Big Oil: Does it face the same future as Big Money?

On the day that BP capped its leak in the Gulf of Mexico, President Obama saw his 2300-page legislation on banking reform safely through the Senate. Oil majors should be examining whether they will face similar legislation once the Gulf issue settles.

There are parallels between Big Money and Big Oil. Both have grown exponentially in the post Reagan, post-Thatcher years on the back of regulatory regimes that have sought to give the industries their head, free of cumbersome restrictions.

We saw where that got us with Big Money: new technologies such as collateralised debt obligations failing under pressure, the damage accelerated by frankly disgraceful lapses such as rating agencies being in the pay of securities issuers, mortgages being sold to people who defaulted on their first monthly instalments etc.

Just as banks were encouraged to boldly go where no capital had gone before, oil companies have been urged to explore marginal and hostile environments without too many checks and balances to slow down the quest for reserves. Big oil has had to gamble the cost of containing unprecedented risks against shareholder return. BP was unlucky in that it happened to them. The industry knows that it could have been anyone.

So will Obama do the same to big oil as he is doing to big money? The legislators must already have their pens out. Like banks, the focus will be on mitigating risk, setting aside capital to cope with future emergencies, capping or controlling incentives and perhaps limiting the extent to which the costs can be passed on to consumers. It could be ugly.

The industry should learn from banking's mistakes. Rather than hiding like guilty schoolboys behind a collective wall of technical obfuscation, it should donate generously its expertise and knowledge, filling in the gaps that have opened up in government understanding of the industry over the past 30 years.

For its part, Government should lift the threat of sending people to jail should they demonstrate that they have put shareholders' interests ahead of safety. Otherwise there will be no cooperation. Legislative solutions will fail on the back of imperfect knowledge.