News outlets are reporting that the catastrophic oil spill off the Gulf of Mexico might (possibly) have been prevented by a last-resort shut-off switch that’s used in other countries like Norway and Brazil. Installing an acoustic trigger as a way to prevent a terrible oil spill would have cost about $500,000; though the U.S. considered mandating these emergency switches, oil companies argued that the costs were too great and the benefits too hazy.
Too late now.
Instead of paying $500,000 in preventive care, BP is now forking over $6 million per day to repair the oil spill.
Putting aside the environmental cost of this spill (one could argue that the damage to the ecosystem can’t be monetized), we’re nonetheless faced with a precarious cost-benefit risk equation. Although this spill is a disaster of a tremendous scale, each of us must weigh a similar balance on a regular basis.
While BP decides whether saving $500,000 is worth the risk of $6 million per day, we regularly decide whether saving $150 on a renter’s insurance deductible would be worth many thousands of dollars in property and hotel costs, if something happened to our home. Those without health insurance must determine whether the (often admittedly expensive) deductibles and user contributions are worth emergency medical costs that could be as high as millions of dollars.
Risk is important, too. If we didn’t take any risk in our investment portfolio, we wouldn’t be making the most of our money.
Given my interest in the environment, I’m tempted to say that BP should have spent the money on an acoustic trigger. In my mind, the payoff (money compared to an ecosystem) is simply not commensurate. But, even when I take off my oh-so-stylish eco hat and replace it with my personal finance one, the risk and reward calculation seems vastly out of whack to me.
What do you think? Should BP have installed the acoustic trigger? When does it make sense not to insure against a risk?