Goldilocks is dead

Categories: Big picture
Published on: March 26, 2015

Resilience / Richard Heinberg / 25 March 2015

goldilocksFor 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.