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.