Looking Beyond The BP Commission’s Report

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The BP (NYSE:BP) disaster thrust itself on the nation’s collective conscience once more last week with the report of the commission appointed by a president who had previously pledged that “the days of science taking a back seat to ideology are over.” It certainly didn’t look that way last June when President Barack Obama filled out a panel that was long on politicians and activist environmentalists and very short on experts on drilling for oil (NYSE:USO).

To be sure, any such group needed to include academics, environmentalists and, yes, party loyalists. But certainly one or two technical experts would not have been unreasonable. The industry had every reason to expect the worst, particularly after the secretary of the interior vowed “to keep a boot on the neck” of the world’s third-largest oil company.

Now the report has been issued–and, lo and behold, it is not nearly as bad as expected. It even has some positive virtues. The commission and its staff did a first-rate job in analyzing what went wrong on the Deepwater Horizon rig, and it is hard to take exception with some of their major proposals–most notably that the oil industry needs to establish an association roughly modeled on the Institute of Nuclear Power Operations, the nonprofit that has had a large measure of success in promoting safety and reliability in that sector.

Despite major differences between the oil and nuclear industries, this is a worthy proposal, even if the commission gives insufficient credit to the American Petroleum Institute, which has committees that have been quietly working for decades on behalf of best practices.

The commission errs egregiously, however, in insisting that the deficiencies that led to the Macondo blowout were “systemic,” which suggests that several hundred exploration and production firms and related service companies share guilt for this disaster. BP (NYSE:BP) was probably about 90% of the Macondo problem. It is well-known that, starting with Lord Browne, BP repeatedly took shortcuts other companies eschewed, shortcuts that led to refinery failures and pipeline failures and finally to the great drilling disaster that put the whole industry’s future in the U.S. at risk.

Moreover, anyone who has ever worked on an offshore drilling program knows that the operator, in this case BP, sets the tone, and that all of the contractors working on the project are there at the sufferance of the operator. The organizational model has more to do with a military chain of command than it does with any New England town hall meeting.

Even though BP, rather than the industry, was the problem, there is no realistic way the industry was going to avoid taking a large share of the responsibility for the solution. The commission has recognized that plain fact of life.

More important, the commission has also acknowledged unequivocally that “we cannot realistically walk away from these offshore oil resources in the near future.” To some people, that may have seemed obvious all along, but for a while last year it was an iffy proposition.

In sum, the ideological opponents of hydrocarbons made their case, but it didn’t hold up in court.

Where do things go from here?

Oil’s enemies were ready to make the BP disaster something akin to Apocalypse Now. Instead it turns out to be more a matter of Apocalypse? Not Now — And Maybe Not Later Either.

Nowhere was apocalyptic imagery invoked more than in assessments of the disaster’s likely effect on the ecology of the Gulf. Ted Turner told CNN in May that the gushing oil could be a warning from God to curb our destruction of the Earth. President Obama said it was “the worst environmental disaster America [had] ever faced,” and likened it to “an epidemic, one that we will be fighting for months and even years.” Time magazine evoked the frightening image of a “morphing mass … changing every day,” one that “threatens to kill wildlife and wreck the fishing industry along nearly 1,300 miles of coastline.”

Yet, as Robert Nelson of the University of Maryland pointed out recently in The Weekly Standard, the environmental effects of the spill have turned out to be modest, in large part because the blowout occurred 50 miles from shore in 5,000 feet of water, giving oil-eating microbes a lot of time to do their work before the slick hit the coast.

Equally modest have been the effects on the national energy picture.

Given an administration with an obvious animus against hydrocarbons and an apparently unlimited enthusiasm for renewable energy, the disaster looked to have the potential to effect radical changes in energy policy. In time, reality intruded, as the BP commission has now recognized.

This doesn’t mean that nothing has changed. The oil industry has a long way to go in order to patch up its image and to assure its future in the American economy, but it should prove eminently capable of living up to the broad standards the president’s commission has set. Unfortunately, since last April the economies of the Gulf Coast energy states have taken a body blow from which recovery will be slow. The deep water drilling fleet has been remarkably patient, for the most part, in not embarking for foreign shores, but it seems likely that we will see a fall-off in Gulf crude production by about 10%, at least through 2012.

In view of these losses, we must hope that this painful episode in the nation’s energy history will have some salutary effect on the Obama administration. Something will have been gained if it realizes that energy policy is most likely to advance not by radical change but through a process of dynamic evolution in which the government avoids picking technology winners and spreads its bets as widely, and as wisely, as possible.

That means dropping its current prejudice against research that aims to advance hydrocarbon-related technologies. Doing so will be difficult for an administration whose secretary of energy got that job not because he won a Nobel Prize in physics, but because he was instrumental in developing a huge laboratory entirely devoted to renewables. That laboratory in Golden, Colo., is where the Obama administration has focused, while the Department of Energy’s National Energy Testing Laboratory, an older facility that concentrates on hydrocarbons, languishes in Morgantown, W.Va.

This imbalance belies the equal likelihood that important future advances in energy technology will emerge from improvements in hydrocarbon extraction, processing and use as they will from breakthroughs in biofuels, wind and photovoltaics. If the staying power of the oil industry during this recent crisis has brought this message home, it will amount to a significant change for the better.

Eric Smith, a professor of finance at Tulane University’s A. B. Freeman School of Business, is the associate director of the Tulane Energy Institute. He is also a contributor to Forbes.com.

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