Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 460 - 479)

WEDNESDAY 14 FEBRUARY 2001

MR PETER HAIN, MP AND MR STEPHEN TIMMS, MP

  460. Was this not the purpose of this much flaunted Forum? How long has it been in existence? Did it arise as a consequence of the events of September, or has it been in existence beforehand?
  (Mr Timms) It was in existence well before the problems of last September. I think it has been in existence for about two years now.

  461. It does not say much for it when it did not realise a crisis like this was coming up?
  (Mr Timms) Well, the people on the Forum were organisations like the Freight Transport Association and the Road Haulage Association which, of course, were not themselves supporting the protest, but they have contributed to us gaining a good understanding of the conditions that the industry faces and that, of course, provided the background for the very substantial package of measures that the Chancellor announced in November. I know that the participants in the Forum felt that was a very welcome move by government which addressed the concerns that they had been raising through the Forum over this period.

  462. With respect, when you cannot even agree on a figure like 20 per cent for the degree of over-capacity, it tends to suggest that the nearest these people get to a steering group is the back seat of a taxi. One does not have a lot of faith in this conceptual body when it cannot even agree on matters like over-capacity in the industry.
  (Mr Timms) What we have attempted to do in the Forum is what I have been arguing to the Committee this morning we should be doing which is to address the full range of the issues facing the industry and we have been able to make some very positive responses that the industry has certainly very warmly welcomed as a result of the discussions that we have had in that body.

Mr Berry

  463. Finally, on the haulage industry, bridging the UK's productivity gap is one of the key objectives of government policy. How does our haulage industry compare with industries in France or Germany in terms of productivity?
  (Mr Timms) Those are figures that I do not have. The DETR may well do.

  464. Moving on to bulk buying, we have had evidence from hauliers and farmers that diesel prices at pumps are often cheaper than bulk buying. Is this an issue that has been discussed or raised at the Road Haulage Forum?
  (Mr Timms) Yes, it is. Concerns have been raised about that and I know that the Director General of Fair Trading has, as part of the work he did last autumn, looked at whether there were problems in that area and his conclusion was that the differential was not anti-competitive behaviour by major oil companies but the result of combination of high world oil prices and public pressure on UK retail prices. Certainly the companies and organisations represented at the Forum were concerned at one stage about that differential. I think the problem has eased now or may not even apply at all, but at one stage it certainly was a worry to them.

  465. I do not immediately see how world oil prices suddenly have an effect on the differential and it is pretty odd, is it not, if you can get cheaper diesel by popping down to the local pump than by engaging in a bulk-buying arrangement. That does suggest prima facie evidence that there is something wrong with the market—perhaps a bit of market failure here?
  (Mr Timms) I think what the Director General of Fair Trading said was that a combination of high world oil prices and public pressure on UK retail prices had resulted in a squeeze on diesel and petrol margins rather than anti-competitive behaviour.

  466. So it is those who are buying in bulk being ripped off, not the people at the pump?
  (Mr Timms) The evidence that he had indicated that there was a lot of pressure on margins at retail pumps and that is what led to, for a fairly short period, I think, the differential that the hauliers were, understandably, very concerned about.

  467. Would it be possible for the Committee to be updated on this? If it is an issue that has gone away then so be it but can you advise us perhaps in writing on the current position on this if it is still a concern? Our impression is it is an on-going concern.
  (Mr Timms) I think the data for that would be held by the DETR.

Mr Laxton

  468. If I recall correctly I think it was evidence received from the National Farmers' Union who were making the claim that they were monitoring the price of diesel at the pumps and yet they were saying that, although that was being squeezed and being held down and stabilised, they had seen the prices they were having to buy diesel going up, I think by some fairly substantial figures—20-30 per cent—and they had been monitoring that. If you can provide the Committee with some information on that particular aspect, that would be helpful.
  (Mr Hain) We certainly will.

  Chairman: Could you also provide us with the OFT information? That would be helpful—or it might not be helpful because we have had material from the OFT before and it has been singularly unhelpful! Notwithstanding that, hope springs eternal.

Helen Southworth

  469. Some of us have not been very impressed by the actions of the oil companies over the past twelve months. Mr Hain, when you were giving evidence you said that when we go to the petrol pump we feel the pain which the oil companies do not seem to feel—they just seem to feel profit. Are you confident that the oil companies will pass on the proposed duty cut that was announced in the pre budget report or do you have some concerns about the integrity of the oil companies, as many of us do?
  (Mr Hain) Stephen probably will want to comment on duty matters as well but I have met all the oil companies over the last ten days or so specifically about the current situation and the introduction of ultra low sulphur petrol and they have assured me they will pass on the duty and cuts whenever they are implemented, and they are determined to do that. I think market pressures and consumer and customer expectations will demand that.

  470. Is there any legitimate reason why they could fail to do that?
  (Mr Hain) Well, there is a very volatile market at the present time. In December I think petrol prices were 5 per cent a litre lower than they were on 4 December but then the weekend before last there was an increase in wholesale prices—had been over the previous three weeks—so there was an upward trend, but the oil companies all assured me, as did the hypermarkets and other independent retailers that, so far as ULSP is concerned at least, they would reduce prices by 2p.

  471. What are you doing or what can you do to make sure that crude oil price drops are followed by price drops for the pumps and for the customers?
  (Mr Hain) Stephen referred to the OFT examination of this matter which found there were no anti-competitive practices going on, and we are pressing for as close a correlation between the two as possible. For example, I think the world price of oil at its highest was round about the mid-30s dollars per barrel compared with ten dollars per barrel, so more than treble its lowest point a few years back. It has now come down to round about 25/26 and you have seen some reduction in petrol prices at the pump as a result—around 5 pence a litre—but it is still very volatile so we are working with OPEC to seek to bring down overall world prices but also to ensure that those are passed on to the customer when that occurs.

  472. It does seem very difficult for people to understand why oil companies are making absolutely phenomenal profits at a time when the rest of us are experiencing difficulties in this area. Do you think that is honest?
  (Mr Hain) It is very difficult for the average motorist to understand that huge oil company profits are not passed on at the pump but, on the other hand, as any conversation or independent analysis will show, margins in the retail fuel markets, especially for petrol and diesel, are very tight and have been squeezed over the last few months. That is a separate market from the offshore oil exploration and development market which, I think, in fairness, has seen a big increase in planned investment over the last few months at least, having plummeted when the oil price was very low, which was very worrying from the point of view of North Sea oil development and all the jobs that depend upon it. You have now seen a surge in planned investment which has reflected grown profitability offshore. As long as that profitability is driving investment and the jobs connected to it, that is a correlation which I think we would expect. If that did not happen then I am sure that everyone would want to scrutinise more closely than has been the case what has been happening offshore.

  473. So you think we are going to see the oil companies recognising more and more their obligations to society and to customers?
  (Mr Hain) You have to ask the oil companies that rather than the ministers, because I do not think it is wise for ministers to comment on individual company profits or performance, but everybody concerned is very anxious that prices at the pump are kept as low as possible, and we are also very anxious to see a highly competitive retail petrol forecourt station market. I do not think anybody can doubt that it is so competitive at the moment that some forecourts have been going out of business. Can I just say that one other factor which has been very welcome is the introduction of hypermarket forecourts into the petrol and retail market. This has had a downward pressure on prices right across the markets and has meant that oil companies could not in a sense overprice because the hypermarkets are operating at highly competitive levels.

Mr Berry

  474. Does the government want to see lower fuel prices or higher fuel prices because clearly reference has been made quite rightly by Mr Timms to the Kyoto targets and so on and I know there is a balancing act. We have environmental considerations and the cost of business but part of the discussion this morning has been about the advantages of higher fuel prices and meeting Kyoto targets; the other part has been about the value of reducing prices to assist business. Which is it?
  (Mr Timms) I think, as you rightly say, there is a balance of considerations to be taken into account. As far as the fuel duty is concerned, the Chancellor announced at the Budget before last that he would make decisions about fuel duty on a budget-by-budget basis, taking into account all the economic, social and environmental considerations, rather than having the annual, automatic increases that we had as a result of the fuel duty escalator previously. I think Michael Meacher has made the point that, in a sense, what has happened to crude prices has done some of the job of the escalator recently, and that clearly changes the context of the decisions somewhat.
  (Mr Hain) Can I add one other point, if I could? Of course, this might have been referred to by Stephen earlier, but the OFT carried out an inquiry into wholesale petrol and diesel prices last year which found there was no evidence of anti-competitive behaviour by the major oil companies, but concluded there was a combination of factors including higher world prices which had resulted in retailers experiencing a squeeze on margins at that time. If the Director General for Fair Trading suspected that there was something dodgy in the market and that his previous inquiry had to be, as it were, updated, I am sure he would act very speedily.

Mr Chope

  475. It is accepted that the pre-tax price of fuel at the pump is about the lowest in Europe and that after tax the price of fuel at the pump is by far the highest in Europe. We have had this announcement on BP's performance yesterday. Can you take this opportunity to congratulate BP on being an outstandingly successful British company, making substantial profits out of its overseas operations and providing its domestic service at almost no profit whatsoever? Can you hit on the head these ludicrous suggestions that there might be some sort of windfall profit tax on the oil companies in addition to the substantially increased petroleum revenue tax yield which you have got this year of an extra £100 million out of the rise in the price of crude oil?
  (Mr Timms) We, of course, welcome the success of British firms whoever the firms are, and BP Amoco is undoubtedly extremely successful and a success we commend. However, of course, it is as a result of the successful management of the economy over the last four years that very many British firms have done extremely well, and I think that is something that will be pleasing to all of us. You asked about a windfall tax on petrol companies. The Chancellor, I think, set out in the Pre-Budget Report in November the approach that we take to these matters, and I can quote you what he said. He said: "I am determined not to make short-term decisions based on short-term factors. The key issue is the level of long-term investment in the North Sea and that will be the approach that will guide Budget decisions in the future." I think that is underlining the point Peter made earlier, that we are very concerned about the need for us to continue to benefit as a nation from investment and profits in the North Sea. It is just perhaps worth adding that there are figures published in the PBR for receipts from North Sea revenues, and if you look at all the revenue coming into the Exchequer from the North Sea, the figure published for 1999-2000 was £2.6 billion and for the financial year 2001-2002 (two years later) it is £7.3  billion. So there is a substantial gain to the Exchequer from the North Sea.

Mr Baldry

  476. Minister of State, I quote you: "Everyone is concerned to keep the prices at the pumps as low as possible." That, of course, is not the case because we do have the highest petrol prices at the pump of any European Union country, and the reason for that is because the Exchequer extracts so much money from consumers by way of petrol tax, which is wholly regretted. A district nurse in a village 20 miles from Banbury is having to pay exactly the same amount of petrol duty as someone who is affluent (?). What we now see this morning is the continuous exercise of buck-passing, of saying it is the oil companies' problem, it is an OPEC problem, whatever. Would it not be fairer, in the interests of consumer transparency, at the petrol pumps, where you tend in the interests of consumer transparency to have litres and gallons made equivalent, for the consumer to not also know just how much of the cost of a litre of petrol is going into tax? Would that be fair at the petrol pump, so they come up and they go to buy their petrol they know exactly how much the Exchequer is ripping them off when they actually fill up their cars or their vans or trucks?
  (Mr Timms) I recall attending a Rule Bill along these lines not very long ago, which Mr Baldry moved. It seems to me to be unnecessary additional regulation being proposed which I do not think would serve a substantial public purpose, and I would not favour it. Just as a matter of interest, if you look at what has happened to petrol prices over the last couple of years, there has been of the order of about an 18p a litre increase in that period, of which only about 2p is as a result of duty, the rest has been as a result of the crude changes, and the proportion of a litre of petrol accounted for by tax today is not very much different from what it was three or four years ago.

  477. But you see, Financial Secretary, you have talked about the line to take is that the Chancellor will balance the economic, social and environmental factors. What actually he is balancing, I suggest, is what he can get away with. The reduction after the petrol protests were what the Chancellor felt he would get away with. In a sense, he wants to maximise the revenue that he gets from petrol. It is a simple exercise, so far as the Exchequer is concerned. When world oil prices go up, of course, it has a disproportionate impact, particularly on the competitiveness of United Kingdom industry. Going back to the question that Mr Berry asked, really it seems that the Government, collectively, have not quite worked out whether they want to help the competitiveness of United Kingdom business by, to quote the Minister of State, "keeping the prices at the pump as low as possible", or simply the Exchequer wishes to extract the maximum amount of revenue. There seems to be a dilemma here which is being paid for by constituents and by business who are finding themselves paying ever higher fuel prices.
  (Mr Timms) I think it genuinely is a balance of those factors that is needed and that the Chancellor takes into account in making his decision. Bear in mind that the fuel duty escalator was cancelled in the PBR before last, long before there were the protests.

Chairman

  478. The tax was not. It is a rather facile point.
  (Mr Timms) The escalator was cancelled. That is my point, Chairman.

  479. But there was still an increase. There is still a substantial element of taxation on a litre of petrol.
  (Mr Timms) Of course there is, and there always will be and there always has been. I am not suggesting we are about to scrap duty on fuel. The escalator was cancelled the November before last, we then introduced an inflation-only duty rise in the Budget that followed (the Budget last year), long before the protests that came in September. So I do not accept Mr Baldry's characterisation of the process that goes on in determining these things. I think there is a genuine consideration of the environmental, economic and social factors, all of which have an influence on the Chancellor's decision.
  (Mr Hain) Can I say, Chairman, that in case Mr Baldry is attempting to separate my common-sense statement that the price should be kept as low as possible, my colleague and I are welded together.


 
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