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3 Ways BP is Making You Look Stupid

Apparently the top kill didn't work, and the Big Gaping Hole in the Gulf of Mexico is still spewing out barrels of crude oil, and we're starting to see the true environmental damage that is taking place on the Gulf Coast. The winds are shifting and it looks like some oil is going to hit parts of Alabama and potentially Florida.

Things are looking ugly.

However, there are some huge misperceptions about risk and blame that are permeating through the American zeitgeist and the media. And we are going to look very, very stupid in hindsight.

I enjoy looking for analogies like this, because when trading options you always have to be aware of the perceptions of risk in the market, and how human behavior affects that perception-- we're seeing that now with respect to the oil spill and how we're getting it all wrong.

Reason's why we're stupid:

1. Banning offshore drilling will eliminate risk to the United States

This is a great example of how humans can misperceive risk, and how once risk is moved somewhere else, it "disappears." This happened during the crash of 2008-- there were very risky assets that were being mispriced in the market, but the risk hasn't been eliminated; rather, the risk was transferred off the balance sheets of banks and onto the Federal Reserve and sovereign holdings.

The same thing is going to happen with respect to risk and oil. A moratorium on fresh offshore drilling seems to be what the politicians are asking for, as if risk will be eliminated. That's not the case-- the future environmental risk we eliminate will only be transferred to economic risk (via higher oil prices) and geopolitical risk as we are paying for oil from countries with very little freedom.

2. It's all BP's fault!

BP has been made the patsy by the media and the US government. But their overall liability in this mess remains uncertain. So while the 6PM news is permeated with news about BP, it seems that no one is concerned about the role that some of the other companies had in this mess, RIG and CAM come to mind.

This is not to remove all blame from BP; but this is another public-perception example, similar to how GS has been the center of the financial regulation controversy.

3. We won't cut the oil crackpipe

With all this political pandering going on, there hasn't been any substantiative change to energy or transport policy by the current administration. It's the same way with the public as well; we look to throw blame about with this ecological catastrophe, and then we hop back into our SUVs to drive 15 miles to the closest supermarket. There is this contradiction that we're ignoring, that we can maintain the same lifestyle we had when oil was much more accesible. No pundit or politician is willing to discuss that fact, and we will continue with business as usual, shifting the risk around and thinking it's been eliminated.

Unless we finally grasp the risks of oil extraction and adjust our perceptions accordingly, we will look pretty stupid in hindsight.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/