High oil prices and low oil prices are both bad for the environment—here's why

It’s not all that long ago that the world was freaking out about the high price of oil, and especially about the way that high oil prices were harming the environment.

And it’s true—high oil prices are bad for the planet. When oil gets expensive, unconventional oil starts becoming economically attractive – and unconventional is often code for “dirty”. Without oil prices at $100 a barrel, for instance, we probably wouldn’t have spent billions of dollars trying to turn the tar sands of Canada and Venezuela into gasoline for our cars. Neither would we be trying to extract oil from shale in the western U.S. These projects pollute the environment, emit carbon, and enrich the owners of hydrocarbons at the expense of everybody else.

On the other hand, cheap oil is also bad for the planet. Economics 101 tells us that the cheaper something gets, the more of it we’ll use, and oil is no exception. So as oil gets cheaper and cheaper, the amount being burned and pumped into the atmosphere, in the form of CO2, only goes up. If you want to cause pollution and global warming, there’s really no better way to do that than to get all of the big oil states to start competing with each other to see who can pump the most oil – even Iran.

So which is worse?

High oil prices encourage new investment in renewable energy and in energy-saving technologies; they’re also associated with smaller, more fuel-efficient cars. At the same time, of course, they’re also associated with calls to “drill, baby, drill”, and with record profits for companies like ExxonMobil.

Meanwhile, low oil prices cause things like this:

What you’re looking at here is a very simple chart, showing the sheer number of miles traveled on U.S. roads over the previous 12 months. During the recession, and when prices were high, Americans didn’t drive as much as they used to, but as soon as oil prices started falling, we hit the road in record numbers, racking up total mileage figures never seen before. And that’s just the immediate effect. If oil prices stay low for an extended period, energy consumption is going to end up substantially higher than it would have been otherwise.

Energy-industry expert Charles Komanoff has run the numbers. Last year, he says, the increase in CO2 emissions thanks to lower oil prices was equivalent to nine new coal-fired power stations. And if oil prices remain at these levels until 2026, we’ll consume 13% more gasoline than we would otherwise have done, which is the equivalent of the CO2 output from 36 coal-fired power stations.

So, which alternative would Komanoff choose? If he was given the god-like ability to set any oil price he liked, for the good of the planet, where would he set it? “If I were summoned down the mountain and given that power,” he says, “I would just turn around and hike back up the mountain.”

The real trick, if you’re trying to save the planet, is not to simply move the price of oil up or down, but rather to create a divergence between the price that consumers pay, on the one hand, and the price that producers receive, on the other.

Here’s the crucial insight: high oil prices are bad for the environment because of how producers respond to those incentives. They cause oil companies to spend more money drilling for more oil, in more and more damaging ways. Meanwhile, low oil prices are bad for the environment because of how consumers respond to those incentives. They cause normal Americans to drive more, to drive bigger cars and trucks, and generally to care less about saving energy.

So in order to save the environment, what we need is the combination of high prices for consumers (which will make them consume less), along with low prices for producers (which will make them produce less). The combination is also great for anybody in the business of renewable energy, because high energy prices from burning hydrocarbons mean that it makes a lot of sense to get your energy cheaper from wind, or solar, instead.

How can oil prices be both high and low at the same time? Easy: A carbon tax. President Obama has recently proposed a $10-a-barrel “fee” which would be added to the price of oil and which would be used to invest in infrastructure; it’s like a mini carbon tax, and it’s a great place to start. Carbon taxes increase the price of oil for consumers, but they don’t pass the money on to producers; instead the benefits go to the government, which can use them to make the country’s infrastructure as a whole more efficient.

So let’s cheer low oil prices – in terms of the amount of money that ExxonMobil and other oil prices receive for their goods. But let’s also hope that oil prices for consumers go up. No less than the fate of the planet depends on it.