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Financial Times: BP and the crude task of balancing cost and danger

By John Kay
Published: March 26 2007 19:00 | Last updated: March 26 2007 19:00

Last week the US Chemical Safety Board published its review of the fatal explosion at BP’s Texas City oil refinery. The board criticised senior executives of the company for demanding cost reductions at the expense of safety. Chemical plants are, by their nature, full of flammable liquids. Airlines carry their customers in fragile metal boxes at speed and altitude. Pharmaceutical products are effective only because they interfere with our bodies.

Refineries, aircraft and drugs are inherently dangerous. There is no limit to what can be spent to make them safer. But if there were no limit to spending, oil, flying and pharmacology would be prohibitively expensive. To say that safety must always come first, as we are all inclined to do when we hear of a tragic accident, is to indulge in empty rhetoric. It is to ignore the real social, ethical and commercial dilemmas that conscientious commentators, regulators and business people face.

Business activities such as chemicals, flying and pharmaceuticals are heavily regulated. Agencies such as CSB must balance the conflicting public interests in greater safety and cheaper products. Some do so explicitly: their economists try to calculate the monetary value of life, serious accidents and environmental damage. Perhaps companies should make the same assessment?

The Ford Motor Company once did. The company’s calculation was the “smoking gun” in what may be the most famous trial in the history of product liability. Richard Grimshaw, a 13-year-old passenger, suffered horrible disfigurement when a Ford Pinto caught fire after a rear-end collision. A Californian jury awarded $125m in punitive damages, but this was reduced on appeal.

Legend has Ford executives marketing a dangerous car after estimating that it would be cheaper to settle with grieving widows than to spend $10 per car protecting the fuel tank. The facts are somewhat different. The offending memo was prepared as part of a submission to the company’s safety regulator, the National Highway Transportation Safety Agency. The memo did not estimate the costs to Ford of protecting the fuel tank from the accident that injured Mr Grimshaw, but the cost to the US car industry of reducing the risk of fuel leakage if a car rolled over. The value of life in the calculation, at $200,000, is offensively low: much less than a US jury typically awards, and much less than the jury did in fact award to the family of the driver of the Pinto, who was killed in the accident. But the figure is based on a common methodology used by public agencies in such assessments and its source was the NHTSA itself. Ford’s calculation was precisely the one it believed the agency would make.

The Pinto was not a safe car. Small cars on US roads are vulnerable. The Pinto’s safety record was neither better nor worse than that of other small cars on American roads at the time.

Making decisions that balance human life against costs is unavoidable. Doctors and politicians, generals and road engineers must do so all the time. Everyone who buys a compact car makes such a trade-off. We wish it were not so. We prefer that the calculations are implicit rather than explicit. We prefer them to be made by public agencies than by private companies. And we deny that we make these judgments ourselves, although we do so every day.

Ford’s error in that memorandum was a more subtle one than the story of profit before human life – which may, nevertheless, have been the reality – allows. A private business had asserted the authority which only a political process can make legitimate. The safest course for a company making judgments about public safety – and it is not a very safe course either for the company or the public – is to rise slightly above the standards of its peers.

The unattractive consequence is that safety standards and costs are the outcome not of calculation, but of competition and comparison. BP’s mistake was to let standards slip in an environment where financial market pressure to enhance earnings per share meant that competition served to lower standards, not to raise them.

Copyright The Financial Times Limited 2007

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