The Gulf Crisis–Beyond Petroleum–A Game Changer?

“US Offshore Drilling is a Good Thing” A few weeks ago, shortly after President Obama announced an expansion of offshore drilling rights, that was the working title of a post I was contemplating for this blog. The premise was that it would take many years before we weaned ourselves from our use of oil, and production of additional domestic oil and gas  would have some impact on overall prices, increase natural gas usage (reduce CO2 emissions), reduce our dependence on foreign energy sources and have a positive impact on our trade balances. While I was fiddling around with this post and enjoying some late season fishing in Argentina instead of writing, along came the  “Black Swan” Gulf disaster.

The disaster is ongoing as it will be for many years to come. Much has been written and will continue to be on the environmental, human, political and economic consequences of this Inevitable Accident, which is the way it should be referred to.  I have my own somewhat disconnected observations, which I will share. trying to see what, if any, good may come out of an event that some are calling a “game changer.” I expect disagreement and dialogue and hope we get some. I hope none of what I have to say approaches the idiocy of one of our Senators who is willing ro repeat again and again that the Gulf incident is not an environmental disaster. Let’s get to some of the observations.

This disaster was inevitable—the Inevitable Accident.  In the continuing search for and production of carbon-based energy sources we keep stepping up the risk, whether that is in a coal mine in Virginia or China, a shale deposit in Pennsylvania, a tanker on the ocean, a LNG terminal or deep wells offshore  anywhere.  The technology becomes more complex, the measure of risk more difficult, and the cost of mitigating risk too high at today’s prices for carbon to be fully recognized and absorbed.  Maybe this disaster was a good thing. I hesitate to say that because of the loss of life and livelihood for those directly impacted. However, the response to it may prevent other similar or worse disasters. Although, most likely, it will simply delay the next more devastating disaster as the risk-taking outpaces the rule-making in the effort to meet the insatiable demand for energy worldwide.  One example of risk-taking outpacing rule-making is the talk of raising the liability cap from $75 million to $10 Billion.  Odds are this “incident” should cost BP well north of $30 Billion. In today’s dollars Exxon-Valdez cost Exxon about $10 Billion. If a major oil company sees its financial risk as “only” $10 Billion, there are lots of risks one can take that have an expected value substantially higher than that.

Whatever the US does in terms of limiting off-shore or on-shore drilling or raising the cost via rules and regulations, it will likely have limited impact on drilling elsewhere. In fact costs may be lower elsewhere as the supply of rigs available rises. Brazil has some heavy duty drilling ahead of it. Its costs will go down. Whatever steps are taken will also likely benefit the bigger companies relative to smaller participants. OPEC must be jumping for joy as well.

I still wonder why we didn’t bring to bear immediately the best engineering and scientific minds in this country, or the world for that matter, to get in front of this disaster. The attitude seemed to be one of “this is BP’s problem.” There was much more time spent on establishing who was at fault than responding to the problem. Certainly, it made it more difficult for BP to shift responsibility technically and financially. But, this had the makings from the beginning of a potential major human and ecological disaster if things did not go well. When a casual suggestion late in the process from our Secretary of Energy provides a solution to a specific problem (gamma rays to analyze the stuck valve) one can just imagine what might have been in a much more organized effort to bring brainpower to the problem. It doesn’t give one much confidence that our response to the next disaster will be any better.

Maybe this increases the odds of further action by the US on climate change legislation and an increase in incentives for alternative energy sources. There are powerful forces opposed to that with several senators as their mouthpieces, but, maybe this is a game changer. I don’t yet see the outrage though. A few people boycotting buying fuel at a BP service station, which only hurts the owners of the station—not BP—but not much more directed anger. A lot of “isn’t it too bad,” as people drive their gasoline guzzlers to and fro, but no real outrage. Why aren’t consumers demanding that the auto companies (the US government in some instances) substantially increase mileage standards and come up with alternative fuel systems?  The boycott should be against new car purchases unless the mpg rating is at least at China’s standard, 35 miles per gallon on its way to 55 or 60 mpg. As I have pointed out before, once we get the fleet to that level we stop buying oil from other countries except Canada and Mexico—and at some point that should end as well.

One could go on with other observations, but the above are some major ones.  The level of outrage needs to rise nationwide, not just in the areas affected, as does the level of responsive and responsible action. Let’s not waste this crisis.  Let’s not wait for the next Inevitable Accident.

This entry was posted in Oil and tagged , , , , by Jack Rivkin. Bookmark the permalink.

About Jack Rivkin

Jack Rivkin retired in 2008 as EVP, CIO, Head of Private Asset Management of Neuberger Berman(NB) and from NB's Executive Management Committee. He was also on the Lehman(LB) Council on Climate Change(CC) and the NB CC Fund Advisory Board. He has been engaged with the United Nations and other entities on policy issues related to Private Capital and CC. He is an Associate Fellow of the Asia Society. He has continued on the NB Mutual Fund Board and with his CC responsibilities. He began his investment career in 68 as an analyst at Mitchell Hutchins(MH), and became Director of Research(DOR) there. After Paine Webber(PW) acquired MH, he served as DOR; CFO of PW; CEO of PWMH-the equity trading and investment arm of PW; Chmn of MH Asset Management and President of PW Capital. 87-92 he was DOR and, subsequently, Head of the Worldwide Equities Division of LB. 93-95, he served as a Vice Chairman and DOR at Smith Barney (now Citigroup). He was an EVP with Citigroup Investments 94-01, responsible for private equity investments. He was also an adjunct professor at Columbia University teaching a course in Security Analysis. He joined NB in 2002. He is the co-author of “Risk & Reward—Venture Capital and the Making of America’s Great Industries,” Random House, 1987. He is a regular guest on various media. He is the principal subject in a series of Harvard Business School cases describing his experience as DOR and Equity Head at LB. He has served as a director of a number of private companies and the NYSSA. He is currently a director of Idealab, Dale Carnegie, Operative, World Policy Institute and other private companies. He is a member of the Economic Club of NY, the Anglers Club, Theodore Gordon Fly Fishers, and a lifetime member of Trout Unlimited. He continues to be an active private equity investor when he isn’t fly fishing. Mr. Rivkin earned his Professional Engineering degree from the Colorado School of Mines and his MBA from the Harvard Business School

One thought on “The Gulf Crisis–Beyond Petroleum–A Game Changer?

  1. Jack….excellent blog.

    Your statement:

    “I still wonder why we didn’t bring to bear immediately the best engineering and scientific minds in this country, or the world for that matter, to get in front of this disaster. The attitude seemed to be one of “this is BP’s problem.” There was much more time spent on establishing who was at fault than responding to the problem”

    is so true…..I have been using this as a teaching example for the last couple weeks. Triage and problem solving are skill sets that we all need to better hone…

    Inevitable Accident…..yes…..with unbelievably tragic consequences.

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