Oil, Energy and Risk

Humans are imperfect, machines break down, mistakes get made, and thus throughout human history we’ve had disasters.  They range from Chernobyl to knocking over your coffee by standing up carelessly, but they happen.

The current oil spill that is damaging the Gulf Coast and could damage much of the eastern seaboard depending on when they can stop the flow of oil into the sea is in and of itself not an argument against off shore oil exploration.   The fact is that one should never support anything without taking into account the risk inherent in that action.

There is risk in everything.    Later this month I’m traveling to Europe with students.   I make that decision knowing that there is a risk that something will happen and I could die, leaving two young children behind.   Of course, that risk is incurred every time I drive anywhere — and when I drive with the children on board, I’m putting their lives at risk.

According to a rational actor model, we should run a risk/cost-benefit analysis every time we undertake an action.   The probability of a fatal car crash en route to a family hike is extremely low, the benefits of family time, the kids hiking, and the pleasure of the event is of high probability and value, therefore we choose to undertake the risk in order to get the benefit.  Indeed, if one spent all of life avoiding risk, in the end death still wins, so what was the point of living?

We’re not rational actors though.   We don’t usually think about the risk of the actions we take, so often people over-react when the risk becomes evident.   The Simpsons parodied this aspect of human nature skillfully in their first season, as Homer becomes safety officer and seeks to try to remove all risk from Springfield life.   The result was a kind of totalitarian hellhole where nothing was allowed so all could be safe.   I’ve also discussed the positive correlation between freedom and risk — the more you try to minimize risk, the more you risk minimizing freedom.   (I couldn’t resist that wording — think it through!)

So if we think about oil production, nuclear energy, coal burning, and other forms of energy, we should not react from the gut — be it “I like to drive an SUV so drill, baby, drill” or “look at the birds covered with oil, shut down the rigs!”   We need to think about the risks, probabilities, and benefits of the activities.

Take oil.   Oil prices are over $85 a barrel, a price that could imperil the global recovery.   In fact, as the economy revives, higher oil prices could push us back into recession.   So one benefit of drilling off shore is that it helps the global economy.   If we drift into recession due to high oil prices hundreds of millions of people world wide could have their quality of life decreased, face unemployment, and suffer untold psychological and sociological difficulties.  This could even lead to war and unrest, especially in poor, unstable regions of the world.

Moreover, given the amount of oil pumped daily from these rigs, the risk of a major spill happening is low.   But as we see, the consequences can be immense, and low risk is not the same as no risk.   Low risk events happen all the time.    There is also the risk of global climate change if we maintain an oil based economy.   Even those who are not convinced that the earth is warming because of carbon fuels have to admit that they might be wrong — there is a risk there, even if we disagree on how to assess the level of risk.     How can one take that into account vis-a-vis economic dangers and alternatives?

One alternate to oil is nuclear energy, but there the same issue emerges.  Nuclear energy done right has a low risk of catastrophe.  But when not done right (like Chernobyl) the risk is much higher, and again — low risk does not mean no risk.   Nuclear energy doesn’t contribute to global warming, however, and may be a way to relieve economic pressure, as well as to remove the economic and political power oil provides to a few dictatorships.   Wind power also provides benefits, and has fewer risks.   Indeed, many people oppose it more for aesthetic reasons (those turbines make the hills look ugly!) than dangers entailed.    Go on through the list of potential energy alternatives, and there is always a mix of costs, benefits, and risks.

So what to make of all of this?   First, there is a reason these issues have such diverse perspectives — there is uncertainty about the nature of the risk and benefits at play, and people have different starting priorities.   Obviously someone with oil lapping up on their beach side property will see the issue of potential oil spills in a different light than those of us living far from the ocean.   Anyone who takes dogmatic positions with an air of certainty is likely wrong.  Second, we can’t avoid risk.  Whatever we choose, there is a potential downside, ranging from a world depression that causes war and famine, to catastrophic global warming that causes war and famine.

To me the rational thing to do is accept a variety of risks in order to try to avoid the most horrible outcomes.  I don’t know if not drilling more off shore or not building nuclear plants means global depression, but I’m willing to accept the risk of an oil spill or even a nuclear accident (albeit a slight risk) to make global depression as unlikely as possible.   I don’t know for sure if our carbon fuel economy is going to cause catastrophic global warming, but I’m willing to accept the risks of nuclear energy to try to minimize that.    An easier call is to invest heavily in alternate energy sources — this will benefit us even if global warming fears or misguided.

So, avoiding dogmatic positions, I think we should continue offshore oil exploration for short term economic benefit, even as we work towards longer term alternatives.   I think nuclear energy is a rational way to deal with short term energy issues, even as we try to work on developing economically feasible and safe long term alternatives.    The possibility of catastrophic global warming, along with the political and economic difficulties inherent in relying on oil make it rationale to work towards rapidly shifting our energy economy to one based on alternatives to oil.   Finally, the dangers inherent in all of these convince me that we should try to move away from a culture based primarily on consumption and materialism, to one that recognizes value in community and life experience.

But whatever one supports, it should be done with eyes wide open.   If you advocate for nuclear energy, you can’t say a nuclear catastrophe is impossible.  If you advocate to stop off shore oil drilling, you can’t say global unrest and depression is impossible.   And if you think you can personally assess precisely what the risk levels are as a citizen getting all your information from the media or internet, then I believe you over estimate your knowledge.   Even the experts are unsure and disagree.   That means any path we choose is risky, but that’s OK — life is about risk!

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  1. #1 by Eve on May 4, 2010 - 02:45

    Excellent points, all. We must indeed count the cost if we hope to live conscious lives. But it does make it just a little less fun when you get in the car to get to the family hike, huh?

  2. #2 by Michael Arnis on May 5, 2010 - 03:58

    Scott,

    A good framework to apply to financial reform.

  3. #3 by Lance Harvell on May 25, 2010 - 20:04

    Scott:

    Great reads we think alike on a good deal of this stuff. Especially debt, demographics and consumption. I would disagree on this falls elections though it will be a big republican year though not because it is a return to the right, (You are correct on that point0 but because the demise of the welfare state will be full of fits and starts. Weaning is always a hard job.

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