Double Thinking Deepwater Drilling

The NY Times yesterday reported that the US Federal government is thinking about developing

...a kind of parallel technological universe in which government would have the robots, the coffer dams and the other tools necessary to help control a big blowout.

At the same time, BP seems to be running out of it's own options to stop the leak. BP is currently drilling a relief well (estimated completion in August 2010) as the last best solution to a deepwater well blowout. Relief wells have worked before (above is pictured the Montara wellhead platform in the Timor Sea which started leaking on August 21, 2009). The problem is that relief wells take a long time to drill and a lot of oil can leak while we're waiting.

Rather than have a parallel technological universe set up by the Federal government (expensive and unlikely to work when needed), the obvious solution seems to be drilling both wells at the same time. Yes, drilling two wells will be twice as expensive. The equation, however, is cost-benefit = 2 x (cost of oil) - 1 x (environmental catastrophe). Another benefit is that 2 x (cost of oil) for deepwater drilling will marginally increase the cost of gasoline which will marginally increase the incentives for carbon neutral technology. Seems like a win-win.

Unfortunately, the double-think proposal is a close-the-barn-door-after-the-horse-is-gone solution. Prince William Sound in Alaska has still not recovered from the Exxon Valdez spill. The Deepwater Horizon spill is much larger and the recovery will be much, much longer.

Can we count on markets to prevent future oil-spill catastrophes? BP will certainly be damaged by the event and other oil companies will be re-thinking safety procedures. However, markets fundamentally reward risk, cost-cutting and externalization of cost (government bailouts, environmental damage, pollution, etc.). Safety costs money and there will always be market pressure to cut corners.

Hey, Slick! Don't Sheen Me On!

On ABC's "This Week" program, BP America Chairman Lamar McKay said that the Deepwater Horizon oil spill was the result of a fail-safe mechanism that failed to fail safe.

So, just what are the rules for reporting oil spills to the EPA? If I jump into the Gulf of Mexico with some "greasy kids stuff" on my hair, do I have to report it to the EPA? Here's the EPA Rule:

The requirement for reporting oil spills stems from the Discharge of Oil Regulation, known as the "sheen rule." Under this regulation, oil spill reporting does not depend on the specific amount of oil spilled, but on the presence of a visible sheen created by the spilled oil.

So, maybe I would have to report myself and BP's problem is really the amount of "sheen" and not the 5-25 thousand barrels of crude oil being discharged daily from Deepwater Horizon or what remains of it. Interestingly enough, Haliburton (Dick Cheney's old company) may have been involved or will be involved in this disaster.

Honestly, you can' t make this stuff up! OK, I can make some stuff up: Sara Palin is putting on her waders and going to help with the clean up. Spill, Baby, Spill!

Financial Crises, Income Inequality and a Return to "American Values"

Today, in a CNN interview, Republican Marco Rubio (former Florida House Speaker) said that we need a return to "American values" that encourage the accumulation of wealth. Also, on Fareed Zacharia GPS, Lloyd Blankein CEO of Goldman-Sachs said no one should be "ashamed" to make a lot of money. Finally, it turns out that part of the reason for the Greek financial crisis is that wealthy people in Greece (there are a lot of them) are underreporting (OK, lying about) their income.

I'm, not sure what Mr. Rubio wants to return to, possibly the high levels of income inequality right before the Great Depression and the current Subprime Mortgage Crisis. For Mr. Blankfein, it probably doesn't matter (what's a million or two when you made $53.4 million US$ in 2006). And, of course, the wealthy use their accumulations for the benefit of society, just look at Greece and the US.

Hey, Slick!

Last night on the PBS News Hour, BP spokeswoman Ayana Mcintosh-Lee said in response to a question about the Deepwater Horizon oil spill, "Well, we have some of the best minds working on this. And they are working around the clock in areas in Houston, in London, as well as here in Houma..."

OK, these are the same best minds that created an ultra-deepwater dynamic positioned semi-submersible oil rig with a blow-out valve that was supposed to prevent spills? Actually, not! The drilling rig was built by a Korean Company, Hyundai Heavy Industries. I guess work isn't going on in Korea.

The political impact of the spill is already starting (here and here), especially since the Obama administration wants more drilling off the US East coast. Before the spin and back pedaling starts, we should understand this event as part of the diminishing returns associated with the approach of Peak Oil. Ultra-deep wells are necessary because the easy-to-reach deposits have already been tapped. Evidently, the engineering on ultra-deep water wells is not quite up to the task and the externality in this case could become a major environmental nightmare.

The case for "drill, baby, drill!" or in this case "spill, baby, spill!" has never made much sense. More drilling means both more carbon in the atmosphere and more environmental degradation. Federal R&D for carbon-neutral technology deserves a strong influx of funds (probably on the order of what will be spent cleaning up the BP Spill), but isn't getting it. Oh, wait a minute, the Oil & Gas Industry make huge campaign contributions. Solar cell, wind-turbine, geo-thermal and other renewable energy industries aren't even on the list.

Turn Off the Bubble Machine

Today on NPR, Michelle Norris interviewed Lloyd Blankfein, the CEO of Goldman Sachs. When asked what Goldman might do in the future to prevent Financial Crises, Blankfein said "...recognize bubbles." On April 27, NOVA presented "Mind Over Money" asking "Can markets be rational when humans aren't?" Taken together, the Blankfein interview and the NOVA program beg a lot of questions.

First, it's not difficult to recognize bubbles (see earlier posts here). Even if Goldman were smart enough to recognize bubbles (I assume they are since they are the "smart money"), it's not their job. What would they tell the "dumb money"? Sorry, we won't place your bets! What would remain of investment banking? In fact, Matt Taibbi thinks Goldman Sachs is "The Great American Bubble Machine." If we wait for Mr. Blankfein and Goldman to recognize and do something about bubbles, we'll be waiting a long time.

How about the Federal Reserve? The Fed also failed to recognize past bubbles since it is the Fed's job to create growth rather than keep the economy from growing too fast.

How about the short-sellers who recognized the bubble and bet against it? They did their job and made a lot of "smart" money, but short-selling neither created nor defused the bubble.

Are there any other institutions that have the power to recognize and control bubbles? I can't find any and I'm not sure that breaking up Goldman would actually solve anything.

As with a lot of political issues, we probably aren't looking at the root cause. Since, 1990 there has been a sharp increase in the share of pre-tax household income held by the top 1% in the US. In 2005, it had almost reached 20%, the same level it had reached in 1929 before the Great Crash. There's a lot of money being held by people who's only objective is to make more money and Goldman is there to help them out (smart) or relieve them of their burden (dumb).

Even Alan Greenspan thinks income inequality is a problem (but doesn't connect it with bubbles) and the cause appears to lie in US politics.

Health Care Reform: The Day After Tomorrow

The New York Times is calling passage of health care reform legislation "A Big Win for Obama, but at What Cost?" Lost was the promise of a "postpartisan" Washington. Actually, I see this as a win. Obama's bipartisanship verged on being naive. The Republican party as it is now configured will never embrace bipartisanship and health care reform was substantially weakened trying to attract Republican votes.

Bipartisanship is a nice idea but it is also import to get things done and there's lots remaining to get done: financial reform, climate legislation, immigration reform, repairing international relationships, ending two wars, etc. The Democrats now realize that they can get something done. It's difficult. Maybe they don't have the energy for the struggle. My advice would be to ram through as much legislation as possible before the mid-term elections and run on accomplishments.

Back to health care, a lot remains to be done to strengthen reform. The current bill is a "Boon for Hospitals and Drug Makers." Here's another lesson for the Democratic party. You've picked off one of the interest groups, the Health Insurance Lobby. Now take on each of the other interest groups one at a time: hospitals, drug companies and physicians. The physicians could be easy. Congress must reauthorize increases in Medicare physician payments, the "Doc Fix," or physicians will face a 21 percent pay cut. Twenty-one percent is close to the right number for required reductions in physician payments (the actual number is 32 percent). Forget the "Doc Fix," pass legislation that requires physicians to accept Medicare payments and move on to the other interest groups.