Wednesday, June 02, 2010

deepwater risk and reward

From my favorite financial blog comes a very relevant post to some of the thinking I have doing related to the Deepwater Horizon. The comments section is interesting as lively though Ritholtz himself posts a rare non-immediate comment pushing back against those who claimed sufficient regulation was in place, not specifically related to Deepwater Horizon and the oil and gas industry, but in general about regulations and the many crises and failures we have seen in the last three or so years. In short, regulation so often fails because it is beholden to the very industry it is supposed to regulate. Ritholtz links to a previous post of his on the ineffectiveness of the SEC and how was rendered useless through what is essentially apathy.

As much as a I want to ponder the concept of "regulatory capture" as Ritholtz puts it, I really want to ponder how poorly we generally understand probability, risk, reward, consequence, and how singularly low probability events will invariably happen given enough time and/or frequency.

In general, we are not wired to intuitively grasp statistics. (I've always felt that Simpson's Paradox is a great example of how some basic statistics can be disbelieved by many). We love anecdotal evidence and what our own life experience has taught us, but so suspiciously view double-blind studies involving thousands of people. You've all heard someone mention a relation of some kind who smoked a pack a day and lived to be 90 or the moron celebrity whose child has autism that must have been caused by vaccinations. Whatever. Learn to accept a basic fact about existence: Life is statistical in nature.

We're drilling for oil a mile beneath the sea and then a few miles past that through the earth. Let's not pretend this doesn't involve extreme risk. The reward is very clear: oil and gas. Why we need the oil and gas is also very clear. What we should do to need less oil and gas is not as clear. As such, we keep drilling and we will continue to drill. Six-month moratoriums will not change the demand side of the equation. Formerly adorable, oil-soaked critters may cause people to stop buying gasoline at BP gas stations, but it will do little to change their actual consumptive habits. We're going to keep drilling for oil and gas because we need to continue. And we continue because, as a nation, we have not put together a viable plan on where our energy would otherwise come from.

The drilling carries risks and we can regulate the industry and do everything we can do control the risks, even strive to reach a point of regulatory non-capturedness. However, there will be another Deepwater Horizon. I don't say this because I want it to happen or think it's a good thing. I say it because failure is inevitable. If we do something often enough and for a long enough time, this must happen.

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