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European Standing Committee C Debates

Higher Oil Prices



The Committee consisted of the following Members:

Chairman: David Taylor
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 o’clock 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.
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 presidency’s aim to reach agreement on the European Union’s 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 Commission’s second strategic European energy review, which is due later this year—from 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 Government’s 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 cars—in India, for example, the growth in car use has been enormous—and 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 done—we certainly agree with this—suggests 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 period—sometimes 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 done—the 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 companies—the big six—said 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 six—I 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 sensible—is 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.
Part of the company’s 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 country—without naming names—who cannot now access the social tariff? Presumably, the majority of the company’s 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?
 
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Prepared 5 November 2008