Op-Ed Contributors

BP oil spills regulation lessons all over

By Kenneth Rogoff (China Daily)
Updated: 2010-06-04 07:54

As the damaged BP oil well continues to spew millions of gallons of crude from the depths of the floor of the Gulf of Mexico, the immediate challenge is how to mitigate an ever-magnifying environmental catastrophe. One can only hope that the spill will be contained soon and the ever-darkening worst-case scenarios will not become reality.

The disaster, however, poses a much greater challenge to how modern societies deal with regulating complex technologies. The accelerating speed of innovation seems to be outstripping government regulators' capacity to deal with risks, much less anticipate them.

Related readings:  BP cuts pipe, plans to lower cap over Gulf spill  BP may sell off assets as Gulf oil spill costs mount  BP faces another setback, oil slick threatens Fla.

The parallels between the oil spill and the global financial crisis are all too painful: the promise of innovation, unfathomable complexity, and lack of transparency (scientists estimate that we know only a very small fraction of what goes on at the oceans' depths). Wealthy and politically powerful lobbies put enormous pressure on even the most robust governance structures. It is a huge embarrassment for US President Barack Obama that he proposed - admittedly under pressure from the Republican opposition - to expand offshore oil drilling greatly just before the BP catastrophe struck.

The oil technology story, like the one for exotic financial instruments, was very compelling and seductive. Oil executives bragged that they could drill a couple of kilometers down, then a kilometer across, and hit their target within a few meters. Suddenly, instead of a world of "peak oil" with ever-depleting resources, technology offered the promise of extending supplies for another generation.

Western officials were swayed by concerns over the stability of supplies in the Middle East, which accounts for a large proportion of the world's proven reserves. Some developing countries, most notably Brazil, have discovered huge potential offshore riches.

Now all bets are off. In the US, offshore drilling seems set to go the way of nuclear power, with new projects being shelved for decades. And, as is often the case, a crisis in one country may go global with many other countries radically scaling back offshore and out-of-bounds projects. Will Brazil really risk its spectacular coastline for oil, now that everyone has been reminded of what can happen? What about Nigeria, where other risks are amplified by civil strife?

Oil experts argue that offshore drilling never had the potential to amount to more than a small share of global supply. But there now will be greater concerns over deep drilling in any sensitive environment. And the problem is not just with oil. The big news in energy these days is the revolution in technology for tapping shale gas. With important reserves near populated areas, governments will need to temper their enthusiasm and think about the balance between risks and riches.