In a recent post in the Google Photos blog ("Picasa" blog) the raw image support of Picasa was explained. But it doesn't really explain whats going on IMHO, and why Picasa is nothing more than a quick (I'm not saying "...and dirty", okay:-) "raw viewer".
First, Picasa does NOT support every raw file. With each new model, camera vendors (have to?) slightly tweak their raw format - the file extension is the same, but the format is slightly different. Picasa works with the raw files from the D70, D80, D200 for example, but it does not support the raw files from the D300 as I write this. There's a solution for that: convert the files to Adobe's DNG (digital negative) format. I've tried it, it works. The converter is free (the download is available for Windows and Mac) and Adobe is very fast in adapting it to new raw formats.
Now, back to the meat of things. The main reason to shoot raw is to stay in control in the conversion process, like, how much contrast do you want, how much highlights, do you want to preserve every detail in the shadows or rather drown them... that sort of thing. But you can adjust these things in Picasa later all right?
Well, partly... Picasa is an 8 bit program. All its edits work on 8 bit image data. But the main advantage of raw sensor data is that it contains 12 bit or even 14 bit depth and it contains much more room for shadows and highlights - which you try to bring closer together when you manually convert a raw file.
And thats the problem: Picasa's raw conversion is NOT manual. You have NO influence on the conversion. Picasa finds a raw file, it renders an 8 bit version out of that file, and thats it. You're not in control, and what you get is an automatic conversion of your raw data. One of the key advantages of shooting raw is lost.
The edits that you do with Picasa are edits on the 8 bit data. The most obvious problem is the sharpening - Picasa's sharpening function is a very crude tool, you can't adjust it in any way (and I'd rather not use it). But usually, raw sensor data needs a little bit of sharpening, but not the tons of it that Picasa's sharpen tool applies.
Conclusion: if you're shooting raw - good! If you're using only Picasa, you're wasting the potential thats in your images.