the deeper lesson behind the deep sea drilling fiasco—disaster is not avoidable in a world of highly complex business

Today the bipartisan National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling released an advance chapter from its final report, to be published on January 11, and a summary of its findings on the blowout of BP’s Macondo well. The summary contains a number of conclusions of which two are critical.

First, the disaster was not the result of any single mistake but was rather the result of a “number of separate risk factors, oversights, and outright mistakes” that “combined to overwhelm the safeguards meant to prevent just such an event from happening.”

Second, “[b]etter management by BP, Halliburton, and Transocean would almost certainly have prevented the blowout.” This leads the Commission to declare: “the blowout of the Macondo well was avoidable.”

Wrong!

This is important because precisely the same factors apply to the world of large and complex financial operations—the one in which we all precariously co-exist while hoping we will not have another financial or industrial disaster like the ones from which we are still slowly digging ourselves out.

Disaster is an inevitable result of extreme complexity. Economists, politicians, policy analysts and journalists—even some of those who argue against too-big-to-fail banks—talk about massive scale business as if it would be good or at least acceptable if only it were done right. Of course the executives of ultra-large scale businesses eagerly reinforce this assumption with bold statements about the capabilities, efficiencies, and even patriotic missions of their firms. Few opinionators have any experience of large-scale operations. The top executives in these very businesses—huge industrial and financial enterprises—themselves become increasingly remote and rapidly out of touch with the daily operations of their companies. This is not their fault; it is the inevitable result of their escalating roles as strategic leaders. But it does make many assumptions about large scale business and its safety rather sanguine.

To assume that somehow what complex industrial and financial enterprises have to do is improve their risk management and get their operations and inter-company coordination right is simply naïve. Mistakes somewhere in the complex web of operations do and always will happen. Most of the time we are lucky and avoid disaster. Excellent leadership can also mitigate the danger. But somewhere, sometime, something is going to go badly wrong. Anyone who has been in the engine room of the modern industrial or financial organization knows this. At some point, as John Kay of the Financial Times has often astutely observed, such businesses become unmanageable. And when things do go wrong the impact—precisely because of the huge scale at which we now operate—is massive and very difficult to control.

So the really deep lesson of both the BP and financial disasters is that the proverbial will hit the fan. When it does we will all be in big trouble unless we impose constraints on size, operations and complexity. If we really must undertake such high-risk activities, we should also insist on stronger safeguards, cleaner structures and lines of responsibility, and more effectively directed and targeted operations. This will of course add to the cost of the operations, which is why such constraints are resisted in the first place. To use the language of the economists who so often encourage larger and larger businesses, only by insisting on such standards will we properly internalize the real costs of the business activities in question.

2 comments for “the deeper lesson behind the deep sea drilling fiasco—disaster is not avoidable in a world of highly complex business

  1. January 8, 2011 at 7:30 pm

    Hey Professor Baxter,
    Nice post, terrific as usual. What I wonder is, how much improvement and buttkicking/housecleaning has been done at the “Office of Mineral Resources Management” (renamed now, yes, but retooled???). I think it has been retooled very little. I would wager a large some of money, very little has been done to change that department. And what about the other offshore drilling in Alaska currently still very active in Alaska??? My hope is that people like YOU (Professor Baxter), “Washington’s Blog”, and ProPublica, and any Obama Bureaucrat reading this now will follow this and bite into it like a rabid pitbull with rabies. These are serious issues. And we needn’t care to much if some wealthy family in Britain got their pension swiped cause ’cause BP abused our shores. You won’t BP abuse the shores of Liverpool. You know why??? Britannia won’t be shit on like weak Americans will. PERIOD

  2. January 8, 2011 at 7:31 pm

    ^^^^^^^
    Large sum, not some……..oh I can never get it right…..

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