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Nick Ainger (Carmarthen, West and South Pembrokeshire) (Lab): I have been involved in the oil industry since 1973, first working in it and from 1992 representing Milford Haven, the largest UK oil port. When I saw crude oil prices starting to rise in the middle of 2007, peaking at $147 a barrel in July 2008, I scratched my bald head and thought, What on earth is going on? Since 1973, I have seen middle east crises, the straits of Hormuz closed, the Iran-Iraq war, problems in Nigeria and hurricanes in the gulf of Mexico that have taken out significant proportions of the American refining industry. However, I have never seen the price of crude oil double, as it did between the summer of 2007 and the summer of 2008, or fall to around $40 a barrel, as it then did in the space of six months.
The effect of that has been catastrophic. We have been talking about fuel poverty and the fact that since around the beginning of 2007, 2 million more people are likely to be in fuel poverty than before. We have seen riots around the world and the beginning of a huge global downturn, the like of which the Chancellor of the Exchequer believes we have not seen for 60 years. We have seen a huge hike in energy prices, coupled with the credit crunchI want to link the two, because I believe that they are absolutely interconnectedand now we are facing a severe downturn.
When I undertook some research in February and March on why the price of crude oil was doing what it was doing, I discovered that the US Congress was conducting exactly the same sort of investigation and taking evidence, so I have used quite a bit of that research. It appears that approximately five years ago, commodity index funds started to grow quite substantially. Between 2003 and July 2008, trade in commodity index funds in a range of commodities, not just oil, grew from $13 billion to $317 billion. Taking into account not just trading on the exchanges, but all the over-the-counter trading taking place, the Bank for International Settlements believes that there is some $9 trillion involved in commodity futures and speculation.
In the summer of 2007, when the credit crunch began, investors abandoned stocks and sharescertainly banks stocks and sharesand sought an investment market that appeared to them to be safe and profitable.
They alighted on commodity index funds for understandable reasons: these were pension funds, university endowments and the funds of insurance companies. The investors needed a safe income, and, believing that commodity index funds would provide it, they piled into them. As a result, we saw a huge growth in the market for commodity index funds. I am certain that the link existsthat the consequence of that huge influx of funds was the remarkable speculative spike that has caused so much damage.
It is interesting to learn the views of people who would be expected to know something about such matters. In April 2008, in a report, Citigroup spoke of
A Tidal Wave of Fund FlowDespite the economic gloom many commodity prices hit new highs in recent weeks, driven largely by investment inflows.
George Soros, who certainly knows all about these matters, said in April 2008:
You have a generalized commodity bubble due to commodities having become an asset class that institutions use to an increasing extent.
Goldman Sachs, one of the biggest players in the commodity index funds market, said:
Without question increased fund flow into commodities has boosted prices.
An even more famous organisation, Lehman Brothers, said:
We have argued recently that some of the price buoyancy during Q1 reflected financial flows and investments in oil and other commodities... Our study indicated that for every $100 million in new inflows, WTI
this was a reference to West Texas Intermediate oil
prices increase by 1.6 per cent... Our conclusion for this study is that we are seeing the classic ingredients of an asset bubble.
The financiers were saying We have now spotted what is happening. We are in an asset bubble.
At the same time, on the other side of the coin, the oil industrycertainly the Saudi energy Minister, and many other energy Ministers in OPECwere saying Dont blame us, guv. We do not envisage a fundamental problem between supply and demand. In fact, Members may recall that Saudi Arabia was prepared to increase its output by 500,000 barrels a day back in May and June. There was not really a problem of tight supply. I have concluded that while China and India were certainly playing a role in increasing demand, that did not justify the level of increase that we saw between the summer of 2007 and the summer of 2008.
Another factor that had an impact, according to pundits, was the fluctuation in exchange ratesthe weakness of the dollar in relation to the euro, and so on. Again, that will have been a factor, but it does not account for the huge spike that we saw. That is true not only of oil but of many other commodities. Once the impact of high energy prices had had its effect on the global economy and we started to see the beginning of the downturn, the fundamentals kicked in, and we saw the collapse of not only crude oil prices but metal prices, and even food prices, as people withdrew from commodity index funds.
A number of Members have said that we will come out of the present situation, and that the days of cheap oil will never return. What we must prevent is a recurrence
of what we saw in 2008. I think that the only way in which to do that is to ensure proper regulation of vital markets, not just in oilimportant though that isbut in metal and other commodities. We need full transparency, not only in relation to commodities traded on the exchanges but in all the over-the-counter deals which are, in effect, unregulated and have a huge impact on the prices of commodities. We also need to return to the situation that existed probably 10 years ago, and had certainly existed since the 1930s, in which position limits were placed on those in the market.
Ten years ago, producers and suppliers of oil were the main players in the exchanges. Perhaps 60 per cent. of trading was carried out by people who had a direct impact; the other 40 per cent. was carried out by those who provided liquidity. Their trading involved speculation, but it was necessary to provide the opportunity to hedge prices on those exchanges. Now the ratio has reversed. The majority of traders do not want to buy a pork belly, a bushel of grain or a barrel of oil. They are there to make money, from their pension funds, their university endowments or their insurance companies. I believe that until we return that ratio to where it was, the risk will remain that we will face yet another speculative spike in the future, and the only way in which to deal with that is through global regulation.
I am very pleased that the Prime Minister is considering all those issues. It is clear that not just the financial sector but the commodity markets need global regulation. I understand that the United States Congress is beginning to consider the matter seriously, and we need to persuade our regulatorthe Financial Services Authority, which looks after the ISAs futures marketthat it should take it seriously as well. The Treasury Committee, of which I am a member, is looking at the issue, although we currently have other problems on our hands involving the banking crisis. I should like to know what my hon. and learned Friend the Minister thinks about the need for greater regulation of the commodity markets to prevent a repeat of what happened this year.
My second point relates to rural energy customers. I wrote to my hon. and learned Friend enclosing two letters forwarded to me by constituents. Both were customers of Flogas, from which they had bought liquefied petroleum gas. One of the letters, dated 1 October 2008, began
Price fix for the winter.
The first constituent was offered a guarantee that the price of his LPG would be increased by 3p per litre, but that it would be fixed until 31 March 2009. Flogas wrote a similar letter to his neighbour on 2 October offering to increase his tariff by not 3p but 5p per litre.
That suggests two things to me. First, on 1 October we had experienced nearly four monthscertainly three monthsof dramatic falls in the price of oil. LPG is tied directly to the price of oil: it is almost like a by-product of the refining process. Yet the company was telling its customers that despite those three or four months of dramatic falls, its price would increase and would be fixed until 31 March next year. I think that that is outrageous. It is clear that no proper market is operating in the LPG sector in rural areas. Furthermore, those two neighbours knew each other and were able to determine that they were being charged different tariffs even though they lived 100 yd apart.
My hon. and learned Friend the Minister gave me an excellent response on what is being done to try to increase competition, not only in the LPG market but in the heating oil market. Heating oil is actually kerosene; it is jet fuel, in effect. It is used to heat a very large number of rural homes that cannot get a connection to the gas main. I am certain that British Airways and other airlines have seen dramatic reductions in the price of jet fuelthat is, kerosenerecently, but I am also pretty certain that domestic users of kerosene have seen nowhere near that level of reduction.
This comes back to the suppliers. I am not talking about the relatively small businesses that deliver the kerosene. I mean the larger suppliersthe energy companies and the oil companies. I do not believe that there is genuine competition in relation to the delivery of heating oil and LPG. Many of the distribution companies that I have spoken to tell me that the price to the consumer for both those products goes up immediately when the price of crude goes up, but that there is an awfully long time lag before any reductions are passed on. That should not be the case. I can understand it happening in the gas and electricity supply markets, but not in the LPG and heating oil markets. The price should fall as quickly as it rises, if it is keeping pace with the price of crude oil. Ofgemor perhaps the Department itselfneeds to look into what can be done to achieve proper competition in the supply of heating oil and LPG in rural areas.
Peter Luff: The hon. Gentleman is making an important point. Some 5 million households are not on the gas network, and this is an important issue for many of our constituents. The trouble is that, in this respect, Ofgem does not have powers. I still think that the Government are wrong to imagine that the Office of Fair Trading can handle the matter, and I believe that Ofgem needs more powers in this regard.
Nick Ainger: I totally agree. There is blatant abuse going on, and there is no genuine competition in either of those so-called markets. Members who represent rural constituencies have heard about real problems that have been encountered. For example, many elderly people retire or move to a rural area, perhaps to a home that is not particularly fuel efficientalthough we can help them with thatonly to find that their outgoings are being hammered. The price can depend on the time of year at which they fill their tank up, which is also an abuse of the market. An 80-year-old man came to my constituency surgery on Saturday and told me that he was spending 20 per cent. of his income on heating oil, which I found quite incredible. There is a real issue that needs to be addressed.
I support other Members comments about the need for far more Government action to tackle fuel poverty. The main reason for 2.5 million people being classified as in fuel poverty over the past two years is undoubtedly the huge hike in the unit cost of energy, and the Government are absolutely right to make significant investments to enable people to have more efficient systems, to start to tackle the problem of prepayment meters, and to make investments so that homes can be much warmer. In the short term, however, we will definitely fail to reach our 2010 energy target unless we can get the energy companies to pass on the substantial reductions in the wholesale cost of energy. I look forward to hearing my hon. and learned Friends comments on this later.
Mr. Mike Weir (Angus) (SNP): The evidence session that the Committee heard when we were preparing this report was among the most interesting that I have been involved in, covering a huge number of issues, from the markets and the impact on industry to fuel poverty. The Chairman, the hon. Member for Mid-Worcestershire (Peter Luff), gave the House a very good resumé of those issues, so I will not dwell on them further. I agree with everything that he said, apart from his enthusiasm for nuclear power, which I do not share. In the time available to me, I would like to comment on a few of the recommendations in the report.
Clearly, the most pressing issues for households up and down the country are the price of energy and fuel poverty. The complex nature of this problem is reflected in the number of recommendations on those subjects. Some of those recommendations have already produced action, and I am now going to break the habit of a lifetime by saying something almost nice about Ofgem. Its action was prompted by the Committees inquiry, and I share the Chairmans reservations about its needing to be prompted in that way. None the less, the report has produced some welcome changes, even if they are somewhat overdue.
However, I would urge the Government, Ofgem and, indeed, the companies to go much further, particularly in relation to prepayment meters. I agree with what many others have said about the difficulties that they present. Under the current proposals, there would still be an opportunity for companies to charge more for such meters, due to what they call opportunity costsnamely, the fact that the meters cost more to service. There might be something in that, but I do not believe that we should accept that argument in respect of people who are on such meters because they are fuel poor. I deliberately make that point because not everybody who is on a prepayment meter is actually fuel poor. We should bear that in mind.
For the fuel poor, prepayment meters are an example of people being penalised for paying in advance in cash. They are often used when people are in arrears and they bring with them the serious worryfor me, at leastthat people will simply self-disconnect when they cannot afford the tokens to feed the meter. We collected data on disconnections relating to other methods of payment to the energy companies, but there are no reliable data on the number of people who simply self-disconnect by not feeding their meter. That can present as many problems as there are for people who are disconnected for other reasons, and they might be disconnected for quite long periods of time because they are unable to afford to feed their meter. That risk needs to be tackled, because if we do not know that it is happening, we cannot take action to help people in that position.
Steve Webb: That is absolutely right. I have asked the energy companies to look into this, and they have told me that they do not know how to do it. The answer, however, is smart meters, and the sooner we can get on with installing them, the sooner we will know what people are consuming.
Mr. Weir: Indeed, and smart meters will also need to be interchangeable, so that everyone will know what the meter does and so that it can be easily looked at. It might also be possible to track instances of meters not being fed.
The report also tackles the difficult subject of social tariffs. I would particularly like to draw the Houses attention to recommendation 38, which states in part:
We do not accept the view that a mandatory and comprehensible definition of what constitutes a social tariff would create a race to the bottom for all suppliersrather, it would provide a minimum level above which they can compete, not only on tariffs, but also on other schemes to assist the fuel-poor.
I strongly endorse that recommendation, and I cannot for the life of me understand why the Government and the companies are so against the idea of a mandatory, statutory minimum tariff. The current tariffs are contradictory and confusing and it is difficult to determine what is in fact the best social tariff.
Nothing sums up the situation so eloquently as the disputes among the energy companies as to which offers the best social tariff. British Gas claims that it does, as it has more customers on the tariff, but I would like to quote from a briefing from Scottish and Southern Energy that I received in the past few days. It says:
The Essentials Tariff (the BG social tariff used in their standard analysis) is set at their direct debit level. This is particularly significant as SSEs standard direct debit tariff has actually been cheaper than the British Gas so-called social tariff. Therefore, British Gas Essentials Tariff is not actually helping fuel poverty; it is just helping some of their poorer customers get a slightly better deal than some of their other customersall within the generally higher British Gas pricing policy. The SSE approach, on the other hand, discounts heavily from our, already low, baseline.
Make of that what you will, Madam Deputy Speaker, but what is the consumer supposed to make of it? How is the consumer able to determine what is actually the best tariff? Even at this late stage, I urge the Minister to look again at the issue of mandatory social tariffs. Let us have a clear, transparent system so that people know what they are getting.
That brings me on to question of switching. It has already been noted that a lot of people switch suppliers, but end up worse offfurther evidence of the lack of clarity about pricing. I was very pleased yesterday when Scottish Power announced an improved tariff for vulnerable customers aged over 60 who receive benefits, but I make the point again that that does nothing for many vulnerable customers who are not over 60. Our Committee made a clear recommendation for more to be done to target the fuel poor who are not pensioners, particularly the disabled. We returned to that issue in our supplementary report, which was issued the other day and in which we said:
We also reiterate our frequent recommendation
it is not just us, as the predecessor Committee also made the same point
that much more attention must be paid to groups in fuel poverty other than pensioners, particularly disabled people under 60,
because they suffer just as much as many pensioners. Something must be done to tackle that problem.
To mention a point that the hon. Member for Carmarthen, West and South Pembrokeshire (Nick Ainger) touched on, I was particularly pleased with the recommendation on off-network consumersan issue that I have pursued for some time, including through the hearings that are mentioned in the report. It became clear that neither of the consumer bodiesEnergywatch previously or Ofgem nowhad any remit whatever in that respect. These people had simply fallen off the radar of fuel poverty.
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