The
Committee consisted of the following
Members:
Cunningham,
Mr. Jim
(Coventry, South)
(Lab)
Evennett,
Mr. David
(Bexleyheath and Crayford)
(Con)
Goodman,
Helen
(Bishop Auckland)
(Lab)
Hendry,
Charles
(Wealden)
(Con)
Luff,
Peter
(Mid-Worcestershire)
(Con)
Mudie,
Mr. George
(Leeds, East)
(Lab)
Murphy,
Mr. Denis
(Wansbeck)
(Lab)
O'Brien,
Mr. Mike
(Minister of State, Department of Energy and
Climate Change)
Robinson,
Mr. Geoffrey
(Coventry, North-West)
(Lab)
Steen,
Mr. Anthony
(Totnes)
(Con)
Webb,
Steve
(Northavon)
(LD)
Willis,
Mr. Phil
(Harrogate and Knaresborough)
(LD)
Wright,
Mr. Anthony
(Great Yarmouth)
(Lab)
Celia Blacklock, Committee
Clerk
attended the
Committee
European
Committee C
Tuesday 4
November
2008
[David
Taylor in the
Chair]
Higher Oil Prices
4.30
pm
The
Chairman: Under the revised arrangements, there is an
opportunity for a member of the European Scrutiny Committee to make a
brief explanatory statement about the decision to refer the relevant
documents to this Committee, but Mr. Steen, who is a member
of that Committee, is not here, so I call the Minister to make an
opening
statement.
The
Minister of State, Department of Energy and Climate Change
(Mr. Mike O'Brien): Thank you, Mr.
Taylor. I am sure that, under your firm but fair chairmanship, we shall
make due progress in considering the
document.
Over
the past couple of years, and particularly the past few months, we have
seen dramatic changes in oil prices. Such changes affect just about
every household and business, with increases, especially in household
bills, hitting the most vulnerable hardest. The Commission
communication that we are debating was written just before oil prices
rose to a peak of $146 a barrel in July and concentrates on the impact
of high oil prices. For that reason, I shall concentrate on that during
my
remarks.
Oil
prices have, of course, fallen by more than a half since then, and by
more than a quarter since the beginning of September, mainly due to
changes in expectations about global demand for oil. We believe that
better availability of information and other factors are important in
ensuring that we deal with such issues. The drop in oil prices is also
affecting the way in which our businesses operate. Some of them can now
obtain oil more cheaply, and that is a considerable benefit to the
transport sector. At 4 oclock today, the market price for crude
oil was $64.9 a barrel, having dropped to $60 last night, so prices are
now quite low. That has a considerable impact on the way in which the
transport industry operates, as well as on
homes.
Lower
oil prices, according to the latest figures, are good news for
motorists, but in the present economic circumstances, we look to
retailers to pass on those reduced prices quickly and in full to
consumers. We have certainly urged our customers to shop around. That
may seem obvious, but people tend to follow the habits of going to the
same retailers, and sometimes it is necessary to emphasise that they
should be prepared to shop around, not only to encourage those who
reduce their petrol prices, but to punish those who refuse to
do
so.
Although
the price of oil has dropped, the recent volatility makes it hard for
producers and some consumers to make investment and purchasing
decisions. Although the oil price has come down, given some of the
factors in the operation of the market in the past year, in due course,
when the economy recovers and the perception
of an increase in production starts to figure in how oil is priced, some
of the market issues are likely to return, but not, we hope, to the
same extent or with the same volatility that we have seen during the
past year. However, we must ensure that information is available to
enable us to try to reduce some of the uncertainty in the market. That
is exactly what the London energy meeting on 19 December will seek to
achieve. It will build on the process, which started in Jeddah earlier
this year, towards a stable oil
market.
Rising
oil prices have led to higher prices for other sources of energy, too,
and that has fed through to bills for domestic power and heating. We
are taking further action to ensure that we see Britain through these
difficult times. For example, the £1 billion home energy saving
package, announced by the Prime Minister in September, will help
households across the United Kingdom to save more than £300 a
year on their energy bills and drive a lasting change by increasing
energy efficiency and reducing consumption. We want that important
package to be delivered as quickly as possible by the various energy
companies.
At
the same time, we need to continue taking urgent action to tackle
climate change, which, if not mitigated, will undermine global growth
and security. Such action will include measures to increase energy
efficiency and diversify our energy supply by building nuclear power
stations, increasing the proportion of energy that comes from
renewables and using low-carbon emission technologies. In that context,
we support the French presidencys aim to reach agreement on the
European Unions 2020 climate and energy packages by the end of
the year. We also look forward to the opportunity for a thorough debate
on the proposals in the European Commissions second strategic
European energy review, which is due later this
yearfrom memory, on 12
November.
A
stable international oil market relies on collaborative work, not just
in Europe but beyond Europe, internationally. That is exactly what the
Government want, and it is why we are holding the meeting in December
in London, why we want to build on the Jeddah process and why we want
to ensure that we have a range of measures that start to reduce our
dependence on oil to some extent and that try to ensure that, in the
shorter term, the oil market is managed in a much less volatile way
than
recently.
This
timely debate gives us an opportunity to consider how best to respond
to the pressures of volatile oil prices, while we work towards reducing
harmful carbon
emissions.
The
Chairman: We now have until 5.30 pm for questions to the
Minister. I remind Committee members that their questions should be
brief. Subject to the discretion of the Chairman, hon. Members can ask
a series of related questions in sequence, one after the
other.
Charles
Hendry (Wealden) (Con): Will the Minister give us a little
bit of guidance on the Governments thinking about the causes of
the price rises? The documentation sets out a number of reasons that
the Commission believes were responsible, but it does not mention any
involvement of speculators. Have the Government made any assessment of
the role that
speculators may have played in the oil price rise? Have they looked at
the impact of the rises in fuel costs in different European countries?
There have been significant price rises in the UK, but price rises of
only 2 per cent. in France, which is heavily nuclear-based. What about
the situation in other countries that are coal-based, rather than
oil-based,
economies?
Mr.
O'Brien: Just for clarification, is the hon. Gentleman
talking about energy prices for gas and electricity generated by oil,
or about petrol
prices?
Charles
Hendry: I am talking about more general energy prices.
Clearly, the price of gas is linked to the price of oil, and because a
significant amount of gas is used in generating electricity, there are
knock-ons in electricity
prices.
Mr.
O'Brien: On the causes of the increases, there have been a
number of major changes in the world. The biggest change that affects
the demand for energy is the growth of India and China. Those countries
are expanding rapidly and have been demanding an increasing amount of
energy in recent years. There have also been some structural issues in
the markets. There has been increased demand, for example, from Japan
and South Korea. It has got to the stage where some liquefied natural
gas tankers that were supposedly coming towards Europe have been
diverted to the far east part-way through their journey, because that
market is prepared to pay more than some of the markets in Europe. That
has affected the overall way in which the energy market has responded
and fed into the demand for
oil.
Some
of the structural problems in the market are quite significant. Both
the number and size of new oilfields are not as great as in the past.
There are not as many new fields coming on stream, and they tend to be
somewhat smaller, so there is a certain shrinkage. Refinery capacity is
an issue, with not so much bottlenecks as some tightness in the
capacity of refineries to process some of the oil, and that has an
effect on price as
well.
Demand
has grown, not just from India and China, but from other parts of the
world where economies have been expanding. More people are driving
carsin India, for example, the growth in car use has been
enormousand that of course produces a demand for petrol. The
increasing demand for oil in parts of the developing world affects the
price to a significant
extent.
It
was suggested that the availability of investment to develop
oil-refining capacity and oil exploration had changed dramatically.
Some of the work that the EU has donewe certainly agree with
thissuggests that that has not been an enormous factor in the
oil price
increase.
Speculators
are always operating in this market. They were certainly involved, and
I have no doubt that speculation caused some of the peaks of the spike.
However, it is clear that there have been real reasons for the price
increase. That is why I suggested earlier that we have concerns about
some of the factors that will influence a rise in the oil price at some
stage down the track, when the world economy starts to
recover.
On
the recent oil price falls, the perception that global economic demand
is likely to decrease has been a crucial factor. Particularly during
the earlier part of the year, hurricanes Ike and Gustav in the US and
the Caribbean had an effect. They had some impact on
perceptions, at least, and some real impact on the delivery of oil. I do
not say that the effect was enormous in itself, but when the market is
very tight, taking out some platforms can cause an impact on
price.
European
countries clearly operate in different ways and have different kinds of
market. Some of the arrangements, particularly those for gas and
electricity, obviously feed into the oil price to some extent. Demand
in the European market has been growing, but the supply arrangements
tend to be different. Some of the deals that suppliers have with those
who buy from them are long term. Oil is bought not so much on the open
market, and certainly not on the spot market, but under long-term
arrangements with an agreed price over a long periodsometimes
not just months, but several years in some very long-term deals. That
is not really an open market. We have been trying to get the EU to move
on that and to try to create a more open market. We must ensure that
the market operates effectively. At present, we do not think that it
does, and that is why we asked the Commission to look at the matter,
but that is how such things are donethe contracts tend to be
longer term.
In
conclusion, I should like to make a point about the way that our market
operates, particularly for gas. There has been a perception that the
drop in oil prices will inevitably lead to a drop in gas prices. To
some extent, the drop in oil prices has affected the gas price.
However, the oil price has fallen by about a half, while the gas price
has only fallen by 22 per cent., and that has not yet fed through into
prices for the consumer, primarily because the British gas industry
buys gas in the market about six months ahead. So there is a process by
which the price falls will feed through eventually, but gas is being
sold at prices that are about five or six months old. Therefore,
through the coming winter, we will still see some reflection of the gas
prices that were seen a month or two ago. That is a worry.
We met the
gas companies, however, and electricity companies, because these things
feed through to the electricity companies, too. The chief executives of
those companiesthe big sixsaid that they were prepared
to indicate to consumers early on that prices would rise. Well, now we
want them to start looking at the gas market and giving us some early
indication of some price falls. Consumers want price falls,
too.
Steve
Webb (Northavon) (LD): First, I want to raise with the
Minister something that he mentioned earlier when discussing the impact
of rising oil prices on individual householders: social
tariffs.
My
understanding of the negotiations that went on with the big
sixI think that those negotiations took place before the
Minister was responsible for these matters, so if he wants to wash his
hands of the situation that is sensibleis that the Government
tried to get the big six to do something on price and they refused. The
big six said that they would do some lofts, but essentially nothing on
price. That is fine if people can get their loft done this winter, but
if they cannot, it is really bad news.
So the refuge
has been to say, But there are all these social
tariffs. However, I wonder how closely the Minister is
scrutinising the access to the social tariffs. He said in a debate in
the House a little while ago that about two
thirds of a million peopleI forget the exact figureare
on social tariffs. That is about one in five or six of the people in
fuel poverty, so most people in fuel poverty are not getting social
tariffs. I therefore wonder whether the Minister could say a little
more about access to social tariffs. I want to give an example. A very
large gas supplierI will not name it, but I think that he can
probably work out who I am talking abouthas closed access to
its social tariff. So, if that companys customers apply for the
social tariff, the company is now saying, No
more.
Part of the
companys contention is that it offers more social tariffs than
anyone else. That is why I am not vilifying the individual company,
because it is arguably already doing what all the other companies ought
to have been doing. However, if someone is a customer with that
company, they cannot now get on to a social tariff. So what are the
Government going to do for the customers of the biggest gas company in
the countrywithout naming nameswho cannot now access
the social tariff? Presumably, the majority of the companys
fuel-poor customers are not on the social tariff in the first place.
Furthermore, customers will not get their loft insulated for however
long it takes, or their loft may already be insulated. So what do the
Government plan to do for those people, other than having another stern
word to follow all the other stern words that the Government have
had?