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Business
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Why BP was unprepared for the big spill T
by James Ledbetter
he continued gushing of oil into the Gulf of Mexico raises wide- spread questions about how badly prepared BP was from an environmental perspective. But what about from a cor- porate perspective? Multinational giants like BP spend large amounts of money to map out scenarios and, presumably, pre- pare for them. Why didn’t BP’s risk mod- els account for a crisis of this proportion, and doesn’t that represent a colossal management failure? We asked Ian Bremmer to explain. He heads the Eurasia Group, a firm that spe- cializes in measuring risk (BP is not a Eurasia Group client), and wrote “The End of the Free Market: Who Wins the War Between States and Corporations?”
TBM: How does a huge, experienced multinational company find itself in a situation like this?
The Big Money is a financial news and analysis Web site from the Slate Group.
Bremmer: First of all, we’ve found in a number of cases, whether it’s BP or fi- nancial firms, you get the best and the brightest, the smartest and the most highly compensated people in these posi- tions in the private sector. The folks left to do the regulation and the oversight are poorly paid, not as up-to-speed, and the most talented can’t be kept there.
And they often get run circles around, despite the fact that they are the guys who are supposed to understand ex- ternalities and look after the public weal. I think we found, in terms of the [collat- eralized-debt obligation] crisis, as well as with BP’s utter lack of preparedness . . . two manifestations of exactly the same thing. The second thing I would say is that
. . . unregulated private sector actors have a problem. They are thinking about maximizing profits short-term, at the risk of maximizing profits long-term. Es- pecially in the context of an economic downturn, there’s a massive amount of pressure to make your numbers this quarter. Not just for BP, but for every subcontractor that was in that chain. In that environment, you are as weak as your weakest, most financially pres- sured, most short-term-in-orientation link.
TBM: This is precisely the parallel
that I see to the financial market melt- down. We’ve had meltdowns before, and we’ve had oil spills before, yet they don’t seem to take that into ac- count. How is it that a company like BP doesn’t build this worst-case scenario into its risk assessment? Or is it the case that it is in their risk assessment and this is how it plays out? Bremmer: No, I think it isn’t. If you
look at the responses from [BP chief ex- ecutive Tony] Hayward and the BP brass in the days and weeks afterward, they clearly thought that this was much more benign. They’re talking about how big the ocean is, how limited the damage is going to be. That implies that their worst-case scenarios absolutely did not take into consideration how dangerous a long-term spill from the bottom of the ocean could be.
TBM: The New York Times reported
that BP had presented to regulators a worst-case scenario of spilling 250,000 barrels a day. They weren’t re- quired by regulators to have a plan for that, and they clearly didn’t. Bremmer: The fact that they gave that plan to regulators does not mean they believe that’s what the worst-case sce- nario was. Unless you think Hayward is a ruthless and inexplicably stupid liar . . .
TBM: Let’s assume that’s not the case.
Bremmer: Then, clearly, their internal models did not build this in as a realistic possibility.
TBM: I am still struggling to under-
stand how a company gets by with a model that is so flawed. In the case of Wall Street, they build models with a positive feedback loop that makes the worst scenarios seem less and less likely. The black swans get pushed out to the sides. Oil drilling doesn’t seem to work like that. You have to build these accidents in, because they hap- pen pretty often.
Bremmer: But the same thing is hap- pening here. As the technology increas- es, and you’re constantly pushing for- ward into a realm that you haven’t ex- perienced before, you tend to spend the most time on what gives you the most bang for your buck. The people who are involved in risk management for these firms are cost centers. And there are peo- ple trying to get investment banking deals done. They’re trying to find ways to mollify these folks and sometimes get around them. And that’s just the way that the corporate structures work — a reason why you need regulatory over- sight. It sounds to me like climate change.
How could we get our models wrong from 25 years ago, from 10 years ago, even from five years ago — how could we miss so many of these feedback loops? It’s because we’ve never done this before. This is the first time we’ve ever heated our climate like this.
TBM: I accept the analogy as far as it goes, but climate change is a tragedy of the commons, right? Everybody will suffer because it’s no one’s responsi- bility; no one person or firm is ac- countable. With corporations, you have, presumably, structures of ac- countability. I can’t understand why BP shareholders aren’t outraged by this. Bremmer: I think they’re outraged,
but they also don’t want to be seen as pil- ing on at this point, because it’s their in-
vestment. They’re probably more morti- fied than outraged. Right now, they’re sticking with Hayward because they have to.
TBM: Let’s put this in the context of
your current book. You talk about the tug of war between state power and corporate power. Does a disaster like this change that balance at all? Bremmer: To be very specific about the oil: When you’re talking about non- OPEC production, you’re talking about Canadian oil sands, Brazilian offshore and American offshore. Those are the big places, and all of those have massive reg- ulatory importance. The U.S. govern- ment is going to respond to this, and it’s going to be limiting to a great degree the kind of drilling that can occur, how long it takes, how many steps you have to go through. Watch very carefully what the Brazilians do, too, with offshore drilling. On the one hand, you have Petrobras say- ing, “We want to have more control of these fields.” It’s quite possible that be- cause they don’t have the same level of technical expertise, ironically, they will be bringing in more private-sector exper- tise.
But there’s also going to be a state re-
action. Whenever you have under-reg- ulation and you have a big crisis, the pen- dulum always swings in the other direc- tion. That is happening in the financial field, and it’s going to happen in this field as well. So we’re going to see lots and lots of regulation. Where aren’t you going to see lots and lots of regulation? Of course, in the authoritarian states, in the places where states can go ahead and do what they want.
TBM: The usual rap on state versus
private oil companies is that the pri- vate firms have many more incentives to act ethically and environmentally responsibly than do the state-run com- panies. Should the BP spill cause us to rethink that? Bremmer: It’s not clear to me that we should think that an unregulated, pri- vate-sector actor acts any more ethically than a state actor. In fact, in many ways they might act less ethically, depending
THE COLOR OF MONEY Beware of scam artists trying to capitalize on oil spill color from G1
the OTC Bulletin Board or Pink OTC Markets, formerly known as Pink Sheets. Both are electronic quotation systems that provide pricing and finan- cial information for stocks sold over the counter. In the case of the BP spill, a firm may falsely claim it has a new technology to stop the spill or has a contract to help with the cleanup. Gullible investors then buy the stock,
creating demand and driving up the price. Gannon said when the promoters think the stock has hit its peak, they sell off their shares. Once the promot- ers stop hyping the stock, demand goes down — along with the price. The pro- moters win. Naive investors lose. In May, the SEC temporarily sus- pended trading in shares of ACT Clean Technologies, of Huntington Beach, Calif. The commission questioned the accuracy of information the company disseminated connecting itself to BP’s cleanup efforts.
Gannon said regulators are investi-
gating other companies that may be re- leasing bogus information related to the spill. The pump-and-dump scam continues to work because unwary investors are quick to believe that they’ve found the next big stock hit, Gannon said. “It gets down to the fact that people
are easily swayed by phantom riches or the ability of quick wealth,” he said. And it’s not just investors who may
fall victim. The oil spill’s impact on wildlife and the gulf economy may spark an upsurge in charitable dona-
CHARLIE RIEDEL/ASSOCIATED PRESS
A helpless bird is coated in oil on the beach at East Grand Terre Island along the Louisiana coast. Don’t get yourself mired in oil-related investing scams.
tions. Schemers know this and will try to take advantage of people’s generosi- ty.
The Better Business Bureau’s Wise Giving Alliance has also warned people to be careful before they give.
“As a charity monitoring organiza- tion, we have seen time and time again that contributors often make hasty do- nation decisions in the wake of a disas- ter and don’t take the time to find out specifically what a charity is doing,” said Bennett Weiner, chief operating of- ficer of the Wise Giving Alliance. “For example, everyone is moved by the pic- tures of tar balls on the beach and oil- drenched wildlife, but not all of the so- liciting charities are or will be involved with hands-on cleanup activities.” If you’re suspicious about an invest- ment offer or you suspect a company’s claims may be misleading, contact the SEC Office of Investor Education and Advocacy. You can also contact FINRA’s Investor Complaint Center. Whether you are an investor or char- itable contributor, please do some re- search. A few Internet searches or calls can save you a lot of money and keep you from falling victim to a slick opera- tor.
singletarym@washpost.com
Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.
Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer’s name, unless a specific request to do otherwise is indicated.
SUNDAY, JUNE 13, 2010 EZRA KLEIN
Why the price at the pump is actually a bargain
klein from G1
cost the region’s tourism industry. But that cost won’t be paid by the people who wanted that oil for their cars. It’ll fall on taxpayers, on Gulf Coast resi- dents who need new jobs, on the poi- soned wildlife on the seafloor. That means the gasoline you’re buy-
HANDOUT VIA REUTERS The massive oil spill in the Gulf of Mexico prompts the question: How did BP, a multinational corporation, find itself here?
on the nature of the state. I don’t see the last 20 years as a failure of the free mar- ket, and I don’t see BP as a failure of the free market. I see it is an utter failure [stemming from] a lack of regulation, a failure of the state not playing the role it’s supposed to play. I’m not a libertarian. I don’t believe
that the state should stay out of our lives. I fear that a lot of the responses to my book have been: “Obama is a socialist. He’s bringing back the state. We’re going to be like France.” Is France so horrible? Europe and the United States are func- tionally the same thing, from an eco- nomic model. I worry that what people don’t seem to understand is that over the last 20 to 30 years, the United States just ignored, abdicated a lot of its responsi- bilities. And so did local governments, so did state governments. One of the big vil- lains in this story is Alan Greenspan. And he sort of admitted it, but way too late and way too quietly. Where was he when Hank Paulson needed the help? He was nowhere. He was someone I would have wanted to see all over the airwaves, because he is a brilliant guy, and he could have said mea culpa. He’s been ab- sent, and I think that is his shame, frank- ly.
TBM: You open your book talking about how state capitalist countries used the failure of Western markets in 2008 as a rationale for arguing the su- periority of their own systems. Do you see the BP spill being spun the same way by state-capitalist oil firms? Bremmer: Not as much, simply be- cause the last two years have given them more than enough already. I think for the United States, the BP spill is a really big deal. For Europe, except for BP in London, the much bigger deal is the real- istic potential failure of the most impor- tant, and heretofore successful, experi- ment of the free market system ever. If you’re China, if you’re Russia, you’re looking at that.
— The Big Money
James Ledbetter is editor of The Big Money and of “The Great Depression: A Diary,” published recently by Public Affairs.
ing at the pump is — stick with me here — too cheap. The price you pay is less than the product’s true cost. A lot less, actually. And it’s not just cata- strophic spills and dramatic disrup- tions in the Middle East that add to the price. Gasoline has so many hid- den costs that there’s a cottage indus- try devoted to tallying them up. At least the ones that can be tallied up. Topping that list is air pollution, which we breathe in whether or not we drive. Then there’s climate change, which is difficult to slap a price tag on because it involves such esoteric cal- culations as how much your grand- child’s climate is worth. There’s traffic congestion and accidents, which harm drivers and non-drivers alike. There’s the cost of basing our trans- portation economy on a resource that undergoes wild price swings. Some of the best work on this sub-
ject has been done by Ian Parry, a sen- ior fellow at Resources for the Future. His calculations — plus some data from other sources and studies — sug- gest that adding all the quantifiable costs into the price of oil would in- crease the cost of each gallon by about $1.65. According to the Energy Infor- mation Administration, the average price of a gallon of gas was $2.72 last week. It should really be as high as $4.37. That, however, is almost certainly an underestimation. There are plenty of costs that we just don’t know how to put a price on. How much of our military policy is dictated by our need for secure oil resources? How much instability is created by our need to treat oil-producing monarchies such as Saudi Arabia with kid gloves? How much is the environment worth in a poor country that would prefer oil in- vestment to air-quality regulations? Or take the spill in the gulf. What’s the economic value of a whale? Of a pelican? Of plankton? The nation’s been horrified by the photographs of oil-soaked wildlife, but how much is not being horrified actually worth to us? And is not knowing about the problem enough to solve it? One rea- son we’re drilling wells far offshore and in countries with poor safety and environmental records is that we don’t want oil companies mucking about in the shallow waters near our homes, or on public lands such as the Alaska National Wildlife Reserve. But as Maureen Cropper, an environmen- tal economist at the University of Maryland, notes, importing oil means exporting the damage associated with drilling for oil. When trying to put a price on that damage, do we think it varies by country? Is Kenya’s environ- ment worth less than our own? For all the complexity of calculating the true cost of gasoline, however, it’s unclear that it matters as much as some might think. When I started re- searching this column, my working assumption was that a world in which gasoline’s total costs were represented at the pump would be a world in which our consumption of gasoline was radically different. But almost all of the experts I spoke to said that wasn’t true. In part, that’s because years of regulations and innovations have made us much more efficient at finding, extracting, refining and using oil. If an energy source as dirty as coal had to pay its true cost, we’d pretty much stop using it. Disasters aside, that’s not the case with oil. Oil might be cheap compared with its true costs, but adding those costs in wouldn’t necessarily make it unaffordable. Our behavior might change at the margin, but we’d still be an oil-thirsty society. That gets to the bigger issue, which
is that energy sources are cheap or ex- pensive only in relation to one an- other. And the heaviest anchor be- neath our reliance on oil is that, at this point, there’s nothing to replace it with. “We’re pretty much stuck with our dependency on oil,” Parry says. “We don’t have any substitutes. Even if we hugely increase the price on oil, we’d only have limited impact on it. People need to drive and get to work.” That’s not to say there’d be no ben-
efit to forcing gasoline to pay its full freight. Increasing the cost of oil could make other energy sources cheaper in comparison, and if the mechanism were a tax that would fund development of alternatives, that would hasten our transition. But it is the speed with which we can discover and refine those alternatives, more than the price of oil, that will decide our energy future. The question, in other words, isn’t just what a gallon of gas costs. It’s what a gallon of anything that can re- place gas costs. Maybe that’s what we should start asking politicians.
kleine@washpost.com
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