Motion made, and Question proposed,
That a supplementary sum not exceeding £45,000,000 be granted to Her Majesty out of the Consolidated Fund to defray the charges which will come in the course of payment during the year ending on 31st March 1985 for expenditure by the Department of Energy in connection with the energy industries including related research and development, selective assistance to industry, energy conservation, oil storage, and certain other services including grants in aid and an international subscription. —[Mr. Buchanan-Smith.]
§ Mr. Ian Lloyd (Havant)
Last, but not I think least, we come to energy. The Select Committee on Energy and I as its Chairman are grateful to the House and to the Liaison Committee for the opportunity to discuss the issues raised by our report on the £45 million allocated to the financing of BNOC in the winter Supplementary Estimates.
Before dealing with the report, I wish to thank very warmly the members and staff of my Committee for the stupendous efforts that they made to complete and publish a report within 15 days of the decision to make the inquiry. In my view, that very creditable achievement conceals two things. First, we were unable to take evidence, as we would have wished, from a number of other significant witnesses such as the recipients of the letter from my right hon. Friend the Secretary of State. As Chairman of a Select Committee which has always sought to base its conclusions very firmly on the evidence, I believe that that fully justifies our first conclusion—that if the spirit of Standing Order No. 19 is to be observed the Government should not put this kind of pressure on Select Committees. Secondly, the Government have yet again refused to disclose important evidence which in my judgment could have been disclosed without prejudicing commercial confidence. This may limit the report, but I do not believe that it invalidates our conclusions.
Two documents are especially relevant. The first is the Government's letter to the oil companies in August this year. A summary of that document, still marked "confidential", disclosed nothing of interest or importance but in my judgment it is clear that the letter influenced both BNOC and the oil industry's actions. I shall return to that later. The second document, which I requested after my right hon. Friend the Secretary of State had mentioned its existence in his evidence, was a review of oil price policy carried out by the Department. Our Clerk was advised that this was "advice to Ministers" and an "internal working document" and could not be provided.
Technically, Select Committees have power to send for papers and persons, but it seems that our power to send for persons is significantly greater than our power to send for papers. That being so, I believe that the discharge of our responsibility to Parliament and to the nation is becoming seriously deficient in a significant respect. We could have been shown those papers—in confidence, if necessary— 199 but we have not seen them. They might even have vindicated the Government's position completely, although I doubt it. Certainly I believe that our suspicions will be justified long before the year 2014. My conclusion is, however, that the rule should be redefined to reflect the present reality—in other words, that Select Committees have power to send for persons and for any papers except those which the Government of the day consider too important or sensitive to be disclosed. All Governments would find that convenient and it defines the real limits to our power. It also seriously limits our ability to provide Parliament and the nation with a second opinion on its affairs which has real value and relevance. I believe that that is a matter for the House as a whole.
As regards the issues involved in the report, the inquiry began in April 1983 when my right hon. Friend the Chancellor was Secretary of State for Energy and gave important evidence to us on oil prices. At that time, there was no immediate prospect of BNOC making losses. The memorandum on the subject from the Department of Energy was quite specific. It stated:Neither B.N.O.C. nor the Government can intervene in the pricing of North Sea oil in defiance of market forces and the underlying changes in the pattern of energy use and consumer behaviour".The memorandum continued, saying that BNOC would not have to make frequent price changes and that it would build up "long-term relationships" with its customers and agree prices whichreflected their longer-run commitments of interest".We were told that the Department itself did not make short-term forecasts, disliked and sought to avoid "sharp and sudden changes" in the price of oil, considered thatour interests, overall, were not the same as O.P.E.C.and argued that price stability in the short termdepends very much on O.P.E.C. agreeing and adhering to restrictive production programmes.The then Secretary of State confirmed the position in a most important evidence session, the conclusions of which marked the beginning of the present inquiry. I shall mention just three. First, he said:B.N.O.C. are price-takers, not price-setters … must interpret market signals … and cannot stand in the way of market forces".Secondly, he said that while seeking "stability" the Government allow the companiesto produce as much as they likeand make no attemptto control the price".Thirdly, he said:it is not the case that I, having any idea or view on what the world price of oil is, seek to try to use B.N.O.C. as an instrument to achieve that price. Nothing like that at all".What, then, is the reality? The evidence since April 1983, as my Committee and I see it, seems to point in exactly the opposite direction. The Government now derive so much of their revenue — comparatively painlessly to themselves, if not to the final consumer—from oil or from the North sea, that their loud protestations of unconcern about price levels simply do not square with their actions. They are not concerned merely with the suddenness or sharpness of any change in direction. Indeed, they seem to me to be almost obsessed with the consequences of what they fear most, which I would define—and I believe that they would define—as the collapse of the highly artificial price structure inflicted on the world by OPEC at a time when we produced no oil and 200 had virtually no short-term options open to us. The apparent permanence of that price structure has been converted by that remarkable mechanism, the market, into a worldwide response of immense power and significance. The production of non-OPEC oil has boomed. The North sea has boomed. The Government's tax revenues have boomed.
The figures for tax revenue are noteworthy. For all the years to May 1979, the figure was £970 million. For the period from May 1979 to this year, it was £29 million. The community still pays much the same price as it paid to OPEC. It is the beneficiaries who have changed. Whatever the national interest may be—and it is debatable—no one can deny a vast overlap of interest between the Treasury and OPEC In 1984, the Treasury's tax take from the North sea was £22 billion gross and £16 billion net, after allowing for related imports, interest, dividends and repayments of capital.
The scale of the national dilemma may be gleaned from the fact that in 1983 the trading profits from all United Kingdom companies amounted to £56 billion, of which North sea companies alone accounted for £15.6 billion.
OPEC makes no bones about its views. At this moment it may be making them plain — for all I know — in Geneva. It is we who equivocate about our views. OPEC stated not long ago that its policy was toregulate and determine oil prices".It believes in holding prices when demand is falling and in raising them when demand is rising. It believes that the purpose of its oil revenues is to finance the industrial transition and restructuring of its members' economies. It believes that its members would be appalled by a price collapse and must refrain above all from "competition in prices".
The demonstration of those views and that interest has been the steady decline of OPEC output from a peak of over 50 million barrels a day to some 16 million barrels now. OPEC believes that it remains in its interests to sell a small quantity at a higher price rather than a larger quantity at a low price. An OPEC think tank has stated openly:Competitive discounting has no theoretical floor above the marginal cost of productionand:Economic recovery will not cause a commensurate increase in oil demand".The House might be interested to know why that is so. In 1978ߝ81, the energy used per unit of gross domestic product in the OECD area fell by 8 per cent., but the oil component of that energy fell by 24 per cent.
So much for OPEC. I have already summarised what we ourselves have said. What we do, however, is different. Broadly speaking, our policy response to the situation has been twofold. Under the OPEC umbrella we have created a significant domestic oil capacity. Much, but not all, of that capacity is dependent on OPEC price levels. When he was Secretary of State for Energy, my right hon. Friend the Chancellor stated in evidence to us that North sea fields would not go out of business at a low price. He said:obviously … there is an oil price at which they would not be profitable, but it is a very low price indeed".That was a most significant statement. The Brown Book itself discloses that the average cost of production of oil in the North sea is in fact $10 a barrel. That judgment was confirmed by a recent analysis supplied by Professors 201 Kemp and Rose which estimated the development costs for some 23 new oilfields in the North sea with a total reserve of 2.6 billion barrels.
For fields of more than 250 million barrels, the cost would be $6 per barrel. For fields of more than 100 million barrels, the cost would be $7 per barrel. For fields producing over 50 million barrels — the most uneconomic to develop — the cost would be $10 per barrel. Anticipated operating costs are $12 per barrel for the larger fields and $17 for the smaller. The margin, therefore, remains very large. The parties that are interested in those margins are not the oil companies but the Government who tax them, either for development in the middle east, or, in the west, to satisfy the insatiable public expenditure budgets.
The position is summarised in a remarkable table published by Shell for 1982. Of the $62 received from a typical OPEC barrel in western Europe, $52 disappears in Government revenue—$33 to OPEC and $19 to other Governments. For the North sea, as I have said, the proportion is even higher—somewhere between 85 and 90 per cent. at the margin, though the percentage varies with the field and the location.
OPEC stands to lose $7.4 billion for every fall of $1 in the price of a barrel. I have been unable to find out what the United Kingdom figure is, but it is certainly proportionate.
Those are the real forces at work. That is the scene in which, so we were told, in some mystical and undisclosed combination, in a sort of immaculate co-determination, the Government and BNOC strove desperately not to influence the price of oil—which they tell us they have neither the power nor the wish to do—but to achieve that equally mystical objective, stability. Over and over again, the word "stability" appears in the evidence. Both Lord Croham and my right hon. Friend the Minister of State declared that stability is the goal. How does one achieve stability without exercising a direct influence on the market? And how does one exercise that influence without influencing either supply or price? Politicians may know, but, for once, the economists are speechless.
It is clear from BNOC's recent evidence that a deliberate decision was made to hold the BNOC price above the spot market. BNOC feared that the market was misguided, and that it might collapse and never recover. That is OPEC's view. Lord Croham was quite frank. He stated that North sea output levels were a matter for the Government but that BNOC accepted the Government's view thatany sharp fall in oil prices would be detrimental to North Sea developmentand that, if prices fell,other things might collapse".He added, however, that the European system of price support was designed to keep oil pricespermanently above what is a competitive price".Made by a former head of the Civil Service, that is a most authoritative statement. It is also very frank. I submit that it defines a reality that is fundamentally different from that which the Government, in their evidence, sought to imply. The reality involved BNOC in supporting the price and the market, created the losses, ensured that BNOC would have to come to Parliament for money and confirmed that it must have acted on instructions from the Government.
In his turn, my right hon. Friend was most disarming. He denied Lord Croham's conclusion. He reminded me 202 very much of a bishop in a confessional. If he is to be considered human and truthful, he must disclose something. However, he dare not disclose anything of real significance that might totally destroy his authority in the pulpit. My right hon. Friend, too, sheltered behind the shield of "stability" — that overworked and jaded criterion that has concealed the true objectives of every cartel throughout the ages, whether or not it has been supported by a Government. However, my right hon. Friend added that there were "special factors". There always are. What distinguishes a market from a bureaucracy is that the former accepts and responds at once to special factors. The latter dislikes them intensely, attributes them to Machiavellian forces and wishes that they would go away and allow the plan to be fulfilled as if the special factors had never arisen.
What we discovered, and now know, is that the interference did not work. The price continued to fall and the taxpayer had to pick up the bill. Moreover, we suspect that the bill will be larger—much larger—unless a few of the realities which I have outlined are accepted, and quickly. That is the background to what I believe to be my Committee's most central and significant conclusion. Perhaps I might remind the House of its terms. It said:The Committee believes that the distinction drawn between promoting stability and resistance to market forces is an artificial one. We find it hard to believe from the evidence of the past year or so that the Government has not taken the view that a certain price level for oil is desirable in the national interest and that it attempts to intervene in the market, as any other body with a considerable vested interest would, to secure that price.On that rests essentially all that follows.
We need a much wider debate than this Estimate allows. The debate should include the future of BNOC and the framework within which it has to operate, whether the national interest as a whole is best served by high or low oil prices, high or low energy prices, the energy development scenarios which might follow one set of oil price policies or the other, and the cost to the west of any formal or informal support of the present OPEC/North sea cartel arrangements.
§ Mr. Dick Douglas (Dunfermline, West)
The hon. Gentleman has mentioned several factors in regard to the Government's policy but has omitted a significant one—the level of output. Does his Committee take a view on the current level of output from the North sea, which is about 2.5 million barrels a day?
§ Mr. Lloyd
I am sure that my Committee would take a view on the current level of output if it considered the matter. What has impressed us far more is the fundamental change in the composition of the world output of oil, during the past 10 years. OPEC occupied about two thirds of a columnar illustration at the beginning of the decade whereas it now occupies just a little more than the top one third. The North sea is a significant factor in that change but the most significant is the decline of 10 billion barrels a day in world demand and the greater decline of 13 billion barrels a day in OPEC output.
I believe that we have blown the top off this can of complexity, half truths, secret initiatives and economic distortion which is disguised by some of the world's most powerful pressure groups as expressions of unqualified public interest. If, as I believe, the world's oil industry has responded to the OPEC price level by creating—very much to its credit—a massive alternative supply system, we should at least discuss whether and how the nation, or 203 the west as a whole, is to receive the full benefits of that and whether and to what extent OPEC will react in the short, medium and long term. There is a significant rather than a negligible overlap of interests between us and OPEC. We should also discuss how we can avoid a recurrence of the serious cartel exploitation which occurred in the 1960s and the 1970s. This must be an open and continuing debate. We have established the bridgehead. It is up to the House and the country, if I might put it this way, to follow through with an armoured division of debate and analysis. Nothing less will do.
§ Mr. Gavin Strang (Edinburgh, East)
I am grateful for the opportunity to congratulate the hon. Member for Havant (Mr. Lloyd) on his introduction of his Select Committee's report. Many of us agree that this might not be the most appropriate time to debate that report—it justifies a separate debate. I should like to address myself to the dominant issue in the energy industry with regard to public cost—the current miners' strike.
We are told that the Government's case in the dispute is the need to close uneconomic pits. There are three levels of argument.
§ Mr. Deputy Speaker (Mr. Harold Walker)
Order. I shall be interested to see how the hon. Gentleman relates his speech to the Estimates.
§ Mr. Strang
I have had advice to the effect that it would be possible to refer to the coal industry in this debate.
§ Mr. Deputy Speaker
Order. A passing reference is one thing, but choosing the dispute in the coal industry as the theme of a speech is quite another.
§ Mr. Strang
I am grateful to you, Mr. Deputy Speaker. I shall therefore make a rather modified speech. If you are telling me, Mr. Deputy Speaker, that it is not possible to refer to the coal industry in a debate on the Estimates, I shall take your advice, but that is not the advice that I have been given.
We are talking about public expenditure and the Department of Energy. Oil, gas and coal are crucially important but our most important energy resource is coal. We should therefore concern ourselves with the cost of its production. Bearing in mind the fact that there has not been one special debate on the coal mining strike—
§ Mr. Deputy Speaker
Order. I have told the hon. Gentleman that it is in order to make a passing reference to the coal industry by way of analogy but he must not make the dispute the theme of his speech. The House is considering Estimates that relate to BNOC and I hope that the hon. Gentleman will direct his remarks to them.
§ Mr. Strang
Well, I should therefore like to draw a comparison between the case for oil and the case for coal. It is right to consider the level of North sea oil production. As the hon. Member for Havant said, bearing in mind the huge world market for oil, Britain could be considered a factor in determining the world price of oil. As we are concerned about the economics of oil production as opposed to other forms of energy, it is right to examine the costs involved. I hope that it will be possible for me to refer in passing to the cost of coal production.
§ Mr. Deputy Speaker
Order. I think that the hon. Gentleman and I have different opinions about what he may refer to. I hope that he will have regard to what I have already told him at least twice.
§ Mr. Strang
I am grateful to you, Mr. Deputy Speaker. It seems that the earlier advice which I received from a good source—
§ Mr. Strang
I am happy to make it absolutely clear that in no way am I challenging your judgment, Mr. Deputy Speaker. For that reason I shall conclude by saying that the case for oil is strong but oil must be considered in the overall context of energy production and supply. It is nonsense to debate these issues without taking account of the fundamental economic and social costs. I make that point without considering just one commodity of production. Whether talking about oil or gas production, or any form of energy production, we must recognise that the economic costs differ. That is a crucial argument to consider not only in an energy debate on North sea oil but in an economic debate in general.
We often do not recognise that the accountancy value of one aspect of production differs greatly from the economic value in terms of fixed overhead costs, fixed costs for pension schemes and, above all, social costs and consequences. Whether discussing North sea oil—this morning the Minister of State spoke about North sea oil in the Scottish Grand Committee—or other sources of energy production, the tragedy is that we are not giving sufficient weight to the huge amount of social damage that occurs as a consequence of mass unemployment in many of our communities.
§ Mr. David Howell (Guildford)
The House will wish to congratulate my hon. Friend the Member for Havant (Mr. Lloyd) and all the members of the Select Committee on Energy on a remarkably lucid report, produced with great speed and efficiency. I warmly join in those congratulations. I intervene in this debate with some hesitation because I am not a member of that Committee, but I should like to direct the attention of my right hon. Friend the Minister of State to certain points.
I shall consider the genesis of the British National Oil Corporation, which is entirely a trading body, trading in crude oil. When the Government decided to keep the BNOC trading arm as a separate body, it was not originally intended that it should become an instrument for shaping North sea oil prices, let alone for establishing an official British North sea oil price. BNOC was kept on at the time it was decided to split the original corporation and to prepare for privatisation — the upstream exploration development production division which subsequently became Britoil—to ensure security of supply. It was thought that that would be the simplest way of establishing security of supply. It was argued — perhaps that argument seems a little remote now — that it was essential to have an instrument which would work and be acceptable and which, if there were a third oil shock and another huge interruption in oil supplies internationally, could assure supplies from British producers to British consumers and the refineries. Some argued that security of supply could be achieved in another way, and a great 205 deal of debate has occurred on that subject. There are difficulties associated with the EEC and the treaty of Rome.
I have wished all along that there should be no such organisation to fix prices, and even today I do not believe that it would be wise to have a body that appears to be the source of an official price or even a single price which people the world over, including OPEC leaders, see as an official price. I believe that we should have adhered closely to that view. In considering participation agreements and the purchasing and selling of large volumes of crude oil, BNOC should be a price taker and not a price giver or maker. That fact should be clearly established in international oil markets and understood, especially by Governments of other oil-producing countries.
The reason we were so worried about the danger that could occur was obvious. If it became apparent that Britain had an official oil price, it would follow that that price could be manipulated. We feared that people would come to London saying, "Why do not the British Government do something about the official oil price, because that would help us with other manipulations on the world market?" Events have justified that fear, because that is exactly what has happened. It is ironic that one of the greatest free-world oil producers, the United States — admittedly, not a vast exporter, but nevertheless a huge producer and therefore decisive in the world oil market — has no national oil corporation. It therefore is not lambasted, squeezed and pushed by the world's oil diplomats in the alleged interests of maintaining price stability. We envisaged that danger.
BNOC's involvement with prices has not evolved in the way originally intended. That would be a sufficient danger, but we seem to face an even greater danger. It is believed that BNOC should not only be concerned with shaping North sea prices but take up a positive position in response to consultation with Government about stabilising the world crude oil price. That bold first step is fraught with danger, and I say that not with hindsight but because I have believed it for a long time.
The Select Committee has already sought to elucidate how the consultation—I put it no more strongly than that—was arranged, so that BNOC, whose officials are familiar with the world market and, given the circumstances in which they operate, have conducted themselves with extreme skill, felt compelled to move further into the vast world of oil pricing to take up an active position to stabilise world oil prices. That is what BNOC appeared to do in the summer. Obviously, my right hon. Friend the Minister of State will explain what really happened but that appeared to be the Government's requirement of BNOC. That function differed from the originally correct purpose and function of BNOC.
It would be unwise if BNOC has not only become generally involved in price shaping of North sea crude oil prices but tried to take a stance on price fixing in world oil markets. The reasons why that is unwise are obvious. It will not work. Obviously, British oil production is only a tiny proportion of world oil production. Vast forces and trends are at work in the world oil market which, frankly, ride right over and stand well away from anything that can be done with North sea prices or volumes. The oil markets worldwide have, for 100 years, barring only the gap of the past 14 years, faced the fact that there is too much oil.
206 For at least 18 months or two years, it has been certain that there would be a continuing softening of oil prices as attempts by the OPEC cartel to maintain the extremely high political and artificial levels of the early 1980s were progressively weakened. I do not believe that that will lead to a collapse in oil prices, but I believe that we shall see the operation of the type of forces that operated at the end of the 1970s. In those days, oil was priced at between $12 and $14 a barrel. Grossing that figure for inflation since then, the price per barrel would be about $25—probably $3 or $4 below the present price.
It has been widely expected by those who try to watch the oil markets that the price would move in that direction. It was optimistic at best and imprudent at worst for BNOC to try to prevent that happening. Any move winch might, at first, lead to trying to hang on to a price and then have to give way gives one the worst of all worlds. It would be worse than doing nothing in the first place. It is a great pity if that is the sequence of events.
That is the first reason why it was not the best thing for BNOC, on the basis of consultation, to try to move into the sphere of world oil prices. It was not going to work.
The second reason is that BNOC was bound to lose money. That view was widely held and it is what has happened. I understand that the loss is at the rate of £15 million a month, and that is also a pity. I join the Select Committee in urging careful thought before any further developments are allowed which will lead to further losses of that size.
The third reason has to do with international diplomacy. For BNOC to get into a posture where it might give the impression, or in which my right hon. and hon. Friends might give the impression, that they could do something decisively to influence oil prices was dangerous, because they cannot. Except in the short term, that cannot be done. A friend refused may be a friend annoyed, but a friend misled is an angry friend. It does not surprise me that harsh words have come from OPEC about North sea price changes being ill-judged and ill-timed, the more so because OPEC leaders have claimed—I do not know whether this is only a claim or whether there is more substance to it—that they were under the impression that something could be done to hold the price and that it would be held, when of course it could not be and was not.
The Government's policy does not seem—it would not be wise—to be to control the volume of North sea oil production. The Varley assurances given by the former right hon. Member for Chesterfield have been extended, and the successful regime which we run in the North sea is one in which there has been an understanding that there will be no direct interference with production.
Any impression that may have been given—I hope that it was not—that we could and would influence the price, was a mistake. That would have led to worse relations with the Arab OPEC countries than if there had been a candid explanation at the outset that we had no control over the volume or price of North sea oil, and that we were price takers and not price givers. I always tried for candour with the Arab countries when I was involved with these matters in government.
The fourth reason why price influencing is a dangerous and unwise matter to become involved in, is that it is not entirely in our interests for oil prices to stay locked at the $29 range for Arab light or $30 for North sea crudes. I agree with those who say that, if the price collapsed to $10 or $15, it would create great international instability and 207 considerable problems for this country, but modest falls to the price at which I believe it will settle—the $25 range — would do no harm to this nation or European economies. As he watches the American growth rate ease a little in 1984–85, Mr. Paul Volcker urges western Europe's economies, I believe rightly, to go for some kind of boost. There could be no better boost and no healthier development for European economies, including this country's exports and jobs, than a modest drop in crude oil prices to about $25. That assumes, of course, that the dollar does not collapse. I know that that is a bold assumption, but it is one with which we must work for the time being.
Even if we had the power to do so, which it turns out we do not, there is no broad economic argument in favour of trying to stabilise oil prices in the national interest at the artificially high levels which prevailed until the summer and early autumn of this year.
The argument on the other side is the one that comes through in some of the examinations that the Select Committee has conducted so assiduously and it is heard in a number of discussions about oil prices outside the House. It is that, if the BNOC trading body in London does not intervene in some way in oil pricing, there will be a world collapse of oil prices. That is what the OPEC Ministers say, but they would say that, wouldn't they? We must see through some of the observations, which are part of an understandable attempt to preserve certain interests, about what would cause a collapse in oil prices.
There is still a strong underlying demand for crude oil on the world market. It is not as strong as it was in the late 1970's because of the large increase in conservation and the way that energy has been designed out of a vast range of products. A sensible judgement would point to the oil price stabilising, as I said earlier, at about the mid-20s for the dollar price of oil. We should not be bluffed by the fear that there will be a collapse in oil prices. We should concentrate instead on North sea oil production and pricing, in our own interests.
There are those who say that it is easy to talk about that, but that we must consider Treasury revenues, and remember that they are essential to the Government's overall medium-term financial strategy, and to the Chancellor to enable him to find room for tax cuts or other job creation measures. That, of course, is a separate debate and not one for the House this afternoon.
I had the opportunity to tell the House two or three weeks ago that it was my view that the Chancellor's £1.5 billion available for next year could be within the range of £3 billion or more, not least because of the dollar oil revenues, and because I happen to believe that he has more room within the medium-term financial strategy than previously revealed.
That view has now been confirmed by a series of Treasury leaks over the weekend. We have now all been informed that £3 billion is more likely to be available for tax cuts, national insurance contribution cuts, and help for community enterprise and so on. I welcome that. I see a real prospect for a vigorous assault on unemployment in the new labour market conditions coming in the spring, partly financed by oil revenues.
Most of those revenues are already in the pipeline, by virtue of the 1984 production. I do not believe that fears about the oil price slipping from $30 to $27 or $26 for 208 North sea oil or from $29 to $25 for Arab light would endanger that strategy in any way. If anything, it might enhance the strategy because it would lead to accelerated economic growth in Europe generally, including Great Britain, which would raise tax revenues and provide even more room for the Chancellor to operate in. None of those dangers stands up.
The worries that have led to the view that it would be in some way terrible if BNOC did not involve itself in trying to stabilise world prices are unfounded. There is one danger only which might lead to a major oil price collapse —if BNOC tried desperately to hang on to the existing oil price and then found, as it has already found to some extent, that it could not do so and that it did not work. That would infuriate—it may already have done so—other OPEC producers. In the end the attempt must be abandoned, BNOC must give way, and the position is more unstable and destabilised than it would have been if BNOC had not involved itself in the first place.
I understand the difficulties facing my right hon. and hon. Friends about having a British national oil corporation which must enter into price negotiations, and about having to explain to OPEC leaders and other world oil producers that we have no official price.
§ Mr. Ted Rowlands (Merthyr Tydfil and Rhymney)
The right hon. Gentleman has not mentioned in his list of consequences the effect of a $25 price on the pound. I mention that neutrally.
§ Mr. Howell
A good deal of the effect has been discounted. One must consider the relationship between the dollar, the pound, the deutschmark and the yen. The pound may come down in relation to the deutschmark and the yen, which would be a good thing and would make it more favourable for us to join the European monetary system. The dollar would not make much difference to us. I expect that the dollar will come down a little and that the pound will come down with it, but that the deutschmark and yen will strengthen. Because the oil world believes that the price will be $25, most of that has been discounted.
I understand the Government's difficulties and the desire of BNOC not to appear to be in the lead in terms of raising prices, which was the problem two or three years ago when I was involved in the matter, or setting the pace in a vicious spiral of collapse. That is threatened by OPEC, but I do not believe that it is a serious danger. That leads me to the conclusions to which the Select Committee was heading in its lucid report.
If BNOC is to continue as an organisation, it should stick to the simplest rule of pricing. That is, it should try to buy and establish contracts as near as possible to prevailing spot market prices that month and to sell them at the same price, instead of getting caught in elaborate contracts as a buyer and having to sell on spot markets when those to whom it was to sell, walk away. It would be wise for the Government, having learned their lesson, to stand well back from consultations that lead to BNOC doing things in an attempt to influence world oil market prices, which would not and could not work and which would be bound to lose it money and friends. We should return to a matter which I pressed when I was a member of the Government and which I have raised since: that is, we should see whether we can get our security of supply by completely different arrangements, and do away with BNOC.
§ Mr. Malcolm Bruce (Gordon)
I congratulate the Select Committee on Energy on its report, which has raised an important question. As the Chairman of that Committee, the hon. Member for Havant (Mr. Lloyd), said, the question needs to be more widely discussed than the debate can allow. We are debating the most important, dynamic element in the British economy, yet we identify a significant flaw in the Government's attitude towards it. To put it more strongly, the Government do not have a clear idea what their policy is. I suspect that people working at the British National Oil Corporation have even less idea what the Government's policy is and are being left in confusion about what is being expected of them.
The point at issue is the consequence of what no hon. Member believes is anything less than Government intervention in an affair, in which the Government publicly stated they were not intervening. The Government's view was that BNOC acted at arm's length. However, it is obvious that the Government made it clear to BNOC that they wanted it to hold the price, presumably because maintaining a high price would produce a high revenue, which was crucial to their overall financial strategy.
If that is the Government's policy, they should have the honesty to admit it. They should make it clear that that is their objective. Even if it is their policy, it is not clear whether it is workable. This Government of all Governments claim to believe in the forces of the market, yet they have chosen to intervene. The consequence of that is our presence here to debate the £45 million subvention.
I wonder what Britain's real interests are. As the hon. Member for Havant said, before we discovered North sea oil we were sure that neither OPEC nor high oil prices were a good thing. Since we have become a significant oil producer, we have slipped into thinking—it is perhaps understandable — that high oil prices are to our advantage. However, we have not debated that openly and cleanly, or considered all the options, or whether there are intermediate options. We have effectively moved to the position in which the Government seek to maintain as high an oil price as possible to maximise their revenue.
The Government are not, for example, giving people in Britain who use oil any comparable advantage. On the contrary, people in the market for oil can often buy it more cheaply outside the United Kingdom than inside. Do the Government believe it fair and proper not only to fix the price of oil at the highest level to maximise revenues but, as a consequence of that, to secure a relatively high exchange rate? Industries that are affected by that get no corresponding benefits from the fact that we produce our own oil. We are no better off than if we bought North sea oil directly from OPEC. If the Government believe in the economics of the market, and as it is obvious that North sea oil does not cost anything like $30 a barrel to produce, why are we plugging ourselves into a cartel which we first opposed and them claimed not to have membership of or even direct interest in? In reality it is obvious that we are hanging in there closely.
Given the importance of the issue, the size of the sums involved and the vast quantities of oil that we produce, the matter should not simply be debated for three hours late on an afternoon before Christmas. The issue relates to the 210 core of the managment of our biggest single national asset. The debate should not end today, but should start today and be extended hereafter.
Some members of BNOC staff may wish me to stress that two thirds of the oil that they trade is traded under participation agreements, for which there are long-term contractual arrangements that causes problems when the spot market expands and the spot market price falls. BNOC staff members have been able to deal independently as dealers on the spot market and although it would be an exaggeration to suggest that £500,000 from a £7 billion deal was an extreme profit, it is better than the £45 million loss on the remaining two thirds. That suggests that there is commercial ability in BNOC. I was going to say that BNOC lacks direction, but perhaps it does not know in which direction to move or from which direction the next instruction is likely to come. That leads to confusion.
The other factor that has arisen from the report, and which was touched on, is the anomaly that apparently exists within the British method of taxation—the so-called spinner. It enables oil companies to sell British oil and to obtain a tax benefit from so doing. It has reached such a stage that the tax rules relating to oil companies trading in North sea oil—what I might call British oil—are known as the plug hole or the sink. If an oil company is left with excessive quantities of several sorts of crude oil, it gets rid of North sea oil first because of the tax advantage. That puts further pressure on the price and causes more confusion in the market—confusion that must be to the disadvantage of Britain in general and especially to the Chancellor of the Exchequer, who, if he changed the rules, would not be accused so much of interfering in the market place and might get sonic revenue that he is currently foregoing.
I hope that the Minister of State will say whether the Government will consider doing something about the tax rules. They confuse everyone at present. They are confusing to those who take some interest in such matters, but to anyone who has no connection with the oil business, it looks like an unmitigated shambles that lacks proper direction. The Select Committee showed that there appears to be a Government policy, although it may be ill-advised and has not yet been declared. To the extent that a policy has been declared, it would appear to be opposite to what has happened.
The Government should come clean and explain to a much wider public than the few who might have a specialised interest in North sea oil what their objective is. What are we trying to do with our North sea oil assets? Is it simply a matter of getting them out as fast as possible, and trying to hold the price as high as possible to maximise short-term revenue so as to sustain the public sector borrowing requirement and our financial strategy, or do we have an industrial objective to ensure that we get some benefit from being a major oil producer and give ourselves some competitive advantage to ensure that we build an energy industry on the strength of our oil industry? Will there be some recognition that having a petro-currency has many unforeseen effects on our exchange rates?
Recently some paper industry manufacturers told me that the Bowater project that was scrapped about three years ago when the pound was worth $2.20 would have been viable had the pound been worth $1.75. Hon. Members will appreciate that the project would have made money hand over fist with the current rate of exchange at 211 $1.17 or $1.18. The Government appear to be interested in achieving stability in the oil price, but they have abdicated all responsibility for stability in the exchange rates, which affect many industries that have no conception of the link between the pound as a petrocurrency, Britain's overall trading position and the general mysteries of free exchange rates.
The right hon. Member for Guildford (Mr. Howell) estimated what would happen to exchange rates. He might be right; I might be right; anyone might be right. The experience of the past two or three years suggests that it will be difficult to predict or plan in those circumstances. If the Government's policy is to achieve stability in oil prices to the extent that the market will allow, the Minister must make it clear how will they relate that to their professed belief in allowing the market to operate freely and in accepting no responsibility for securing stability of the exchange rate. As yet, for reasons which I understand, although I am not sure that we have obtained the right benefits, Britain has not joined the European monetary system.
The Select Committee has provided a useful service in drawing this matter to our attention. I question whether we should approve the subvention, which has been introduced only because the Government appear to be pursuing a policy that is in direct contravention of their stated objective. The Government must not believe that they can continue in that vein, return to the House, after another period of falling prices, and expect the House cheerfully to cough up so much money. They will get a more hostile reception than they have today.
§ Mr. Peter Rost (Erewash)
I am pleased to follow the hon. Member for Gordon (Mr. Bruce) because, although he is not a member of the Select Committee, which is a loss to us, I enjoyed his perceptive analysis of what has worried the Committee. May I express my gratitude to my hon. Friend the Member for Havant (Mr. Lloyd) for his inspired work as Chairman of the Committee and for his dedication to the job.
The Select Committee concluded that the British National Oil Corporation has become engaged in a creeping transformation, undeclared by the Government. As my right hon. Friend the Member for Guildford (Mr. Howell) so brilliantly said a few moments ago, BNOC was created with the primary objective of maintaining security of oil supplies for Britain at a time when there were shortages, political disruption and steeply rising prices. But without any redirection of policy by the Government, BNOC has been quietly instructed not to secure supply —that is unnecessary at a time of glut and falling prices —but to secure prices. Yet there has been a reluctance to admit that fundamental change in Government policy.
I am reminded of the long Committee debates in which some of us participated during the passing of the Oil and Gas Enterprise Bill in February and subsequent months in 1982. My right hon. Friend the then Secretary of State for Energy, who is now our distinguished Chancellor of the Exchequer, said:The trading corporation will exist for the specific purpose of security of national oil supplies."—[Official Report, Standing Committee E, 25 February 1982; c. 631.]We had lengthy discussions in Committee and we were considerably enlightened by my hon. Friend the Member 212 for Bedfordshire, North (Mr. Skeet), who expressed grave anxiety that the British National Oil Corporation was not being hived off or privatised. He believed that there was some doubt as to whether the corporation performed a useful function. He was not given the credit at the time for the amendments that he moved to try to enact the privatisation of the corporation, which were of course resisted by the Government. Nor was he given credit for his profound prognostications at the time.
I did not know that my hon. Friend would be in the Chamber today, and I hope that he is not embarrassed by this, but I shall quote what he said in Committee:I should not be surprised if the oil price fell further, to below $30 a barrel."—[Official Report, Standing Committee E, 11 February 1982; c. 167.]At the time it was $34 a barrel, and on that basis my hon. Friend argued that there would be a serious impact on the role of BNOC if that trading company were faced with a declining market, difficult trading conditions and the losses that would result.
The Committee's inquiry clearly shows that that is exactly what has happened. There has been a clear change of policy by Government, but a refusal to admit it. Security in a time of glut is an irrelevance, and in any case we have the powers under the Energy Act 1976 to deal with crises. We have the right to buy 51 per cent. without BNOC if we ever needed to exercise that right. We should be curiously questioning why we have to exercise that right to purchase 51 per cent. through Government agencies when we do not need security of supply.
If the policy is to maintain the price of oil, the Government should say so. Why should it not be their policy? It is not a policy of which we need to be ashamed. After all, the Government have declared their policy in many other sectors of the economy where they believe that it is desirable to maintain prices well above market levels, and we accept that. For example, the Government support the airline cartel to maintain airline prices well above the market level, to protect international and national carriers. We may or may not agree that that is a good thing, but that is what happens and the Government admit it.
The Government maintain a coal cartel by subsidising by over £1 billion a year, an industry that produces coal that costs over 50 per cent. above world prices, and the aim is to protect the British coal industry. Some may dispute that policy, but it is accepted and admitted by the Government as official policy.
If my right hon. Friend the Minister of State, Department of Energy, who will be replying to the debate, wants a third example of where the Government are honest enough to admit maintaining prices above market levels, there is agriculture. The Government support a food cartel so that our food prices are well above world prices, and this is done to support our agriculture through the CAP. If we can accept Government policy that is believed to be in the national interests in other spheres of our economy, why do we not also accept that, if it is in the national interest to support the price of oil, we should do so? It would be a respectable argument, but the trouble is that we have not yet heard it, and that is what concerned the Committee.
I shall not be presumptuous enough to suggest whether it is in the national interest that we maintain the world price of oil or whether we would be better off if we allowed it to fall. We know that a decline in oil prices would help British industry and consumers, but it would not help the 213 pound, the public sector borrowing requirement or the Treasury. It might even endanger the viability of North sea investment. On the other hand, world trade would grow and we would benefit from that.
However, the Government's argument is that they would not be too happy about a price fall because our competitors, who do not produce oil, would benefit more from the price fall than we would. In particular, Japan, Germany, France and the United States would all stand to gain a great deal more than we would from a substantial reduction in world oil prices. Whatever the arguments, and they have been ably put by my right hon. Friend the Member for Guildford, let us at least hear them from the Government. Let it be spelt out — tonight I hope—whether it is in the national interest that we try to sustain the world price of oil and play what role we can in doing so. We should not hide behind BNOC, pretending that we believe in a free market, while authorising that company to try to support the market.
This leads to my principal doubt about the wisdom of the Government's policy towards BNOC, because if it is the Government's declared policy to try to stabilise the price of oil in the national interest, is not the present method of doing it through BNOC the worst possible way to try to achieve that? I should like an answer on this tonight. BNOC has maintained the stability of the oil price by buying oil at fixed prices off the oil companies and immediately selling it on the Spot Market in Rotterdam. Far from having stabilised the price, this may have contributed to a more rapid decline. As the chief executive of BNOC, Mr. Ian Goskirk, succinctly told the Select Committee when it questioned him:We cannot stand in the way of market forces.However, it is clear that that is what the Government have asked BNOC to do.
Has BNOC helped by trying to stand in the way of market forces? Have not its market operations contributed to the fall in prices? Have not BNOC's forced sales on the spot market—it has no reserves in which to hold stocks and has to sell oil stocks as it gets them—become a major factor in the Rotterdam market becoming the price setter rather then the marginal market that it used to be? If the Government want to try to stabilise the price of oil, would they not be more honest to say so and to co-operate openly with OPEC, or even join it? At least we would then know where we are. Afer all, our interests are very much in line with those of OPEC. Government policy would be much more likely to succeed if we actually joined or cooperated more actively.
If the Government are not going to do that, but they wish to make an impact on stabilising the oil prices, they should at least agree to production quotas. That might at least make a useful contribution, as the way that BNOC is trying to influence the market has probably had the reverse effect. Instead of stuffing the Rotterdam spot market with oil as a distress seller, BNOC might have influenced the market more if it had operated in reverse and had bought from the Rotterdam stock market and then sold the oil to the oil companies that were short of crude. I doubt whether BNOC losses would have been greater if it had tried to do that, and it might have had a more beneficial effect on the market.
If the Government wish BNOC to play a role in influencing the market, they have to give BNOC enough muscle to be able to do so. In other words, they must allow it to have the resources with which to hold oil prices, as 214 multinational oil companies do, so that it can operate with a little more flexibility and manoeuvrability than it does now. However, the present obscurity of the Government's stance is unsatisfactory, and I hope that it will not last beyond this evening.
BNOC could be scrapped because it no longer has a useful function, is not required to maintain security of supply and cannot control the market. That would allow the free market to find its own level and allow the oil companies to market their own oil, which they might be able to do without disturbing the market any more than BNOC does. If the Government do not want to take that line, they must outline an effective policy for practical intervention, which perhaps means curtailing production, using BNOC as a market buffer or collaborating more openly with OPEC. They have to take one course or the other, and at the moment we are stuck in the middle.
I hope that, by the end of this debate, the Government will be able to clarify what they believe is in the best national interest. Is it to try to maintain the price of oil, or to allow it to fall? Or do they believe that either course is in the best national interest? Whatever the reason, let the Government outline how they propose to pursue that policy more sensibly than they have so far by using BNOC as a front for policies which they have been incapable of implementing effectively.
§ Mr. Kevin Barron (Rother Valley)
I thank the chairman of the Select Committee, the hon. Member for Havant (Mr. Lloyd) for putting so well the Committee's findings on the winter Estimates. The House should consider the Committee's first recommendation. The winter Estimates do not have to be approved until February and yet the Committee had only three weeks to complete its inquiry before it had to come to the House. It is nonsense to have this debate at this time when the Committee could have considered the Estimates in more detail, and have taken more evidence.
I am a member of the Committee and I should have liked to have had the time to ask the Treasury about the implications of the Estimates. I should have liked to ask Treasury Ministers about the British National Oil Corporation.
As the Chairman of the Committee said, we found it easier to summon people than papers. We made several attempts to see a letter sent by the Minister to oil companies in August. Eventually, we got hold of 80 per cent. of the letter. Some remarks in it were missing. I told the Committee that I had already read 90 per cent. of the letter in the newspapers way back in August. It would have been helpful if the entire letter had been shown to us. It is nonsense that we should have had to struggle to obtain information about Estimates of this size.
In the brief time at our disposal we investigated the BNOC's role. Its first role seems to be to maintain supply. At a time of surplus and with a glut in the world energy market, it might seem to some hon. Members that that is not necessarily right. But I believe that it is essential that such an organisation is able to supply us with oil. In the 1960s and 1970s the position was different. Oil was tight on the world market and we could not maintain supply.
The middle east is unstable and OPEC countries are not able to guarantee supplying the world energy market for 215 as long as six months, even at a time of surplus. War and other events could mean that we definitely need BNOC's right to 51 per cent. of production in British waters.
The Select Committee asked the Minister about prices and he replied in a forthright manner:Mr. Buchanan-Smith: Thank you. The first point I would make is that neither my Department nor myself set North Sea oil prices.That is a definite statement which no one can misinterpret. The Minister went on:The BNOC has certain functions in relation to the participation agreements and setting its contract prices, and in doing so it forms its own judgment of the market situation, and also consults with my Department, and on occasion with myself, as to what the different factors are that should be taken into account before it sets any particular price.In all innocence, no one could say that the Department does not have some influence on the setting of North sea oil prices. In the short time that the Committee had, it tried to get to the back of that influence and to find out what had been going on in the last six months.
The Minister has had a few days to reflect and he should tell us his Department's exact involvement. He has admitted that the Department is involved in the setting of prices. That should be debated in the House more fully. All hon. Members should know what is going on.
The Select Committee recommended that no more Supplementary Estimates should go to the BNOC until we are satisfied with the Department's involvement. That is not unreasonable. I do not favour voting against the Estimates if it is in the nation's interest to give public money for the North sea. However, we must know why we give the money and what has happened in the last six months. Against the wishes of many Government Members, because of their ideological stance on the free market economy, we are giving £45 million to private companies. Once that money leaves the BNOC it goes to private interests in the North sea. We should know exactly why £45 million of taxpayers's money should go to private offshore companies operating in British waters.
We must have some answers. How will the Minister ensure that we are informed? How do the Government view contract prices and BNOC's role in them? The Select Committee asked whether contract prices should be changed from three months to one month. I understand that that happens in Norway. Such a change could move contract prices closer to spot prices. The evidence to the Select Committee shows that the spot prices are as near as dammit to the average market price for oil. The three month contract price through BNOC has been higher for some time. Perhaps we should come nearer to the spot price because that seems sensible in terms of the cost of oil to Britain. The spot price share of the total oil market has risen in the past 10 years from 1 per cent. to 40 per cent. and it may not be long before the majority of oil sold on the open market is sold at the spot price.
What are the implications of paying £45 million into the BNOC? I assume that this is being done to maintain spot prices. I understand that tax revenues from North sea oil accrue from the spot price in any event. If £45 million is used to maintain spot price, the Treasury will benefit from the tax revenue. Is there a direct relationship between every £1 million that is used to keep up the spot price and the revenue so derived that is received by the Treasury? We were told in evidence that it would be in the national 216 interest to grant the Supplementary Estimate to BNOC this winter and we should, therefore, know the exact nature of the national interest and whether the Treasury has been receiving revenue. If the Treasury has not accrued the revenue that was expected, there has been a net loss to the national interest. It is important that we ascertain whether that has happened.
It is predicted that there will be a fall in the price of oil. That will have a dramatic effect on Britain if the fall is significant. We have heard about the billions of pounds that the Treasury is receiving in the form of oil revenue. These moneys are used in various areas of the economy. If the moneys were lost, the effect on the United Kingdom economy would be catastrophic.
What would happen if we lowered the price of North sea oil to the spot price? What effect would that have on the revenue that is received by the Treasury and used thereafter to finance the welfare state, for example? Massive sums are received annually from North sea oil revenue and I want to know what will happen if there is a further fall in the price of that oil.
§ Mr. T. H. H. Skeet (Bedfordshire, North)
I am grateful to my hon. Friend the Member for Erewash (Mr. Rost) for his kind of observations. I think that I should be fair to the British National Oil Corporation and acknowledge that it was profitable for at least part of 1984. If blame is to be levelled, it should be levelled at my right hon. Friend the Minister of State, and I say that with much regret.
The price of oil collapsed in July 1984. I tabled a question for written answer on 16 July 1984. I asked my right hon. Friend the Secretary of State for Energywhether he proposes to give the British National Oil Corporation a specific direction on price for North sea crudes in view of the decline in spot prices.His answer was:No. The prices of United Kingdom North sea crudes are governed by market forces and established by negotiation between BNOC and its customers and suppliers."—[Official Report, 16 July 1984; Vol. 64, c.67.]My right hon. Friend stated in evidence to the Select Committee—this is to be found at page 44—The spot market is normally the more acccurate reflection of the market price at that moment of time.That must be set against the colossal loss of £45 million by BNOC which eventually will have to be paid.
It can be argued that one of the first objectives of BNOC was to trade profitably. In 1983, the company made a profit of about half a million pounds on a turnover of about £7 billion, which is a profit of only 0.007 per cent. on turnover. Unfortunately, that was followed by a loss of £45 million in 1984. The corporation is not permitted by statute to act commercially.
At page 35 of the evidence, Lord Croham said:The framework which was agreed by Parliament makes it almost impossible for us to earn a profit on the great bulk of our transactions.What is the use of blaming a corporation for bad results when it is working in an economic straitjacket? By mid-September 1984 the corporation was contractually committed to losses in excess of the value of its assets. If it had been a private concern, it would have been bankrupt. But for the state subsidy that was paid into it, nothing more could occur. We are resigned to the fact that £45 billion must be paid under section 6 of the Oil and Gas (Enterprise) Act 1982. As grants under that section may 217 be made subject to such conditions as the Secretary of State for Energy, with the approval of the Treasury, may determine, what conditions are to be laid down?
The next objective of the state corporation is that it should receive the maximum benefit from the oil that is available, and that is normally expressed in terms of price. The Government are naturally interested in high prices. As my hon. Friend the Member for Havant (Mr. Lloyd) said, North sea oil is a high-cost commodity. Prices range from anything between $6 a barrel to $20. I echo his anxiety about the threats of OPEC. Saudi Arabia's range of production costs is between 35 cents and 50 cents a barrel. That is almost basic and Saudi Arabia can reduce its prices significantly without injuring its own production. Oil is overpriced in the market and the revenue from North sea oil is such that the Treasury dominates the issue. The price of North sea oil is kept high to provide revenue. This is understood fully when it is recognised that the tax take on North sea oil for the five years between May 1979 and October 1984 was no less than £35 billion.
I direct myself to what is probably the most interesting part of the issue, and this is where I affix liability on the Government. They talk about consultations with BNOC, but the corporation is simply a negotiating front. The Government control the corporation while standing in the shallows. At page 15 of the evidence, Lord Croham said:we do not get details of the information available to the Government. We do get a Government's judgment as far as the national interest is concerned. We agree with Government judgments. It is their judgment, not ours.There are an enormous number of factors which have nothing to do with BNOC. Let us consider them. There is United Kingdom standing in Saudi Arabia, which is a matter of great importance. There is the effect of pricing on world financial institutions. The indebtedness of Group 77 is of prime importance. The momentum of development in the North sea, the amount of investment and the fear of plunging prices are similarly critical issues. There are many other factors but I shall not refer to them now. These are matters for the Government and not for BNOC.
It is rather extraordinary that there are other factors that may induce the Secretary of State to reach his own decision and simply instruct BNOC what to do. Her Majesty's Government have the right to give a specific directive to BNOC, whenever they like, on a particular matter, including pricing, under section 4(1) of the Petroleum and Submarine Pipe-lines Act 1975. When Dr. Otaiba and Sheikh Yamani come to the United Kingdom, they are not concerned to see the chairman of BNOC; they go straight to the Secretary of State or the Minister of State if necessary, if the Secretary of State is not around. The man who can influence decisions is the man to whom they want to talk. It is not the distinguished chairman of BNOC; he might not be available. Anyhow, he is not the major front.
It was rather significant that if the Government were lacking in influence, the Minister of State should send that letter to the oil companies on 31 July 1984, which he refused to give to the Select Committee because it held confidential information. It urged the companies to support the figure that had been set by BNOC.
Furthermore, we know that OPEC is considering the matter tomorrow. Today's edition of the Financial Times contains an article with the heading:Government blocks BNOC move to stem losses".218 That is just a heading; I shall not go into detail on that point, because the article is there for everyone to read. The newspaper is naturally assuming that the Government have the right to lay down what they consider to be the reality of the matter.
The third major objective of BNOC is security of supply. My right hon. Friend the Member for Guildford (Mr. Howell) and my hon. Friend the Member for Erewash dealt with that matter adequately. However, there is no problem in the present era of substantial surpluses. There are complete statutory controls covering 20 Acts of Parliament and a myriad of regulations over the North sea, and those operations go into considerable depth. The legislation includes the Energy Act 1976, which could be modified to provide for economic conditions short of crisis.
There is also a substantial indigenous oil industry and reserves in the United Kingdom. The Government hold a 31.731 per cent. investment in British Petroleum. That is not without significance. A strategic national reserve of proved areas could be established in the North sea, analogous to the naval reserves of the United States of America. They have not been so established. A strategic national storage facility could be evolved. That approach is well understood in the United States and Japan.
I should like to refer to the power to influence the market. It will be argued by my right hon. Friend the Minister of State that there is a distinction between fundamental change and short-term fluctuations. That point was also made by one of the directors of the BNOC on page 16 of the notes of evidence. However, that is of little value if one cannot identify the difference between the two. It is well known that BNOC's power to influence crises such as those in 1973–74 and 1979–80 was absolutely nil. The power to use the marginal barrel to influence a saturated market when OPEC's production allocations are under threat is also extremely limited. It is notorious that no attempt was made to smooth the market in the way recommended when the price was going up. When the price went up from $1.5 a barrel to $12 a barrel, not a squeak. When it was going up from $12 to $25, not a squeak. When it went up to $40 in Libya, not a squeak. The power has been used only when the price has been in decline. There is a vested interest on the part of Government to keep it up for revenue purposes.
I should like to make some recommendations. There is no harm in hon. Members making recommendations, even though the Government may disregard them. The basic approach is simple. To reduce the quarterly period to one month for fixing price to prevent term and spot prices moving too far apart is one recommendation. It is open to my right hon. Friend the Secretary of State to make it if he wants, but it is only cosmetic. One could fix the price by the spot market, analogous to what is going on in Norway. That approach is understood and could be commended. If we must keep BNOC, we should abstract the United Kingdom from the centre of the debate about managed oil prices and intergovernmental relations with OPEC, by shifting to the United States system of allowing individual buyers to post prices according to the market. I give the analogy of refiners in the United States of America. Ministers should give full encouragement to the forward market that emerged in the United Kingdom in 1982 in response to the need for a hedging mechanism in the United Kingdom.
219 There could be other recommendations as well. We could for the time being cease taking royalties in kind. We could reduce the amount of participation crude and, if the concept must be retained, we could reduce it to 20 per cent. of the total. Also, as BNOC has no long-term strategic storage facilities, if the corporation is to be retained, that prospect should be considered. The strategy involves the manipulation of stocks in relation to the market.
An alternative that I fully recommend, which I do not suppose the Minister will accept, is to abolish BNOC and let the industry operate subject to modifications of the Energy Act 1976. If BNOC is not abolished, a reference to the Monopolies and Mergers Commission for a comprehensive review might be useful.
I hope that my recommendations will be useful to the Minister if only because the structure of the market has been altered. In coming to his conclusions, he will note the ascendancy of the spot market in this era. It may change, but it is here for the moment and there has been a substantial decline in the term market. Spot prices for Arabian light are $27.45 while the term prices are $29. Spot prices for Brent blend are anything between $26.80 and $26.90, as opposed to the term price of $28.65. Therefore, spot is vital and one has to get a price near to it to avoid loss.
OPEC members ignore official prices. OPEC does not sell at term prices, and many members over-produce—the Nigerians, the Iranians and the Emirates—
§ Mr. Skeet
Those countries exceed agreed production quotas. The United Kingdom does not have agreed production figures.
Those countries exceed production quotas, formerly 17.5 million barrels a day and now 16 million barrels a day. Half of them sell at discounts and under barter arrangements and by other means. It is hypocritical on their part to say that the United Kingdom's action is wrong. The United Kingdom could afford to be much more courageous. The size of stocks is often the invisible factor. The stock position is becoming a key factor. It could have played a distinctive and much more effective role in the 1979–80 crisis.
All that I shall say about taxation is that current taxation distorts the market. The current differentials do not make sense. The problem has arisen because differentials between light and heavy crude oils have not been changed, and it does not look as if there is any possibility of OPEC getting together to change them.
There have been one or two other changes—a change in the use of oil and the yield of products, and a decline in the energy-intensive industries. The impact of conservation has been greatly underestimated.
BNOC and the Government have failed to assess correctly the measure of demand in a saturated market and to recognise the inability of OPEC members to maintain their production quotas and change differentials. For the time being, the market is on the way down. I suggest that the grant should be made only subject to the strict conditions under section 6(2) of the 1982 Act; otherwise it would be unreasonable for the House to pass it.
§ Mr. John Hannam (Exeter)
I am grateful for this opportunity of saying a few words in this debate which, as has already been said, comes on the eve of an important OPEC meeting tomorrow. I congratulate my hon. Friend the Member for Havant (Mr. Lloyd), the Chairman of the Select Committee, on the excellent way in which he introduced the debate. We have heard a fascinating series of speeches, and the speech of my right hon. Friend the Member for Guildford (Mr. Howell) was superb in its analysis of the situation facing us.
It is equally important that we should be debating oil at a time when our minds have been totally concentrated on the crisis in the coal industry. In a way, like many energy matters, the two subjects are related, although not in the context of this debate. The heavy use of oil in our power stations has replaced coal burning, and has thereby eased the surplus of heavy oil stocks which now exists.
The extra amount of oil now consumed by our electricity generating stations must, however, have a limited effect on the overall world situation. But if instead of recent reports of attacks by Iraqi jets on oil tankers in the Gulf there were reports of the closure of the Straits of Hormuz by action there, the present situation would be totally reversed, and we would be discussing the crisis of oil shortages developing, not in weeks or months, but literally in hours.
We have experienced that in the past, and it will be remembered that within hours queues were forming at garages, rationing was considered and all sorts of emergency measures were taken. A recurrence is not a remote possibility. It is a very real one. The Iran-Iraq war has not ended and more and more is becoming a war of attrition aimed at oil production and the movement of oil rather than a swift land-based assault.
We are now in the middle of a coal industry dispute, and are dependent on a large oil burn in our power stations, yet in the middle east there is potential for disaster in relation to oil supplies. BNOC as it exists today — a trading company in North sea oil—is a security weapon for the Government. In my view it should be retained and clearly explained as such.
Although private oil companies have given assurances of supply to the United Kingdom market in the event of a crisis, access to 51 per cent. of participation oil, which BNOC has by law, would be a valuable underpinning of our crude oil supplies in the event of such an emergency. I therefore believe that we are right to continue the present BNOC role in relation to security of supply.
Perhaps the most important aspect of this report is the role of Government in the pricing of our oil. I actually believe that there is a limited role to play and that it should be clearly stated. I accept the Select Committee's criticism that perhaps this has not been clearly stated, and the debate gives my right hon. Friend the Minister of State an opportunity more clearly to define that role.
If one accepts my description of the crisis that could develop quickly, no one can doubt that at very short notice oil prices could begin to escalate sharply, thereby affecting world currencies and creating economic instability. The same situation could develop in reverse and there could be a downward spiral of oil prices. The oil market is unstable at present, with excess world production capacity, and the 221 marginal cost of production is much lower than the current world price, as my hon. Friend the Member for Havant clearly explained.
In the short term, oil demand and production are insensitive to price, but with Nigeria threatening to match any price reduction by BNOC, and with Saudi Arabia and other Gulf states speaking in terms of a price war would force other oil producers out of the market, there might be no clear bottom to such a free fall in oil prices.
I do not believe that we would benefit from a collapse in oil prices. I doubt whether any hon. Member believes that. But great damage could be caused to the world banking system and to the basis for industrial investment in energy industries, not just in production but in energy-using and conservation industries.
The likelihood is, as in the 1970s, that we would experience a sharp increase as equilibrium was restored. We would again be in the seesaw position that we were in throughout the late part of the 1970s and the early 1980s, and our own expensive North sea oil-producing sector would be hard hit.
Only this morning I asked a number of oil company executives whether they felt that BNOC should continue to play a role, however limited, in pricing at the margin. They all felt that such a role had to be played. If we accept that BNOC can exert any stabilising influence, even in the shortest of terms, it should continue to do so. The spot market is declining, companies are releasing stocks on to the market, and traders are selling short in the expectation of a price fall. OPEC meets tomorrow and it must decide its response.
In these circumstances, a price cut by BNOC before this meeting would further undermine market confidence and prompt a further "stock draw" and short selling. That would set off price cuts by other producers, and again we would get caught in the downward spiral of the collapse of oil prices. Nor would such an action enable BNOC to reduce its losses, as in that kind of uncertain market spot prices are likely to fall by as much as, or more than, term contract prices would be cut. It would therefore be wise to wait until underlying market trends have been clarified by the OPEC meeting and we have a truer indication of the winter demand for oil. Experience has shown how a change in climatic conditions in the winter can materially affect oil demand within a short period.
The Select Committee was right to draw attention to the role of BNOC and, therefore, the Government's role in oil pricing. I accept that there is an inter-relationship between the two. The £45 million losses during the recent period of falling spot oil prices requires detailed explanation, although in oil trading terms that is not a large amount and might easily be recouped in a stable or rising market. When one looks at the figures of the major oil companies, one can see that a comparatively small amount of money is lost or gained. In any case, I imagine that the Exchequer recoups most of this loss in increased tax revenue. I hope that my right hon. Friend will confirm that.
I do not believe that BNOC or the Government have any illusions about their power to determine or influence oil prices in other than the most limited or marginal way. It would be wrong for BNOC to try to lead in fixing oil prices, but any attempt to retain stability is to be welcomed. The BNOC price card can be played only occasionally. It cannot be used every few months. There must be quite a long interval between occasion of its use. I hope that my right hon. Friend will assure the House that 222 he accepts this description of BNOC's role and that the present losses on trading will be eliminated once the threatened free for all drop in prices has been averted. Our thanks are due to my hon. Friend and his Committee for the excellent work they carried out in a very short period of time. I hope that we shall receive a number of detailed answers to the questions that the committee raised.
In conclusion, may I say to the House that I have another parliamentary engagement to fulfil, which was fixed a long time ago. Therefore, I hope that my right hon. Friend and hon. Members will excuse me if I am not here for the winding-up speeches.
§ Mr. Gerald Malone (Aberdeen, South)
At the risk of placing yet another laurel on the stoical head of my hon. Friend the Member for Havant (Mr. Lloyd) I shall nevertheless do so; it is a risk worth taking. My hon. Friend performed an excellent job in chairing the Select Committee throughout this important inquiry. I run a risk in experiencing chairmanship of that kind. As a relatively new Member of the House I am beginning to think that these inquiries can take place within 15 days, with an immediate debate on the report being held on the Floor of the House. Perhaps that illusion will be shattered in due course. In congratulating my hon. Friend, may I extend my remarks not only to my hon. Friend and to my colleagues on the Committee but to the officers who serviced the Committee and produced a draft report and then a final report within very strict guidelines.
A number of interesting points have been highlighted relating to BNOC. Much has been said about its important statutory responsibility to secure supply. During the inquiry I felt that the responsibility for ensuring security of supply was outweighed by what my right hon. Friend the Minister believed to be another responsibility of equal, if not overriding importance, namely the national interest. Throughout our short inquiry, it seemed to me that the definition of "national interest" was at the centre of the investigation. My view is that, when the legislation was framed, drafted and passed by the House, "national interest" had a different meaning from its present definition. My view is that "national interest" had some connection with security of supply. It had to be placed in the context of the failure of the oil companies that were participating in North sea development to give satisfactory undertakings to the Government of the day that in a crisis they would continue to supply resources to the Government. What has taken place since then is an indication of a change in the definition of "national interest". This definition was returned to again and again during the evidence given by both BNOC and my right hon. Friend. I ask my right hon. Friend to elaborate in his winding-up speech upon what he now believes to be the national interest.
It is possible that a case could be made for maintaining BNOC involvement in the national interest, whatever that may be. The problem is that it has not yet been properly defined. There has been a departure from the original concept. Is it in the national interest to maintain a continuous process of investment in the North sea? I understand that oil companies and others who are involved in North sea developments and its potential believe this to be a great priority. That may be a national interest which is worth developing.
223 Is it in the national interest to maintain the price of oil at a certain level so that the Exchequer benefits from it? The evidence we heard leads me to say that that is not the case — for two reasons. There is the view that the Exchequer benefits from a high price and a high tax take. Alternatively, if we support the price of oil, as we are doing in this supplementary Estimate, the view is that we have to vote sufficient funds to supplement the losses of BNOC. It goes further than that and points to another motive of the Government.
There is not a strict balance between the benefit to the Exchequer and the benefit to the country and BNOC as a whole in maintaining prices if they operate a tax break system. I do not suggest that there was a covert arrangement. However, an arrangement was certainly arrived at by the Treasury which gave those who participated in purchasing oil and selling it on the market at BNOC prices a marker price. This was fixed for revenue and tax purposes at a totally different level than that which was fixed by BNOC. That indicates that another extremely relevant factor was involved in what the Government were doing. This goes to the crux of the matter.
We were constantly told in the evidence by parties who were mutually engaged in discussions, conversations and various exchanges of influence that one had no effective influence over the other. I found this to be quite incredible. Perhaps I may suggest to the House a similar example. If a man and his mistress are found in flagrante delicto—not in a seedy hotel but in a comfortable hotel—and they suggest that they are engaged in no more than an exchange of views, one could take an objective view of it. However, my objective view of the suggestion made by my right hon. Friend and BNOC in their evidence was that I did not believe it. I believe that there was collusion and a certainty of purpose in their negotiations and discussions and that they went along with each other in very close agreement. The question before the House is whether that was in the national interest and whether it is right that we should vote the supplementary Estimate.
I credit my right hon. Friend with a little more horse sense than to suggest to the House that this came out of the blue. I believe that it was unique. There has been an attempt to influence oil prices. My right hon. Friend probably understands that in a wider context and in the more difficult market than has been faced during the last 10 or 12 months this might be impossible. However, there was an opportunity, and the Government took it. In this instance, the price is relatively low. However, I doubt very much whether this kind of opportunity can be taken again.
It is worth considering where we go from here. It is essential that we should move towards a more market-oriented pricing system for BNOC. The lead has been given by Norway. I believe that it will inevitably be followed, unless we are to come back to the House continually with supplementary Estimates of this kind. If this were to be a permanent feature of Government policy, the supplementary Estimate would not be for £45 million. It would be for a figure well in excess of £45 million. I accept that this is an extremely delicate time. Meetings of OPEC are taking place. Therefore, it is impossible for my right hon. Friend to form a firm view. However, it would be helpful if he could tell us that movement is taking place towards a more market-oriented pricing system. Unless such an indication is given, we must assume that the policy 224 of this country is that oil prices should be kept high—for the good of what? I do not take the view that our manufacturing industries should be thrown away or put at a disadvantage compared with our industrial competitors. My view is that if within the broad context of Government policy it is possible to achieve a low energy pricing policy, we should be decisively striving towards it rather than trying to prevent it. I shall be most interested to hear my right hon. Friend's views on the direction in which he sees Government policy going.
It would be unfortunate if, in the future, we were always debating whether BNOC should be continually subvented. Can we tonight have a clear view of where Government policy is leading? If my right hon. Friend can convince the House that to subsidise oil prices with taxpayers' money, albeit in a somewhat circuitous way, is worthwhile for Britain, let us hear that and argue it out on the Floor of the House. My right hon. Friend may well convince us on that point.
Unless my right hon. Friend is prepared to admit that the purposes for which the BNOC was set up in the first place have been long outlived by the practical realities of the market—the fact of a continuously rising oil price until relatively recently and the fact that Britain is now a major producer and is well able in an oil glut to secure its supply—the debate would be sterile. That would be a loss, in view of all the work that my hon. Friend the Member for Havant (Mr. Lloyd) did in Committee.
§ 8 pm
§ Mr. Ted Rowlands (Merthyr Tydfil and Rhymney)
Having been brought up against a Welsh nonconformist background, I shall not follow the hon. Member for Aberdeen, South (Mr. Malone) in the habits he so vividly described in Latin terms. But I shall follow him in one other sense; that is to convey my congratulations and thanks to the Chairman and members of the Select Committee for producing this short and sharp report.
It is sharp in more ways than one. I am too gentle a soul to draw too much attention to some of the things that the Committee says about the Government's policy and their attitude and approach. The Minister will have read it and the strictures are there. However, it was invaluable in helping us to concentrate our minds.
I felt a nostalgia for our debates on the Oil and Gas (Enterprise) Bill. There are few survivors of those Committees. The hon. Member for Bedfordshire, North (Mr. Skeet) and I spent many an hour debating the problems that would arise in BNOC once it was shorn from the mainstream exploration and development side which was hived off in the form of Britoil.
Between us we made a number of forecasts about the potential vulnerability of a national oil corporation left to trade in the way that it was. No hon. Members, despite our perception, forecasting and crystal ball gazing, quite foresaw the way in which the financial crisis would hit BNOC. Why we did not has been brought out by several hon. Members who have spoken. We spent our time thinking that BNOC (Trading) had only one objective, and that was to secure supplies.
I cannot recall debating the other objectives at any length in Committee. The then Secretary of State for Energy, who is now Chancellor, and his Ministers, did not produce any argument in favour of a BNOC trading organisation other than to ensure the security of supply.
225 Clearly, in doing that, the corporation would become involved in pricing, but it would, in a sense, always be reacting to pricing and not in any way trying to shape up.
It is clear that in recent months, for reasons which await a more elaborate account from the Minister, BNOC and the Government have been trying to do something rather different from what was traditionally seen to be the role of BNOC (Trading). It would be easy to heap blame on a state organisation that has lost £45 million. But, as the report and the evidence clearly show, the decision was taken by the Government and BNOC after consultation. We should not try to blame BNOC. It was arrived at by a joint process.
Let me underline that point. In paragraph 93 of the evidence the Minister gave the striking testimony:I believe the BNOC has scope to act in the short term to influence what may happen in the oil market.That was a straightforward admission that the Government supported and were involved in the process of trying to do something, albeit in the short term, about oil prices.
Mr. Goskirk, in his evidence at paragraph 9, underlined that point even more strongly. He said:we felt that it was worthwhile as far as both our commercial interest and—following discussion with the Secretary of State for Energy—the national interest were concerned to seek a pause. That pause took place and the pause was achieved".Again, that is a clear statement of a deliberate endeavour. We do not say that the Government have acted surreptitiously. At least in the evidence there is a confession that there was a joint operation of a kind and character which, when we debated the notion and nature of the BNOC, I cannot recall ever envisaging.
Therefore, we have every right to say that there is not just a change in degree but a qualitative change in the way in which the BNOC and the Government tried to do something about oil prices in the summer of this year. We must ask why they did it, what has been the consequence and where we go from here. Those are the three questions posed in one way or another by the Select Committee's report.
I should like to have a shot at trying to answer some of those questions. Let me try to offer a slightly different interpretation of events from that produced by the right hon. Member for Guildford (Mr. Howell) and one or two other hon. Members who have spoken critically of the attitude of Government and BNOC to oil prices.
I do not think for one moment that either BNOC or the Government chose to become involved. It was not some sort of great voluntary act. The missing ingredient in the otherwise excellent Select Committee's report is some sort of analysis of how events unfolded over the 18 months leading up to the events of this summer. If we look back at those 18 months and at the role oil plays in our economy, we can anticipate some of the answers that the Minister might wish to give as to why we became involved in the way that we did this summer.
I have discussed the matter with various people and I believe that part of the answer lies in the events of February and March 1983. Until then, BNOC (Trading) and the Government had managed to stay out of the price argument in international terms. BNOC did what we all thought it was doing — reacted to prices. When the market shifted its price moved.
There was a vigorous reaction by OPEC and, particularly, the Nigerians, in February and March 1983 when they trumped the BNOC alteration in price and therefore deliberately involved BNOC and the 226 Government in the whole argument about pricing policy. Until then we had stayed out of the turmoil of OPEC arguments and the problems of the various conflicting interests within OPEC. From that time on BNOC, the Government and North sea oil prices were caught up in the commercial and political swirl of OPEC and the problems of some of its members. Therefore, we did not have much choice. We did not volunteer—I hope that the Minister did not volunteer—to get involved in those arguments. There was a reaction from OPEC to the situation.
If one agrees with that assessment and interpretation, it helps us to try to understand what followed. Once such a situation occurs, North sea oil prices become a politically sensitive issue. They become part and parcel of an argument with OPEC. I cannot recall Sheikh Yamani or the chairman of OPEC making statements of the kind that we have seen today on the tapes or in the last few days and weeks about North sea oil prices. It is not our position but OPEC's that is the reason for our sudden involvement. OPEC's whole ramshackle effort to sustain a price and to balance and juggle its position is in trouble.
The ultimate absurdity was when the Norwegians managed to create the last oil crisis. Who, in the name of heaven, would have thought that the Norwegians could create an oil crisis? The only reason why the Norwegians have managed to create an oil crisis and North sea oil prices have become politically sensitive is that OPEC cannot square the situation. OPEC cannot balance the books. It cannot balance the relationship between production price and demand. It is trying to do so, and I understand the reasons for that, but the problem is with OPEC. We have been caught up in the swirl. That is one of the reasons why British and Norwegian North sea oil prices, BNOC and Statoil are now causing not so much a ripple as a shudder throughout the system. It is because the system itself is now unstable.
In one sense, Sheikh Yamani has a point. Throughout his evidence to the Select Committee the Minister defended the short-term intervention on the ground that it was an attempt to stabilise the situation. He does not seem to mind which way prices go, so long as they go quietly. Whether they go up or down he seems not to have a view, although we shall try to tease one out of him today. Because he wanted them to go quietly, he was interested in stability. I suspect, however, that the only people who can provide some kind of stability are the members of OPEC.
§ Mr. Rowlands
Perhaps not, but only OPEC has the size and weight even to attempt it. Sheikh Yamani thus has some right to feel that there is still something of perfidious Albion about us. We talk about price stability and indulge in mini-interventions in the market, while draining our North sea oil at a fantastic pace. Despite the abortive attempt to cut the price in July so as to sell the oil, I suspect that most people are on their prayer mats praying that OPEC will succeed in holding something like the current price level. For a variety of reasons, a sudden downward lurch in oil prices may not be in the interests of the British economy. I leave that open to question as I intend to return to the points raised by Conservative Members about the national interest in this respect. At any rate, if we are talking about price stability only OPEC is capable of achieving that. Experience in July certainly showed that 227 the British Government and BNOC cannot do much about it. Moreover, the attempt cost £45 million. We must therefore be careful where we stand on this.
§ Mr. Rowlands
If the hon. Gentleman had listened more carefully, he would realise that I had described that situation as vividly as he has. As I have said, OPEC has and will continue to have great difficulty in maintaining that ramshackle operation.
§ Mr. Rowlands
I did not say that we should. I am about to give my view on the matter. I was saying that Sheikh Yamani might have a point because we keep talking about price stability when he and OPEC are the only people capable of trying to achieve a measure of stability. It may not be in our interests for that to happen, but in the summer the Government and BNOC tried in a small way to stabilise prices and to create a pause through a minor form of intervention.
§ Mr. Rowlands
The hon. Gentleman shakes his head. I know that the attempt failed. It tried to buck the system, but the power of the market was far greater than the effort put into the attempt to influence it. Nevertheless, if Sheikh Yamani were in the House today I believe that he would try to make the case that I have described, although personally I do not agree with it and I do not believe that it is necessarily in our best interest for OPEC to succeed in its attempt.
This is what we want to know from the Minister. It was he, not the Select Committee or the Opposition, who talked about the greater national interest. We are entitled to ask him to define what he means by that. The Select Committee believes that the Government have an oil price policy. I do not know whether they have such a policy, but assuming that they do, it is a somewhat schizophrenic one to say the least. I hope that the Minister will define what he regards as the broader national interest in relation to the action that he has chosen to take.
Like other hon. Members, I wish to emphasise the dilemmas and conundrums that face us when we discuss the national interest in relation to oil prices. A fairly dramatic fall in oil prices, albeit organised to take place reasonably steadily, might help to recreate our non-oil economy. The area that I represent would certainly welcome support and assistance to recreate our manufacturing industry. On the other hand, a high and stable price is perhaps the only way to ensure development of our most marginal oilfields. What is the Minister's view on that? Would a fall in price of the kind described by the right hon. Member for Guildford (Mr. Howell), a former Secretary of State, have a detrimental effect on the marginal oil fields so important to future North sea oil supplies? Would a high, stable oil price prevent further decimation of our currency against the dollar? In one year we have already devalued our currency by 25 per cent. against the dollar.
228 The right hon. Member for Guildford seemed to take a rather sanguine attitude to the possible impact on our currency of a fall in oil price of $4 or so per barrel. I should have expected such a major issue to arouse considerable worry. Certainly the Treasury could not ignore it unless the Government's "sound money" policy has now been abandoned. As virtually every hon. Member has pointed out, the Chancellor is like an addict. He is hooked on the oil revenue and cannot afford to come off it. To add to our conundrums and dilemmas, the Chancellor's position is perhaps the most curious of all. Every time the pound goes down his oil revenues increase because they are calculated in dollars, giving him a rather perverse, topsy-turvy interest in further devaluation of the pound against the dollar.
Those are the dilemmas and conundrums that we face and to which the Select Committee rightly challenged the Government to respond. I feel that the poor Minister of State, Department of Energy should not really be facing these questions, as answering them should be the job of the Chancellor. Nevertheless, we can ask the Minister of State what he intends to do in response to the situation in which BNOC and the Government now find themselves.
However, we must be careful. Here I part company with some Conservative Members. In the longer term I believe that there remains an important role— a vital role—for BNOC in maintaining the security of our oil supplies. That was the original reason for maintaining a state trading oil company, and we should not be blown off course because in the short term we have a glut of oil and BNOC has to change the shrewd and skilful pricing operation which it maintained until last summer. There is a strong case for retaining BNOC (Trading), which has been and can still be a sensible and useful instrument.
It is a pity that the Chancellor of the Exchequer—the former Secretary of State for Energy — is not here, although he has apologised to us for his absence and explained his reasons. He, more than anyone else, knows the value of BNOC and how it can marginally alter the situation and bring oil back into the market. In the summer of 1979, he was harried at the Dispatch Box by Government and Opposition Members about the shortage of oil at filling stations throughout the country. He knows about the skilful role played by BNOC in bringing back into our market not a huge but a significant and useful amount of oil and in trying to stabilise oil supplies within the United Kingdom. He will also know — here I disagree with the hon. Member for Erewash (Mr. Rost), who said that if BNOC carries on, it could cut the volume of oil purchased—that volume is essential for flexibility and for the potential of affecting the market in a time of crisis or shortage. It was so in 1979 and would be so in a future crisis.
The hon. Member for Bedfordshire, North (Mr. Skeet) tried to argue that we have other means of ensuring that we do not run short of oil. He had the audacity to quote British Petroleum as an example. In 1973–74, when the Government owned a much greater percentage of BP and the right hon. Member for Old Bexley and Sidcup (Mr. Heath) called in the chairman of BP on the question whether BP should make some great national contribution to the management of the crisis, he was given short shrift—or so I understand from some of the books and articles that I have read. We cannot rely on a 30 per cent. share in BP to offer security of supply. I do not think that the cumbersome and draconian powers in the 1976 Energy 229 Act would suffice either. We argued that out in discussion on the Oil and Gas (Enterprise) Act 1982. There is no sensible solution in that direction. We have a sensible, helpful, professionally organised and professionally run trading corporation which has been given that function. In my view, despite the problems identified in the report, and the Committee's strictures and the valuable questions that it has posed, the corporation should be allowed to survive.
§ The Minister of State, Department of Energy (Mr. Alick Buchanan-Smith)
I should like first to congratulate my hon. Friend the Member for Havant (Mr. Lloyd)—as other right hon. and hon. Members have done—on chairing the Select Committee and presenting the report today. I would certainly wish to echo the congratulations that have been showered on my hon. Friend and his Committee from every side. They are to be congratulated especially on the speed with which they carried through their investigation. I also congratulate my hon. Friend on the manner in which he presented his report to us. In many respects, his speech was a model of the way in which such reports should be presented. My hon. Friend will not, however, be surprised to hear that, although I admire his style, I do not wholly agree with the content of his speech.
This is an important subject, and I think that the Select Committee did a good job in a short time, although I may not agree with everything said in the report. The subject is important not only to the members of the Select Committee, to my Department and to BNOC, but on a much wider scale. It is therefore disappointing that the House is not crowded—to say the least—for this debate. I understand the reasons why some hon. Members who have participated in the debate have not been able to see the matter to its conclusion, but I am sorry that they are not here.
Firstly, I wish to deal with one or two points not referred to so far at any length, although my hon. Friend the Member for Havant referred to some of them. I refer to some of the procedural points to which the Committee drew attention in the third paragraph of its report. As the members of the Select Committee will understand, some of those matters are the responsibility of my right hon. Friend the Leader of the House. I have drawn those matters to his attention.
However, one of the procedural points lies closer to my own responsibilities. I refer to the recommendation that, in future, minutes notifying Parliament of a contingent liability to the Consolidated Fund should be copied to the Public Accounts Committee and the relevant departmental Select Committee. I discussed that point with my right hon. Friend the Leader of the House, and the Goverment accept the Committee's view. My right hon. Friend is asking all Government Departments to observe that practice in future. I apologise to the Committee for not having done so in this case, and I am glad that this occasion has given us an opportunity to change in a minor but important way the procedures that we follow in relation to Select Committees and supplementary estimates.
On the main subject of the debate, I have the same views as I expressed when I appeared before the Select Committee a week ago. There are two central themes. First, is it necessary to retain BNOC? The hon. Member for Merthyr Tydfil and Rhymney (Mr. Rowlands) dwelt 230 on that point in the latter part of his speech. He spoke about participation and security of supply. The second theme is the exact nature of the Government's relationship to BNOC and the Government's policy in relation to actions that may be followed by BNOC in carrying out its responsibilities.
The hon. Member for Merthyr Tydfil and Rhymney and my hon. Friend the Member for Exeter (Mr. Hannam) were right to draw attention to one of the fundamental subjects of discussion in such a debate—the role of BNOC in relation to its participation agreements and to the security of supply. I remind my hon. Friend the Member for Erewash (Mr. Rost) that under the participation agreements, which have been fully discussed in earlier debates, BNOC has to give notice up to two years in advance. If one takes the view that BNOC should work in a more flexible way, one should be prepared to argue that there should be no participation agreements. However, if one has participation agreements, and contracts have to be entered into in advance and notice has to be given, it is inevitable that the situation cannot be as flexible as my hon. Friend the Member for Erewash and some other hon. Members would wish.
As my hon. Friend the Member for Exeter said, we could face disruption in the Gulf at any time. Exocets are still used against tankers, and Iran is still threatening retaliation on the oil trade of other Arab states. Most of the present world surplus capacity is also in the Gulf. If production there were lost, so also would be the spare capacity. During the past 12 months one of the main anxieties in the European Community which is principally an oil-consuming interest, and in the International Energy Agency has been the threat of an interruption in the supply of oil from the Gulf. Although there is a surplus, the IEA reviewed its contingency plans which culminated in co-ordination, especially over the use of stocks. The agreement was reached as recently as 11 July. The adequate stocks of oil have been discussed three times this year at meetings of the Energy Council of the European Community which I have attended. Simply because we transparently have a surplus, we should not dismiss the argument about security of supply. We should also bear it in mind that security of supplying is of interest to other consuming countries.
However, participation is not a simply a matter of security. We must ensure that the United Kingdom continental shelf and the price that Britain secures for oil in international markets is not entirely under the control of international integrated companies. We must also ensure that there are some arms length sales at transparent prices. That is an important function which BNOC performs in setting the reference price. I know that there are other systems. Some have been mentioned in Committee and my hon. Friend the Member for Bedfordshire, North, (Mr. Skeet) in his knowledgeable speech — I expect no less of him — referred to the American posted price system. Other systems are not necessarily comparable with those which we work. The American system is based on a strong independent refinery sector. That makes it much easier to establish the arm's-length price. If we think that we need another system, it is not enough simply to draw attention to systems in other countries.
In regard to security of supply and a reference price for taxation purposes, BNOC performs an important and useful function. The second main area of debate today and 231 in the Committee concerns policy on oil prices. The hon. Member for Gordon (Mr. Bruce) said that we appear to have no policy. I only wish that he had read the Committee's evidence. The hon. Member for Merthyr Tydfil and Rhymney obviously has. If the hon. Member for Gordon had read my evidence to the Committee and that of the BNOC, I do not believe that he would have said what he did. I accept what my right hon. Friend the Member for Guildford (Mr. Howell), who has had experience of these responsibilities, and others have said. I told the Select Committee that the United Kingdom cannot control world oil prices. I accept that. We are only a minor player as compared to others. A country is given power in the world oil market by its production capacity and reserves. The United Kingdom is in a relatively minor league in that regard as compared to other countries such as Russia and the United States. Saudi Arabia is in a completely different league as it has four times our production capacity and 13 times our reserves. Moreover, it is able to vary production from less than 4 million barrels a day to 10 million barrels a day. That puts the matter into perspective. As I think I have made clear, the United Kingdom cannot influence any long-term trend in oil prices.
§ Mr. Skeet
On 16 July—at the time of the collapse of prices—my right hon. Friend told me that there were market forces which guide BNOC. I assume that he did not intervene to save this great liability because some other factors were involved. What were they? What were the factors that he was keen to operate on which would stay the hand of BNOC? My right hon. Friend did not intervene on oil prices when he could have done to save the situation.
§ Mr. Buchanan-Smith
Perhaps my hon. Friend will give me a little more time to develop my speech. I should like to deal with the relationship between the Government and BNOC. I should like also to answer the question which more than one hon. Member has asked—what price level the United Kingdom and the Government believe correct. As I endeavoured to make clear in the Select Committee last week, the Government do not believe that any given price is desirable in the national interest. I accept in general terms that a lower price would stimulate the world economy and lead to various advantages. However, it would also lead to certain disadvantages. That issue is, to some extent, academic. The Select Committee considered it. As I said in the Committee, the question is academic because we do not believe that anything we do will influence the long-term movement of world prices. However, we recognise that precipitate changes in price pose a danger in the world oil market. There is no short-term economic limit to the price to which oil could rise, nor is there any economic floor. There is always a risk that once the price has started to change there can be a huge and fast change.
§ Mr. Buchanan-Smith
My hon. Friend has made his speech. Perhaps he will allow me to develop mine.
In an effective speech, my right hon. Friend the Member for Guildford said that there could be a role for BNOC or the Government in the short term taking an 232 interest in what happens to oil prices. If BNOC allowed a fast, sharp and precipitate change in the short term, great damage could result. That is the type of national interest to which I ask my hon. Friend the Member for Bedfordshire, North to address himself.
§ Mr. Buchanan-Smith
I shall give way soon. My hon. Friend has asked me to say what the national interest is. He wants to interrupt me before I have completed my answer. Short-term precipitate changes would damage the economy. They would destroy some of the basis for industrial investment, especially in energy industries and, I believe, in energy-using industries and energy conservation. On a much wider scale, those changes could have a severe influence on the world banking system. That view is taken by not only the Government but the International Energy Agency, which is an arm of the OECD on which the consuming economies greatly outnumber the producing economies. My view is not one taken by the producing countries, as some hon. Members sought to make out, but is shared by consuming countries, not least in the OECD.
§ Mr. Skeet
My right hon. Friend said that the intervention would smooth over difficulties whether the price was going down or up. When the price went up, it increased by leaps and bounds. There were pauses and opportunities for his Government to intervene. The Government let the prices go increasingly higher because they knew they could have an interest. The only time there was intervention was when the prices were coming down.
§ Mr. Buchanan-Smith
I do not believe that my hon. Friend is wholly correct. This debate has occurred in the context of a decreasing world price, but in the 1978–80 period BNOC price rises lagged behind those of OPEC countries. To some extent, that had a smoothing effect and acted as a restraint on certain proposals, although the price did go to a higher level. I believe that BNOC could not have influenced the eventual level reached. No more, no less—I used that phrase last week—does BNOC seek to influence price during a downward movement of prices. I believe that BNOC can have relatively little influence on the eventual price, but it can smooth the movement from one market to another, and that is why its role is important.
§ Mr. Rowlands
As he did in his evidence to the Select Committee, the Minister has emphasised that the Government want stability of movement of price. What does the right hon. Gentleman believe is desirable to come from the OPEC talks tomorrow?
§ Mr. Buchanan-Smith
The hon. Gentleman would think me naive if I were prepared to speculate on the OPEC talks. I shall correct the hon. Gentleman on one point. He said that I was interested in stability of prices. The Government and BNOC are interested in the stability of prices—in the short term. I agree with my right hon. Friend the Member for Guildford that we do not have an influence on long-term movement of prices. We have an opportunity to assist stability in the short term in a movement from one market to another.
The Government's policy on oil prices has been stated more than once. It is to avoid destabilising moves in the short term. To the limited extent BNOC can influence events, its aim has been to promote stability. BNOC has 233 therefore resisted making precipitate responses to short-term, speculative, spot price movements. I emphasise yet again that BNOC cannot and should not stand in the way of underlying market trends. I hope that my hon. Friend the Member for Havant (Mr. Lloyd) will accept that point. With respect, I do not believe that the Select Committee gave sufficient attention to that aspect.
§ Mr. Bruce
Given that the right hon. Gentleman says that the policy to intervene aims to provide short-term, but not long-term, influence on the trend, is it likely that the right hon. Gentleman will have to return to the House on other occasions with a request for a similar amount of money? That is the implication in the right hon. Gentleman's speech.
§ Mr. Buchanan-Smith
I cannot answer for what may happen in the future, but I remind hon. Members who have raised this point that this possibility was mentioned by my right hon. Friend the Chancellor of the Exchequer when he was Secretary of State for Energy. He made those points to the Committee in 1982 when the legislation provided specifically for moneys of this nature. My right hon. Friend admitted that it was conceivable that the corporation could, in some years, incur losses, and that is precisely what has happened. There is nothing unusual or unpredictable in what has happened.
We are not trying to control or interfere with the market in the longer term. We agreed with BNOC that a price cut in July or August could be damaging. It would have been incredible for the Government to sit back and do nothing. After discussing the matter with the oil companies, I asked them to think carefully before pressing BNOC to make any premature price cut. When the companies saw that a precipitate price cut could be avoided, they not only co-operated but contributed towards it. That action was taken sensibly and rationally. I emphasise that this cut was not a novelty. In 1980, we pressed companies to avoid abnormal market transactions that might push prices up. There was, therefore, nothing new in the relationship between the Government and BNOC.
My hon. Friend the Member for Bedfordshire, North asked whether the Government rather than BNOC was responsible. While consultations occur between the Government and BNOC, the ultimate decision is taken by BNOC. BNOC has an independent board, and the corporation is responsible for proposing prices for the different grades of oil with which it deals. I hope that the House and the Select Committee will not forget that, in evidence to the Select Committee, BNOC's chairman made it clear that there was no difference in the relationship between the Government and BNOC between the spring of 1983 and the summer of 1984. There was, therefore, no introduction of policy and no change of policy or practice in that period.
§ Mr. Buchanan-Smith
I have only a few minutes left, and I want to deal with some of the other points raised in the debate.
The action taken in 1983 and in the summer of 1984 was effective. As soon as it was clear that BNOC would not cut its price in July and August, the price quickly became a spot price and returned to a proper relationship. BNOC cut the price only when the longer-term trend to a lower price started to emerge in October. As my right hon. Friend the Member for Guildford said, neither BNOC nor the Government can be a price leader in such matters. We have to follow the market, but we believe that in the short term we can have some influence.
My hon. Friends the Members for Exeter (Mr. Hannam) and for Aberdeen, South (Mr. Malone) referred to the £45 million cost. In my evidence last week to the Select Committee, I made it clear how that amount was calculated. It is worth remembering, as my hon. Friend the Member for Exeter said, and I fill in the point, that for every pound lost by BNOC over three quarters has been recouped directly by the Inland Revenue through incrased petroleum revenue tax and corporation tax paid by BNOC's suppliers. The cost to the Exchequer is about one quarter of the total. It is a small sum to pay in relation to the more general benefits and in relation to the higher cost to the economy which would be caused by the short-term destabilisation of prices.
What overshadows events to some extent at the moment, as the hon. Member for Merthyr Tydfil and Rhymney said, is the OPEC meeting this week. One of the most important things to remind ourselves is that not all oil is suffering from a weak market. The spot price for the world swing crude, the Saudi Arabia mix, is not far from its firm price.
One of the most important problems to which I hope OPEC will address itself this week is that of differentials. Until that is resolved, it is difficult to form a proper view of the way in which prices may move in the future. There are other uncertainties. There are uncertainties about stocks. Current commercial stocks are down to about 71 days' supply. That is below the 1978 level when the Western world was generally ill-prepared to resist the reduction in Iran's oil supply.
Although we sometimes make fun of it, there is the weather. The third week of December last year saw one of the strongest firmings of prices. As I said to the Committee last week, decisions should not be taken in advance of knowing the conditions—
§ Original question deferred, pursuant to Paragraph (2)(c) of Standing Order No. 19 (Consideration of Estimates).