Oil, Innovation and Risk

I was very impressed by Kenneth Rogoff's essay today in various papers about the larger implications of the BP disaster in the Gulf of Mexico. He had the foresight to question Brazil's ability to handle its oil reserves safely. This includes both the known and obtainable reserves and the now famous "pre-sal" (i.e., even deeper and harder to obtain) reserves that President Lula is touting as one of the great successes of his administration.

The economics of the pre-sal oil aside, can Petrobras and its drilling contractor partners really handle the technological problems and risks that are involved in bringing this oil to market. We know that Petrobras is currently undercapitalized - because it is in the market seeking new capitalization. One of the lessons of the BP experience is that attempts to manage risky assets such as deepwater oil without sufficient capital to fund controls systems and pay for their monitoring courts disaster.  Can Petrobras really assuage public concern about these risks? As Rogoff puts it in his article, "Will Brazil really risk its spectacular coastline, now that everyone has been reminded of what can happen?"

The other point that Rogoff emphasizes is regulation of the manner in which the technological innovations are applied to obtain the resources. Clearly in the case of BP, the Minerals Management Service of the US Department of Energy was not managing in any way that would suggest that it understood the risks involved with the technology nor with BP's management of the Deepwater Horizon platform.

I also find Rogoff's linkage of the BP disaster with the regulatory and financial technological meltdown that enabled the current economic recession compelling. Both disasters involved applications of poorly understood, highly risky new technologies (drilling technology and well shut down procedures in one and new financial instruments in the other) and lack of sufficient government regulation to protect society as a whole.

This article is very much worth reading.