimulus spending, and low interest rates, the recovery following the 2008 crash was anemic.
However, at $100 a barrel, the oil price was high enough to incentivize fracking. Small, risk-friendly companies leased land and used expensive drilling techniques to free oil from rocks that geologists had previously described as too impermeable to bother with. This entailed a tenuous business model that required not only high oil prices but easy money as well, as low interest rates enabled producers to pile on enormous amounts of debt.
Oil production in the United States rose sharply as a result, and this eventually impacted prices. Since mid-2014, the oil price has declined by half, settling around the historic, inflation-adjusted mean price of $50 a barrel. Consumers are much happier than they were with oil at $100, but producers are wilting. The American petroleum industry has seen over 75,000 layoffs, the balance sheets of fracking companies are bleeding, and drilling rigs are being idled by the score.
For consumers, experience suggests the acceptable oil price zone is $40 to $60 in today’s dollars: higher than that, and goods and services (particularly transportation) become more expensive than current spending patterns can handle. For producers, the acceptable zone is more like $80 to $120: lower than that, and upstream investments make little sense, so production will inevitably stall and decline—eventually making consumers even less happy.
You will have noticed that there is no overlap. An oil price of $70 would not be high enough to give the industry a rebound of confidence sufficient to inspire another massive round of investment. Clearly, consumers would be happier with $70 oil than they were with $100 oil, but if $70 isn’t a high enough price to incentivize production growth, then it’s not really in the Goldilocks zone.
According to the narrative emanating from most mainstream energy economists, oil production rates will soon slow, prices will rebound, and everyone will be happy. That narrative misses the all-important news that Goldilocks is dead. There is no longer a price that everyone can live with. And that’s a recipe for price volatility.
For oil traders, price volatility may offer opportunities for profit. But for everyone else, it is treacherous. Price volatility only hints at the real extent of our peril: we have built an economic system overwhelmingly reliant on a nonrenewable, depleting resource. This is not a sustainable situation. Unless our dependency on oil somehow magically disappears, we are in for a wild ride on an unmapped road.

Heinberg



22 Comments on "Heinberg: Goldilocks Is Dead"

  1. lawfish1964 on Wed, 25th Mar 2015 9:29 am 

    This pretty much cements what Davy has been saying. There aren’t enough consumers who can pay for $70/barrel oil, so the price won’t get there, so production will decrease. Seems like that’s the perfect dynamic for peak oil.

  2. Kenz300 on Wed, 25th Mar 2015 10:06 am 

    Quote — “Price volatility only hints at the real extent of our peril: we have built an economic system overwhelmingly reliant on a nonrenewable, depleting resource. This is not a sustainable situation. Unless our dependency on oil somehow magically disappears, we are in for a wild ride on an unmapped road.”

    ———————–

    Diversify…diversify…diversify….

    It is time to speed up the transition away from fossil fuels. It will be better for the economy and the planet.

    Wind, solar, wave energy,geothermal and second generation biofuels made from algae, cellulose and waste are the renewable and sustainable future.

    Bring on the electric, flex-fuel and hybrid vehicles. It is time to end the oil monopoly on transportation fuels.

  3. Mark Ziegler on Wed, 25th Mar 2015 10:09 am 

    Bring on the rail road systems and close the automotive companies.
    viewcrafters

  4. Plantagenet on Wed, 25th Mar 2015 10:35 am 

    Heinberg is creating a “straw-man argument. There never was a “goldilocks zone” for oil prices—they’ve been volatile for decades. All that is happening now is that fracking has created an oil glut and an oil price collapse, just as past increases in oil supply have created oil gluts and price collapses.

  5. Kenz300 on Wed, 25th Mar 2015 10:39 am 

    Middle East Turns to Biofuels Amid Rocky Oil Prices and Environmental Awareness

    http://www.renewableenergyworld.com/rea/news/article/2015/03/middle-east-turns-to-biofuels-amid-rocky-oil-prices-and-environemtal-awareness

  6. rockman on Wed, 25th Mar 2015 10:50 am 

    I would have to agree with plant on this one as far as the straw man point goes. I would change some wording though: All that is happening now is that demand induced price increases created increased oil production and price induced demand destruction, just as in past, increases created oil gluts and price collapses.

    Likewise: “There aren’t enough consumers who can pay for $70/barrel oil, so the price won’t get there, so production will decrease.”. Just as in 1986 when prices fell to under $15/bbl because there weren’t enough consumers who could pay $25/bbl. Of course, prices did eventually get back to $25/bbl…and higher…much higher at times. Time will tell if prices get back to $70/bbl…or higher…or much higher.

  7. penury on Wed, 25th Mar 2015 10:56 am 

    All he is saying is what others have been saying for a few years. Deflation is affecting the entire economy. Real employment is not available. Wages are shrinking, People can no longer afford the things they used to. Industry is dying, the ability to afford energy is slowly shrinking, the world is reverting to a less energy dependent state. ” Price volatility only hints at the real extent of our peril: we have built an economic system overwhelmingly reliant on a nonrenewable, depleting resource. This is not a sustainable situation.”

  8. Perk Earl on Wed, 25th Mar 2015 11:11 am 

    Even if Heinberg’s consumer and producer price ranges are to some degree, his point is consumer affordability is dropping while cost of production is rising. We can only surmise from price of oil fluctuations as to what those exact ranges are, however, with oil being a finite resource subject to depletion, it makes every bit of sense (and I give Heinberg credit for pointing this out) that a goldilocks oil price range either has or will soon disappear.

    Heinberg above has consumer between 40-60. Short on his charts has the oil price max. at 76. So maybe he’s low on the upper end of that range, so let’s change the range to anything up to $76 a barrel.

    For oil producers of course it’s going to vary depending on their cost of production with fracking and other non-conventional higher than most conventional land based operations around the world. But to capture the marginal barrel let’s say the producer needs $70 or more.

    That turns out to be a range of 70P-76C (P for producer and C for consumer). That’s a very narrow goldilocks range and we would expect over time for that range to get smaller and then disappear.

    So whether you agree on the price ranges provided by Heinberg, mine or some other metric, we all get his point which is well made and is not a strawman argument.

  9. nubs on Wed, 25th Mar 2015 11:38 am 

    Planta notes that the price of oil was always volatile, which is true, but another simple truth is that the cost of extracting tight oil, measured in money or EROEI, is too high for this energy source to promote a rapid return to business as usual. It is not even 100% clear to me that with current techology the EROEI of tight oil is positive. Many folks here conclude that civilization will therefore collapse. This is possible, but by no means a certainty. By reducing the huge amount of energy wasted, adding new sources of energy (particularly for transporation), and redefining what BAU is, the gradual decline over the coming decades in the supply of liquid fossil fuels will be a storm that can be weathered, not the apocalypse that some folks here anticipate with fear or glee. We are now in a situation of extracting oil at a loss only because of a government monetary policy that allowed the betting of sereral hundred billion $US on a foolish gamble. It will take a year or so for this gamble to run its course, after which the price of oil will rise. The rise in the price of oil is critical for economic pressures to promote greater energy efficiency, the switch to other energy sources, and a redefinition of BAU.

  10. Plantagenet on Wed, 25th Mar 2015 12:27 pm 

    nuba notes that governmental monetary policy helped the tight shale oil biz operate, which is true, but another simple truth is that the amount that people can pay for oil depends on their income and their other expenses. There is no absolute rule controlling the maximum amount energy can cost before the economy collapses. Take health care for example—folks in the US spend 3-4x what people in the EU and other countries pay for healthcare but no one at this site is saying that will cause the end of BAU. Oil is the same—there is no rigid preset limit on what oil can cost when supplies are tight, just as there is no limit on low it can go when we are in an oil glut like now.

  11. jjhman on Wed, 25th Mar 2015 1:20 pm 

    I don’t know how anyone can say that there is so well defined a price range given the enormous amount of wasted oil sloshing around in western culture. Look at vehicle sales. Damn fools are out buying 4WD pickups and SUVs again at $45 oil. I suspect that if we have a prolonged period of $70 oil the fools will start buying smaller vehicles and the manufacturers will start making more economical ones. If $70 bankrupts half of the producers the other half will cling by their fingernails and some economics will be squeezed out of the business. Yet another balance will be struck.

    You can still classify me as a doomer but the resilience of BAU has truly astonished me so I am leery of predictions based on straight line extrapolations of what has happened in the past 2, 3 or 10 years.

    I suspect the end reality will look like we imagine the dying days of the Mayans. When the last family walks out of the last city, it will seem like a perfectly normal day to the family.

  12. Davy on Wed, 25th Mar 2015 1:35 pm 

    JJ, fools that buy any cars are fools me included. Why does it matter if a fools buys a pickup or a fool buys a more efficient vehicle? More efficient vehicles are not going to help much. People will just drive more and or spend the saving somewhere else. A large SUV is not that bad if full of people or things. It is better than a single occupancy Prius for example.

    At this point I don’t think it matters. Efficiency is not going to save us. Efficiency has hit diminishing returns in any case. The car culture has just a few short years left. Anyone buying or driving cars are fools in my book me included. Greens who drive are hypocrites. I am a tree hugger but I drive so I know I am a hypocrite. Driving is the most un-green thing most people can do

  13. GregT on Wed, 25th Mar 2015 1:54 pm 

    The inflation adjusted goldilocks range during non-recessionary periods for most of the last century, has been between 20 and 30 dollars a barrel. The current price of ~$50bbl is still too high to allow continued growth rates required by our financial and monetary systems. Growth continues to slow, debt levels continue to rise, and the central banks’ monetary policies have not resulted in a recovery from the global financial crisis.

    ~25$bbl oil is required for the continuation of BAU. There isn’t enough oil available at that price to meet the demands for growth by the world’s economies. We are now in a financial race to the bottom. Whichever large economy crashes first, will take the rest down with it.

    We are now in the new age of austerity. That austerity will continue to grow larger as time goes on.

  14. Davy on Wed, 25th Mar 2015 2:34 pm 

    Greg nailed it with a 5lbs hammer.

  15. shortonoil on Wed, 25th Mar 2015 3:22 pm 

    Heinberg is essentially correct. Average production costs are increasing as the price that the economy can pay of oil is decreasing. The two met in 2012. This can be seen in the second graph on this page:

    http://www.thehillsgroup.org/depletion2_022.htm

    The light blue dotted curve, Maximum affordable Price, and the blue production cost curve have now crossed. High production cost producers are now priced out of the market. This will only worsen as time progresses as all producers’ production cost increase, and consumer affordability continues to fall. Within a very few years only the lowest cost legacy producers will remain. Exactly were this will bottom out is difficult to say with certainty, we think it will likely be in the $20 to $30/ barrel range. It will depend on how fast, and how efficiently producers can cannibalize existing infrastructure. Needless to say, there will be insufficient E&D to replace depleting fields. Once existing low cost legacy fields are entirely depleted the oil age will be concluded.

    http://www.thehillsgroup.org

  16. shortonoil on Wed, 25th Mar 2015 3:37 pm 

    “~25$bbl oil is required for the continuation of BAU. There isn’t enough oil available at that price to meet the demands for growth by the world’s economies. We are now in a financial race to the bottom.”

    The petroleum industry now has $2.5 trillion in debt outstanding. There is not enough low cost oil remaining on the planet to pay off that debt. Default on that debt would undoubtedly collapse the already insolvent banking industry, and the CBs that back it. As I have concluded for many years, the world will run out of money before it runs out of oil. Where as a reasonably accurate estimate of world petroleum reserves is possible, and estimate for how long the financial system can be maintained is anyone’s guess.

  17. Apneaman on Wed, 25th Mar 2015 5:22 pm 

    Plant, your comparison to previous price collapses is not a fair one since none of the previous price collapses were due to debt fueled fracking and tar sands production. What is happening now has no comparison, because we have never been here.

  18. peakyeast on Wed, 25th Mar 2015 6:52 pm 

    I would say that the “machine” is stuttering which its likely to do if there is a small or no goldilocks zone.

    In earlier times (before 2000) the stutters were constructed from political issues.

    Today it seems its stuttering due to supply and economical issues.

  19. Makati1 on Wed, 25th Mar 2015 8:57 pm 

    EROEI…

    NET is the real number in any discussion, not gross.

    The NET income of the consumer determines what he can consume.

    The NET energy provided by any resource is the limit of it’s value.

    The NET income from production limits the options of the producer.

    All three of those are interlocked and decreasing. What does that say for the future of oil? Am I wrong?

  20. Aire on Wed, 25th Mar 2015 10:07 pm 

    It seems like most of us agree but a couple like plant and rockman who say this is normal activity. But with this “zone” or “range” gone, what is the breaking point. What exactly pops the bubble and stops the bubble machine from making anymore?? (Besides the laws of nature and physics of course) I mean what will the powers say it is?

  21. Aire on Wed, 25th Mar 2015 10:17 pm 

    And I have said before we have 3 or more ticking time bombs — overloaded population, nuclear upkeep requiring major energy, and climate runaway disasters. I thinks the loss of this goldilocks zone is the beginning of not being able to defuse these bombs

  22. Davy on Thu, 26th Mar 2015 8:06 am 

    Air, good point and a point that really matters now. If you are bought into peak oil dynamics in its many forms then one sees a systematic disequilibrium in the economy and oil sector in the making. We have been clearly on a bumpy plateau since 05 with conventional oil growth stagnating. The increases in oil C&C production has been the unconventional higher priced variety. This has clearly been the primary force in causing the bumpy plateau.

    When I say bumpy plateau I am saying this in a POD context. When we say dynamics we are saying oil dwells within an economy. The economy has oil as its foundational commodity. The oil sector is naturally a business within a global economy. Both operate in a codependent relationship. Hence the bumpy plateau with oil and the economy. We have seen C&C growth but this growth has occurred within an economy that has gone through a financial crisis. The resulting economic responses by TPTB was the employment of debt and repressed interest rate and by extension the promotion of a bubbles.

    These bubbles were in the markets at the expense of the real economy. One such bubble was the shale sector in the US with high priced production driven by cheap and plentiful capex. We have seen high priced oil since the oil price and market recovery since 09. This can be seen as a bumpy plateau because oil production rebounded with higher price unconventionals but the real economy never recovered to healthy normal growth. That is a disequilibrium of the oil and economy dynamics.

    What recovered after 09 was a distorted market economy with financial stimuluses’ for the markets and mal-investments from monitarization and repressed rates globally especially in China and the US. What I am saying is the real economy of most of the global economy is limping along from the trickle down of an orgy of digital financial activity at the top. The reality of this top down financial activity is wealth transfer and financial cannibalization of the real economy of the many for the profit of the few. This process has also seen an orgy of market manipulation, industrial/political corruption, disregard for rule of law, and outright theft. This is clearly a bumpy plateau and not healthy growth within a free market of price discovery with sound fundamentals.

    This all change recently within the last year when limits of growth to this monitarization and repression. Diminishing returns set in and market distortions threatened to open a Pandora ’s Box of financial ills if continued. We still have not seen rates normalize. This appears to be unachievable for the Fed. The Fed is in effect naked at a time when economies across the global system are cutting rates further stressing the dollar relationships in the global FX markets.

    This my friends may be the beginning of the bumpy descent of the economy down along with oil production. The real economy cannot afford the higher priced oil of recent years conventional crude is stuck in stagnation. The tickle down of the tops monitarization is drying up with the end of effective QE monitarization and the diminishing returns of rate repression. The markets are holding the digital economy in place barely but the real economy is not growing and with that the oil sector is not getting the goldilocks price they need.

    A bumpy descent will likely be a messy affair with a cycle down of oil production and economic activity i.e. demand and supply destruction volatility. This is showing every sign of being in place now. We are due for a business cycle decline in the markets at the top stressing what little economic activity is growing in the real economy. Once this descent happens at the top that is likely all she wrote for BAU. BAU has had the bumpy descent long enough to damage the real economy and once oil and the digital economy shrink that is “Katy bar the doors” that is all she wrote friends for growth of all kinds real and faux.

    BAU can’t descend and maintain energy intensity and complexity needed to battle entropic decay of the overshoot of consumption and population. Growth must happen and real economic growth for BAU’s continuation. We are likely at the end of growth at all levels. This may appear a continuation of a bumpy plateau but the ingredients for descent are present. It will take a few quarters to see this clearly just like a final PO point may take some quarters to determine.

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