THE REALITY: High prices make it possible to extract oil from unspoiled or environmentally sensitive areas.
Conventional wisdom says that high oil prices can reduce oil consumption and thus reduce pollution both at the source and from the tailpipe. In this scenario, high oil prices would increase gasoline prices, which would in turn reduce miles traveled and/or inspire a transition to smaller, more fuel-efficient vehicles.
The price of gasoline has almost doubled since 2004. Since transportation accounted for 70% of U.S. oil use in 2008, we should have seen a very significant decline in oil consumption. Instead, global consumption has increased, despite a U.S. decrease of about 8%. In particular, the demand for gasoline decreased 8.5%. Amidst a period of stagnant growth and a lingering recession, such a rapid price increase should have resulted in a much larger drop in demand.
On the other hand, price signal has a significant influence over the extracting industry. Higher oil prices not only generate higher profits, but also increase the economic viability of extracting oil from unconventional oil sources such as tar sands. The following graph charts the growth in oil production from the Alberta Tar Sands in Canada, in conjunction with the increasing price of oil in recent years:
The signal of higher oil prices also enables oil production in more remote and technically challenging areas. These areas may be more environmentally sensitive and can introduce greater risk in extraction. For example, deep sea drilling is increasing along with oil prices, while the greater technical complexity of deep sea drilling increases the possibility of future disasters like the Deepwater Horizon spill in 2010.
In summary, higher oil prices changes driving behavior only at the margins, while significantly increasing production from both environmentally sensitive areas and environmentally intensive extracting technologies.