Too Big to Fail: Catastrophic Risk after the Deepwater Horizon Disaster

The eerie timing of the BP Deepwater Horizon disaster, only a month after the Obama administration announced plans to expand offshore drilling, has been widely noted. But a second coincidence is equally striking. Just as the oil rig exploded, Congress began debating legislation developed in response to another man-made disaster: the financial meltdown of 2008. A juxtaposition of the two events helps us to see the problem of catastrophic risk in a new light.

In the aftermath of disaster, there is typically a search for the immediate source of blame. In the wake of the financial meltdown, there were a number of candidates: the collapse of an inflated housing market, irresponsible lending practices, the negligence of governmental regulators, nefarious investment schemes. There are good reasons for this search for a specific culprit: it helps not only in demanding redress but also in narrating the significance of the event. However, such a narrow purview can distract attention from a larger issue: the characteristics of the system that made it vulnerable to these specific failures.

In the case of the financial disaster, legislators eventually turned to this latter question. One of the prominent features of the debate over the financial reform bill was the question of how to mitigate “systemic risk.” This term refers to the idea that our economic well-being depends on a complex and fragile financial system that is potentially vulnerable to catastrophic failure. A major source of systemic risk is firms that are “too big to fail”—firms whose failure could provoke a collapse of the entire system. In the case of finance, most experts argued that the problem of systemic risk required new forms of government regulation. The goal of such regulation is to provide the financial system with resilience against unexpected shocks so that catastrophic failures such as the 2008 meltdown are not repeated

When it comes to energy and environmental legislation, however, the critical problem of systemic risk has not yet been recognized, as we can see in the governmental response to the Gulf oil spill. Even before we know how much oil was spilled and how devastating the environmental consequences will be, attention has focused on finding specific culprits. Questions about blame are asked mainly about proximate causes of the disaster: Did the cementing techniques used by Halliburton lead to the initial explosion? Did Transocean fail to install the necessary blowout prevention equipment? Did government regulators neglect to insist on further backup systems for shutting off the flow of oil? Was BP underprepared for a disaster of this magnitude?

The search for culprits in this environmental catastrophe is necessary insofar as it helps us pinpoint who is responsible for the costs of the immediate cleanup and for remediation of direct damages. However, it should not be the sole object of inquiry as we reflect on what the spill means for the future of energy production in the United States. The danger is that we will focus only on the correction of narrow regulatory lapses and on technological fixes that will allow the expansion of offshore drilling plans to go forward.

Rather, the same broad lessons that were learned from the financial meltdown can be applied to this environmental disaster. This would imply directing new regulatory mechanisms and public investments toward the elimination of systemic risks, that is, forms of energy production that pose the danger of catastrophic failure to the broader ecological—and economic—system.

As the BP disaster has proven to tragic effect, the ecosystems of the Gulf Coast in which oil production takes place are complex, interdependent, and vulnerable to catastrophic shock. Brown pelicans, sea turtles, bluefin tuna, and other endangered species depend on a functioning Gulf. The marshlands, coral reefs, and sea-grass meadows that support coastal life are imperiled by ecological shocks such as major oil spills. And the livelihoods of fishermen and resort operators in turn are threatened by the disaster. Deep-water oil drilling is best understood as a systemic risk to these fragile ecologies and local economies.

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