Including changes in security of supply in cost benefit analysis – an application to oil prices in the transport sector

Abstract

This paper contains a tentative suggestion of how to take into account changes in security of supply in real world cost-benefit analysis. Assuming that consumers are risk avers, security of supply can be viewed as a matter of avoiding oscillations in consumption originating from volatile prices of for in- stance oil. When the government makes transport related choices on behalf of the consumers, the effect on oscillations in general consumption should be included in the policy assessment taking into account the most significant correlations between prices on alternative fuels and between fuel prices and consumption in general. In the paper, a method of valuing changes in security of supply based on portfolio theory is applied to some very simple transport related examples. They indicate that includ- ing the value of changes in security of supply often makes very little difference to the results of cost benefit analysis, but more work has to be done on quantifying, among other things, consumers’ risk aversion and the background standard deviation in total consumption before firm conclusions can be drawn.