Monday, May 17, 2010

Afoul of Natural Capital

It's the twenty-eighth day after the fiery rupture of BP's oil platform in the Gulf of Mexico, and only now the massive oil leak seems to be slowing to a close. It has been called a "transforming event" (good diagrams here) for the way that this rupture has been handled, both environmentally and in terms of risk to the industry. In observing the ongoing efforts to cap this leak, as well as the expanding impact of the oil on the surface and in the newly tracked underwater plumes, the magnitude of this accident becomes almost overwhelming. Yet this kind of activity in environmentally sensitive areas - as in this case our seafood supply - carries risks that have, at least until now, seemed manageable in the traditional costs and balances of business risk and accounting.

There is a systemic way of looking at this called Public Choice theory, which relates to the economics of government in that there is a lack of information feedback, as well as limited capacity to respond to major events like Hurricane Katrina. It's endemic to government processes and the slow filtering of information to the decision-makers who are not experts in the situation. When regulations and legal structures allow a cap on the costs of risks, such as BP has, then the operation will tend to take the risks that would produce far greater damage than if the company were to be held completely liable. Hence the position of the Obama administration that BP take full responsibility for the effects of this rupture, not just that which has been previously bounded by contracts and regulations.

One way to understand this is to briefly read this fascinating "Oil Electric" blog, which explains in some detail what exactly is on the floor of the ocean in the Gulf of Mexico. It's not a natural environment any more, there's an entire network of pipes and rigs throughout this shallower part of the ocean. It is an entire underwater industrial system that is interconnected and runs miles of pipe on and under the sea floor. Actually it's the impact crater from the asteroid that impacted the earth 65 million years ago and caused the extinction of the dinosaurs. Has something to do with all the oil there, I suppose.

So the natural environment, or what's left of it, has co-existed with this industrial system for over a century. These rigs have evolved into platforms that are self-sufficient small cities; some are movable, others are permanent platforms. These permanent structures ultimately become a haven for sea life after the oil platform is no longer in use. But what kinds of risks are acceptable, particularly now that we've seen the "worst case" that has decimated sea life and the ecology of the entire southern coast?

A new kind of balance sheet, that gives weight to the true value of natural systems and the life support that they provide, has been evolving globally to benchmark the true risks to all life and their systems from the human activities that impact them. This is Natural Capital, and it takes into account the extended costs of human impact on natural systems - our planetary resources. Key to these measurements is the value of biodiversity in ecological systems. This event will no doubt move the discussion forward very rapidly now.