The Great Oil Spill of The Gulf
By: Rene Velez May 12th, 2010
As of this late date there should be no debate that the oil spill that is currently occurring unimpeded in the Gulf is by all accounts a disaster. I can only imagine what I may find as I visit my summer destinations such as Naples and Vanderbilt beach and yes the white sandy beach of Sarasota. Listening to the news I can practically smell the oil and see the profound impact on the ocean wildlife and on the shores. For anyone that has never had the opportunity to visit the shores of the gulf in Florida, there is still plenty of beautiful and unspoiled wilderness and wildlife right here in my home state. Yet it is fragile at best.
Our Need for Oil
I recently attended a seminar hosted by FIU and presented by Exxon. It was a forecast of energy demand and consumption through the year 2030. Without a doubt oil is a big part of our current energy needs and that of a future yet to come. So I do not see a way around alternative for oil. Surely we could build more nuclear plants and this may be good but NIMBYISM may derail many of the attempts to build them. Let’s face it, just when O’bama came on board the concept of “Drill baby Drill” did not go over very well with many who feared exactly what is happening now. These dissenters of oil drilling off the coast of Florida have been vindicated in their vocal calls not to drill. I will tell you that even though I am for oil drilling, I could not have imagined this disaster. But I am not alone. The realty is that when you take the need for oil and the risks, we have to drill no matter what. Drilling is risky as is nuclear energy. So its easy to push it down and push it aside, especially when you see what is happening. But beware, doing nothing can be worse. Our need for oil goes beyond a demand and supply issue. It is also a national security issue and a way to avoid, to some extent, having to be sucked into military conflicts in the middle east. This incident hurts every aspect of our need for energy. This and the Exxon Valdes will be examples of what oil drilling in sensitive areas could be and what might happen at a nuclear power plant in your back yard. This negative association is profoundly devastating to innovation and the publics willingness to take on new and innovative ways of meeting energy demands.
Corporate America and Government Fails Again
It will be months and years of looking back only to find one underlying truth to this event other than its devastating reality. Corporate America failed to provide every failsafe measure that could have been undertaken and government was by default an unwitting accomplice by lack of proper regulation. Before corporate America waves the red flag of “The Cost of Failsafe Measures” on the American economy to the price of a gallon of gas. Let’s make sure they make a proper comparison to the cost of wars, the cost of national security, the cost to our environment, the damages to businesses and all other associated ripple effects in our economy. When you look at it from that perspective, an additional blowout preventer or other technologies will pale in comparison. It will also pale in comparison to the record profits that oil companies reported in just the last few years. The bottom line is that here too this should not have happened. We have the technology and the means. What we do not have is a management that is forward thinking. We fail to over engineer when it really counts because somewhere the bottom line is more important that the outcome of the risks as a whole.
Measuring Risk
Our energy policy, the energy industry and the financial meltdown have a common theme. One that the press is not talking about because it simply is not sexy in mainstream news. We as a society are in harms way in more ways than we care to understand or realize because we do not adequately measure risk. Just as AIG, Fannie Mae, Fredie Mac and the banking industry failed to analyze risk in their portfolios and in their products, many an industry is failing to measure risk and the ripple effects of large scale and interconnected industries. This is very important, because unless the real impact of risk is understood at every level of a business or an industry, then there is no way to establish rules to regulate or to prevent widespread waves of disaster.
Strangely enough the measurement of risk is something that every CPA that has an understanding of how and why audits work understands risk and its components. In a nutshell, as CPA’s we render opinions on managements representations of financial reports based on an elaborate set of measured risks when compared to what may be considered acceptable given the size of a population of elements. What is acceptable is a professional judgment call by the CPA. What is the measurement of risk is empirical as it is a real sample based on accepted statistical data.
In lay terms, envision everything that can go wrong given a set of circumstances then try to figure out the potential for that risk to occur. How to eliminate that risk to sizes that are either immaterial or that won’t have devastating consequences is a key analysis. And if for any reason there is no way of eliminating very large risks disclose it so everyone knows. Doesn’t that sound like what our government and corporate America should be held accountable for? Sounds like there is a huge service industry in the making for someone that can sell the product. In the case of oil drilling, it doesn’t take much imagination. All you have to imagine is how easy it may be for your home plumbing to develop a leak or to get clogged. Anyone that doesn’t live in a cave can well imagine the likely scenario.
The Punishment
Yes someone needs to get a good old fashioned spanking. In this case I recommend an oar will do the job nicely. The government should line up for a good whack with the paddle as well.
Along with accountability comes punishment. Their has to be some significant downside to not looking out for the public interest on these “preventable” disasters. Typically, for corporate America a financial punishment is the norm. A fine, the economic consequences of tort law can impose awards of financial damages to those harmed. These are okay, but in the end the consumer pays the price also. That is their big drawback. Further it takes years and years of legal battles and maneuvers and in terms of damages, you know you have to have money to have the law work in your favor and the attorneys get the biggest chunk of any possible reward. So it’s not what I call equitable justice. In other words its not entirely fair. I am not sure what the punishment should be, but I like the idea of taking over a portion of the company stock such that you can influence management, make required changes, void management bonuses and provide for a return to those affected through stock appreciation and the payment of taxes on those returns. In the end the company gets to buy back its stock. That’s scary stuff if the government can mutualize (as opposed to nationalize) your company for not mitigating risk appropriately.
By: Rene Velez May 12th, 2010
As of this late date there should be no debate that the oil spill that is currently occurring unimpeded in the Gulf is by all accounts a disaster. I can only imagine what I may find as I visit my summer destinations such as Naples and Vanderbilt beach and yes the white sandy beach of Sarasota. Listening to the news I can practically smell the oil and see the profound impact on the ocean wildlife and on the shores. For anyone that has never had the opportunity to visit the shores of the gulf in Florida, there is still plenty of beautiful and unspoiled wilderness and wildlife right here in my home state. Yet it is fragile at best.
Our Need for Oil
I recently attended a seminar hosted by FIU and presented by Exxon. It was a forecast of energy demand and consumption through the year 2030. Without a doubt oil is a big part of our current energy needs and that of a future yet to come. So I do not see a way around alternative for oil. Surely we could build more nuclear plants and this may be good but NIMBYISM may derail many of the attempts to build them. Let’s face it, just when O’bama came on board the concept of “Drill baby Drill” did not go over very well with many who feared exactly what is happening now. These dissenters of oil drilling off the coast of Florida have been vindicated in their vocal calls not to drill. I will tell you that even though I am for oil drilling, I could not have imagined this disaster. But I am not alone. The realty is that when you take the need for oil and the risks, we have to drill no matter what. Drilling is risky as is nuclear energy. So its easy to push it down and push it aside, especially when you see what is happening. But beware, doing nothing can be worse. Our need for oil goes beyond a demand and supply issue. It is also a national security issue and a way to avoid, to some extent, having to be sucked into military conflicts in the middle east. This incident hurts every aspect of our need for energy. This and the Exxon Valdes will be examples of what oil drilling in sensitive areas could be and what might happen at a nuclear power plant in your back yard. This negative association is profoundly devastating to innovation and the publics willingness to take on new and innovative ways of meeting energy demands.
Corporate America and Government Fails Again
It will be months and years of looking back only to find one underlying truth to this event other than its devastating reality. Corporate America failed to provide every failsafe measure that could have been undertaken and government was by default an unwitting accomplice by lack of proper regulation. Before corporate America waves the red flag of “The Cost of Failsafe Measures” on the American economy to the price of a gallon of gas. Let’s make sure they make a proper comparison to the cost of wars, the cost of national security, the cost to our environment, the damages to businesses and all other associated ripple effects in our economy. When you look at it from that perspective, an additional blowout preventer or other technologies will pale in comparison. It will also pale in comparison to the record profits that oil companies reported in just the last few years. The bottom line is that here too this should not have happened. We have the technology and the means. What we do not have is a management that is forward thinking. We fail to over engineer when it really counts because somewhere the bottom line is more important that the outcome of the risks as a whole.
Measuring Risk
Our energy policy, the energy industry and the financial meltdown have a common theme. One that the press is not talking about because it simply is not sexy in mainstream news. We as a society are in harms way in more ways than we care to understand or realize because we do not adequately measure risk. Just as AIG, Fannie Mae, Fredie Mac and the banking industry failed to analyze risk in their portfolios and in their products, many an industry is failing to measure risk and the ripple effects of large scale and interconnected industries. This is very important, because unless the real impact of risk is understood at every level of a business or an industry, then there is no way to establish rules to regulate or to prevent widespread waves of disaster.
Strangely enough the measurement of risk is something that every CPA that has an understanding of how and why audits work understands risk and its components. In a nutshell, as CPA’s we render opinions on managements representations of financial reports based on an elaborate set of measured risks when compared to what may be considered acceptable given the size of a population of elements. What is acceptable is a professional judgment call by the CPA. What is the measurement of risk is empirical as it is a real sample based on accepted statistical data.
In lay terms, envision everything that can go wrong given a set of circumstances then try to figure out the potential for that risk to occur. How to eliminate that risk to sizes that are either immaterial or that won’t have devastating consequences is a key analysis. And if for any reason there is no way of eliminating very large risks disclose it so everyone knows. Doesn’t that sound like what our government and corporate America should be held accountable for? Sounds like there is a huge service industry in the making for someone that can sell the product. In the case of oil drilling, it doesn’t take much imagination. All you have to imagine is how easy it may be for your home plumbing to develop a leak or to get clogged. Anyone that doesn’t live in a cave can well imagine the likely scenario.
The Punishment
Yes someone needs to get a good old fashioned spanking. In this case I recommend an oar will do the job nicely. The government should line up for a good whack with the paddle as well.
Along with accountability comes punishment. Their has to be some significant downside to not looking out for the public interest on these “preventable” disasters. Typically, for corporate America a financial punishment is the norm. A fine, the economic consequences of tort law can impose awards of financial damages to those harmed. These are okay, but in the end the consumer pays the price also. That is their big drawback. Further it takes years and years of legal battles and maneuvers and in terms of damages, you know you have to have money to have the law work in your favor and the attorneys get the biggest chunk of any possible reward. So it’s not what I call equitable justice. In other words its not entirely fair. I am not sure what the punishment should be, but I like the idea of taking over a portion of the company stock such that you can influence management, make required changes, void management bonuses and provide for a return to those affected through stock appreciation and the payment of taxes on those returns. In the end the company gets to buy back its stock. That’s scary stuff if the government can mutualize (as opposed to nationalize) your company for not mitigating risk appropriately.
Honestly, I don’t know but I am sure that in this case the punishment will be small compared to the damage done and come what may it will be years in the process. It simply becomes part of the cost of business and a problem for the next guy. We need to rethink punitive damage awards for gross negligence by corporate America and maybe even regulatory officials who have a job to do.
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