Really smart piece by David Leonhardt in the Times:
n retrospect, the pattern seems clear. Years before the Deepwater Horizon rig blew, BP was developing a reputation as an oil company that took safety risks to save money. An explosion at a Texas refinery killed 15 workers in 2005, and federal regulators and a panel led by James A. Baker III, the former secretary of state, said that cost cutting was partly to blame. The next year, a corroded pipeline in Alaska poured oil into Prudhoe Bay. None other than Joe Barton, a Republican congressman from Texas and a global-warming skeptic, upbraided BP managers for their “seeming indifference to safety and environmental issues.”
Much of this indifference stemmed from an obsession with profits, come what may. But there also appears to have been another factor, one more universally human, at work. The people running BP did a dreadful job of estimating the true chances of events that seemed unlikely — and may even have been unlikely — but that would bring enormous costs.
***Similarly, Ben Bernanke and Alan Greenspan liked to argue, not so long ago, that the national real estate market was not in a bubble because it had never been in one before. Wall Street traders took the same view and built mathematical models that did not allow for the possibility that house prices would decline. And many home buyers signed up for unaffordable mortgages, believing they could refinance or sell the house once its price rose. That’s what house prices did, it seemed.
Read the whole thing.
SiubhanDuinne
Just mentioned (O/T) in the previous thread that AG Holder has announced the US is opening a criminal probe into the gulf oil spill.
MTiffany
If the Supreme Court, in their infinite and infallible wisdom in Citizens United, has decided that corporations are real people, then does it not necessarily follow that corporations can be subjected to capital punishment if found guilty of the appropriate criminal acts?
ChrisS
…and everyone just knew that we would be greeted by Iraqis as liberators, with flowers and candy tossed at our feet. We would install a new gem of democracy in the midst of a middle east rebirth. We would do so with a new way of thinking about war, efficiently and with minimal cost, and root out a massive stockpile of WMD.
Why is it that DFHs have been right about so much in the last couple of decades?
licensed to kill time
It’s amazing how willfully blind people can be when there is a lot of money to be made.
Ok, not so amazing.
ChrisS
@SiubhanDuinne:
Pointless.
Until America has a frank talk with itself about fossil fuel dependence and the true cost associated with it, it’s all just political theater.
but I’m green now!
El Cid
Maybe BP could help that nice West Virginia guy run his mines without all them unions or safety regoolayshuns.
Rick Taylor
This is a systemic problem with unregulated capitalism. Businesses have incentives to take risks that yield large profits, and that involve risks that are infrequent but have catastrophic downsides. Human nature being what it is, businesses will risk more and more seeing the huge immediate profits while discounting the risks. If one farsighted business refuses to play the game, they’ll make lower profits and investors will abandon them for those that do. When the catastrophe comes, we all pick up the bill.
geg6
I have a friend who is a consultant who often works with the petroleum industry (among others). Specifically, he has worked for BP on consulting jobs in Siberia, the North Sea, and the Gulf of Mexico.
Now I can’t imagine that regulations or regulators are any stricter in Russia than in the US (though I certainly believe that they are in the UK). But he told me once that he was appalled by how bad the working conditions, equipment, and safety measures were on the rigs in the Gulf compared to those off Siberia and in the North Sea. I laughed him off at the time (probably about 7 or 8 years ago). I’m not laughing now.
Apsalar
My brother is a geologist for Exxon, and he told me the same thing. He said BP really has this reputation for letting middle management cut corners, and that any geologist or technical person on that rig would have known that the blowout preventer was fundamentally broken. He’s kind of wingnutty and even he admits that the moratorium on off-shore drilling is necessary (although he does wish someone other than the government could be in charge of clean-up, but when pressed he couldn’t come up with who that should be).
He also said that this whole thing is kind of crazy bad luck as well, since it was an exploratory well, and wells are drilled all the time with around a 10% expectation of finding a good reservoir. I guess this was one of the “good” ones.
Sly
@MTiffany:
As corporate charters are considered contracts under law, than it is at least possible that they can be subject to “capital punishment”. Revoking a corporate charter effectively kills that corporation. The most recent example that I can recall was when NY AG Dennis Vacco got the charters revoked for the Tobacco Institute and Council for Tobacco Research back in 1998.
The issue is due process. This is not something that can legally be done through the legislature, because it would essentially amount to a bill of attainder, but through the order of a court with jurisdiction.
robert green
i’ve said it elsewhere, but i will say it here as well: “worst case scenario” is synonymous with “thing that sometimes happens”.
until this simple syllogism gets through the thick skulls of the assholes who run everything, we are hopelessly fucked. it applies just as well to military heuristics as it does to finance schemes as it does to wells being drilled, but it is ALWAYS FUCKING TRUE. and never fucking accounted for.
Whitney
My father is in the oil business and he said that it was commonly known that BP is a fucked up company (his words, and he doesn’t cuss much). When I asked “how so?” he echoed what others are saying: they are frighteningly obsessed with profits and had just been lucky up until this point because people in the business were predicting BP was going to have a major catastrophe one of these days. And you know when people in the oil industry are freaked out by another company’s lust for profits it must have been really bad.
asiangrrlMN
It’s depressing to read articles such as this one because as much as we (American society, not the BJ commentariat) cry out, “Hoocoodanode?” after each disaster, and as much as we (again, American society on whole) declare that It Will Never Happen Again (whatever It may be), we don’t really want to make the changes necessary to decrease the likelihood of another banking collapse, oil spill, etc. The only liquid in my glass today is spilled oil, and it tastes horrible.
Alex S.
Nobody could have predicted….
Those mathematical models are nice and they have their value – unless they are used to downplay the probability of truly catastrophic events. There are things that simply must not happen, like the housing crash, that almost took the world economy down with it. It’s not enough to have a 0,5% probability (or something like that) because the consequences would be so bad that they simply wouldn’t justify the little amount of extra wealth that could be created by a few more risky investments.
A systematic crash of the economy has to be prohibited, either by strong regulations, laws like the derivatives ban, or more profound systematic rules like Glass-Steagal – even though it’s unlikely, the whole systematic collapse must not be a possibility, it’s just not worth it.
Similarly, if there is a chance of an oil spill so dramatic that it destroys several industries of several states probably for decades, and there is no way to contain the spill with current technology, it simply isn’t worth it. Benefit and danger are out of proportion.
Bill Murray
@Alex S.: “Those mathematical models are nice and they have their value – unless they are used to downplay the probability of truly catastrophic events. ”
But you just cut out at least half their value right there.
Ecks
There’s a difference between underestimating the cost of an unlikely event, and a moral hazard which is where you know what the cost is but you don’t care anyway because you won’t be the one to pay it.
In this situation we have both. Companies, especially publicly traded ones, get rewarded for profit now, so they tend to develop myopia and stop looking far enough ahead (like a guy who’s got away with drunk driving for a few years they see only the past string of success, and even recalling the times they swerved to avoid something only proves to them they have excellent swerving skills to bail out of problems with). But the oil companies may also have been handed a get-out-of-jail free card with that cap on liability. If you know the car is a rental you may as well drive like a heck, because it becomes someone else’s problem after it is wrapped around a lamp post.
Ryan
Seconding what some of the commenters have already said, there are multiple people in the oil industry that claim BP has a cavalier attitude towards safety. And it is a fact that more BP workers/contractors have died in the 21st century than have workers for any other company. I’ve heard that the situation has been getting better since Lord Browne retired, but things take time to change.
Doug
Question is, who else in the energy industry has such a reputation? Seems a place you’d want regulators to look extra hard, all of a sudden.
mr_gravity
And just think, I spent the best days of my youth worrying about nuclear holocaust. Who could have guessed that we would ultimately be done in by friendly, benevolent corporations seeking to maximize profits?
I guess it could be worse.
Wait a minute. Didn’t someone suggest plugging the hole with nuclear weapons?