Mt Rainier

Mt Rainier
Mt Rainier

Monday, November 1, 2010

Risk and Externalities




Events are unfolding as the President’s Commission continues its inquiries into the 2010 Gulf Oil Spill. A major focus is around the cement used to plug the Macondo well. As Halliburton was a contractor for BP, issues of responsibility swirl around the interpretation of contractual language as well as actions in determining responsibility. These issues then emerge into the financial marketplace in as part of stock decisions and rating agency actions.

The decisions made by Halliburton and BP regarding the cementing and associated issues will be exposed to heavy scrutiny. The degree of indemnification provided to Halliburton in the BP-Halliburton contract will be closely examined and interpreted. Time will tell where all the lawsuits will come down, how many civil and criminal penalties will be assessed, and to who.

It is likely the quantum of risk will reflect decision-making processes in key areas such as the cementing issue. Those decisions should reflect the impact of externalities on the risk-decision spectrum. The question will be how much weight was given to immediate issues of cost and time versus the long tail risk of a disaster, including the impact of a spill on the coastal areas, the ocean ecosystem and birds that don’t buy stocks, don’t pump gas and whose idea of take out is a worm coming out of the sand.

Societies like to look at redress, at making victims whole, bringing back ecosystems. The concern is where does the money come from to accomplish these goals and is it enough? Redress also includes assessing and enforcing responsibility. Societies also need to address solutions looking forward to help prevent and mitigate future disasters, including regulatory and other solutions.

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