HL Deb 11 November 1976 vol 377 cc769-82


Clause 1, page 1, line 20, at end insert— 'This power is exercisable at any time in the case of petroleum products, but otherwise is exercisable only when an Order in Council under section 3 is in force'.

8.51 p.m.


My Lords, I beg to move that this House doth agree with the Commons in their Amendment No. 2. I had touched on this Amendment in my earlier remarks. It restores to the Bill the permanent power to regulate the prices of petroleum products. This provision was deleted from the Bill by your Lordships' House at Committee stage. Your Lordships will have observed that this provision has been reinstated in Clause 1 and not in Clause 3 where it stood when the Bill was previously before your Lordships' House. This transfer leaves Clause 3 solely concerned with the procedures for activating the emergency provisions of the Bill.

The power proposed under this subsection—and I made mention of this earlier—is a continuation of a similar power in the Fuel and Electricity (Control) Act under which only one product, paraffin, is controlled at present. It will enable the Government to make orders at any time should they deem it necessary to regulate the price at which petroleum products may be supplied. Again, as I emphasised a few moments ago, the Government regard this as a reserve power to be held against unforeseen contingencies. Many of the major industrial countries already have such powers, and some use them. Apart from premium paraffin the Government have no immediate plans to control the prices of oil products except to the extent provided for by the Counter-Inflation Act.

The supply situation can, however, change quickly and in an unpredictable way, as the OPEC developments in 1973 and subsequently have shown. We must be able to move quickly to protect the national interest, or the interests of particu- lar classes of producers or consumers. However, I can assure your Lordships, and I want particularly to emphasise this point, that the Government would not introduce the new controls without full prior consultation with the industry, and I make that point very clearly.

It has been said that the Government already have extensive price control powers under the Price Code, and it has been asked why they should be extended. The powers in the Counter-Inflation Act and the Price Code, I am advised, are general powers. They are inappropriate for fixing the prices of individual oil products; neither do they permit an exact controlled retail price to be fixed, whether it be in the interests of the retailer or of the consumer. No decision has yet been taken about the longer term arrangements for price control under the counter-inflation policy, and it is therefore, in the Government's view, important to have permanent powers available in this key area, which in the Government's view affects us, the citizens, in so many and varying ways. I commend this Amendment to your Lordships.

Moved, That this House doth agree with the Commons in the said Amendment.—(Lord Kirkhill.)

8.55 p.m.

Lord STRATHCONA and MOUNT ROYAL moved as an Amendment to the Commons Amendment: Line 4, at end insert ("provided that, in the case of petroleum products when such an Order in Council is not in force, this power if exercised shall be exercised from time to time so as to set maximum prices only and to ensure that such prices when taken together enable the suppliers of the petroleum products so regulated to recover the full economic cost of supply for those products at all times whilst the said power is being exercised when such Order is not in force.").

The noble Lord said: My Lords, I am not entirely clear as to what is the proper procedure, but it is clear that my Amendment, No. 2A, is an Amendment to No. 2, and I shall therefore be speaking to these two Amendments together. Obviously we have been disappointed that the Government have not seen fit to accept the Amendments that were put in in this House removing price control. This is perhaps the single biggest political disagreement between us now that remains in this Bill. We twice rejected price control in this House, and the Liberals in another place joined with the Opposition in resisting the replacement of those control powers which were eventually put back at the Report stage on the Floor of the House. We have never challenged the need to have powers of control over the price of any fuel, including petroleum products, in a national or a domestic emergency, and we are not challenging those powers now in our Amendment No. 2A. What we are challenging is the Government's proposal to have an unqualified power of control over the prices of petroleum products outside an emergency.

The Amendment that we have tabled aims to do two things. First, it makes the power of control over prices of petroleum products exercisable at all times. It locates the power in Clause 1 of the Bill instead of Clause 3, which was originally proposed when the Bill was first introduced, as the noble Lord pointed out. Our Amendment seeks to qualify the control which the Government can exercise over the price of petroleum products when we are not in an emergency situation. The qualification is that price control must be administered in such a way that suppliers will be able to recover their economic costs of supply if the market conditions make it possible for them to do so.

This does not in any way affect the powers which may be exercised in an emergency. We still believe, and the Opposition have expressed the view, that the permanent powers of price control of petroleum products outside emergencies are both unnecessary and undesirable. This has been a view which has been supported by the Cross-Benches and the Liberals in this House and by the Liberals in another place. But at this juncture it is clearly not appropriate for us to challenge the permanent price control powers as reinstated by the Government in their Amendment No. 2, in spite of all the misgivings we have about the implications of those powers. But we believe that it would be right for this House to exercise its revising role and try to make sure that the powers which the Government are taking—which are very extensive, and are confined only to one industry, for reasons which I do not believe the Government have ever satisfactorily explained—can only be exercised in a responsible manner.

I should like to reassure the noble Lord that the Amendment is not put forward in any spirit of wrecking the Bill. We hope that it may prove acceptable to them. Indeed, we go so far as to say that it appears to us that we are not asking for anything more than the Government claim they intend to do anyway. At the end of my remarks I hope that perhaps the least we may be able to do is to extract from the Minister some further assurances as to the way in which they see these powers being administered and exercised.

If it is accepted that there are good reasons for saying that these permanent powers are unnecessary and undesirable, then we are all the more justified in arguing that if the Government are determined to have these powers, then they should at least be restricted in such a way that everybody can have confidence that they will be exercised in a responsible manner. It is worth looking back. When this issue was first discussed in your Lordships' House, the Government appeared to see a connection between price control and the end use control for conservation purposes. This was an argument that was pursued at some length by a number of noble Lords in this House, who pointed out that on the whole price control, unless it meant minimum price control, which it practically never does, tends, if anything, to encourage fuel consumption rather than otherwise. This was a point which was made from the Cross-Benches, most effectively I thought, by the noble Lord, Lord Robbins, who might have been here to say it for himself had we not drifted somewhat in our timetable this evening.

Our argument against the need for price control has been something on these lines. The industry is a highly competitive one and all the forecasts indicate that there is likely to be a surplus of refinery capacity in Britain and in Western Europe for some years to come, and this will tend to reinforce the competitive pressures. If the Government felt that the industry was behaving in an irresponsible manner, or was colluding to earn excessive profits on its refinery and distribution facilities, it would be perfectly open to the Government to refer those activities to the Monopolies Commission. But I repeat that I am not aware that the Government have ever produced a satisfactory case for singling out the oil industry, alone of all the industries in this country, to be subject to permanent price control. A great deal of our time has been spent on debating nationalisation clauses. Perhaps we should thank God for small mercies: the Government are not proposing to nationalise the oil industry, and they would have a right headache if they did. I do not think that they have claimed that the intention of nationalising other industries it to exercise price control in those industries either. At least, that is not an argument which I remember during the course of the many weary hours we have debated those issues.

Where the oil industry is the same as other industries is that it is controlled by the Price Code in exactly the same way as in every other industry and it would therefore be subject to any general price control which Government saw fit to enforce. We concede right from the beginning—and it is worth saying again; there is no dispute between us—that there may be a need for price control in a domestic or an international emergency. But it is worth emphasising that, as the noble Lord said, many other countries have these powers. If that argument is to be deployed, we should look at what has happened to the countries which have exercised price control. Various formulae have been used designed to give a fair return on investment, but the actual prices in most of these other countries are below the maximum levels because of the effect of market competition.

Therefore it could be argued that the maximum prices in these circumstances do not have any effect except the cost of administering them. But one could go on and ask: in that case, what is the point of having them? Surely, it must be conceded that at the very least they impose a large, unnecessary bureaucracy for which somebody, in the end, has to pay. I have said many times, with the greatest respect to a noble body of men, that there are too many civil servants in this country at present. This is not to say that they do not do a good job, but there are simply too many of them doing it.

I have said this before, but it bears repeating. The classic example of the potential damage that price control can do has been in the natural gas industry in the United States. I do not think that we should labour the point that by con- trolling the inter-State gas prices the United States have encouraged the consumption of natural gas with the result that they have now roared through the availability of this natural resource and are facing a real crisis in a very short time as to how natural gas supplies are to be kept going in the United States. Anybody who has been interested in energy will know that there has been a furious debate raging in the United States for many months now about the question of the pricing of all petroleum products.

The United States authorities have held down the price level of petroleum products, for reasons which no doubt seem good to them, to well below their market level and the result is that consumption is beginning to rise and Project Independence, on which so much store was set—a conservation attempt in its way—has now gone out of the window. In Italy, the Government forced down the prices to such an extent that both Shell and BP have withdrawn from the market. I should not have thought that that was the kind of development that we particularly wanted to see take place in this country.

I believe that in France the Government have juggled prices in such a way that there is now a shortage of naphtha feedstock for the petrochemical industry. If on the other hand one looks at Germany, Sweden and Switzerland, one finds that there has been no monkeying about with the market and the result is that petroleum products are freely available at highly competitive prices in those countries. So I suggest that the overseas experience does not in fact reinforce the Government's claim that price control is an inherently desirable activity.

There is then the complicated technical question that oil products are produced in joint supply, and it is extremely difficult to identify the actual cost of any individual product from a complicated process like a refinery. The analogy has been suggested that it is very difficult to distinguish between the cost of wool and the cost of mutton—and I am sure the noble Lord will appreciate this as a good Scotsman—when they are produced from the same flock. It is a very difficult exercise to carry out. If the Government start setting maximum prices for oil products, how are they going to know that the differentials they establish make economic sense within the industry? If the Government are going to react to the effects of the market, they are for ever going to have to be tinkering around with the prices which they are setting.

The final objection to the re-introduction of this power is that the Government have given very little indication of how they would exercise the very wide and open-ended powers that they are taking. They can introduce major distortions by reducing the prices of one or two products well below the market level, or they might set prices which would bring all the prices below the market level. This would have the effect of putting the oil companies in a position where they were unable to recover the costs of the very large capital investments which they have made to produce these products. We have no indication of what it is the Government intend to do in the exercise of these powers, although the noble Lord has very properly said—and we welcome it—that they would consult freely with the industry. But we have had plenty of examples in recent months of the kind of dialogue of the deaf which passes for consultation. It is a noble aspiration which can sometimes get wrecked in the exercise.

The Government now say that they want these as reserve powers and they have no intention of using them, other than for paraffin, in the immediate future. This is a curious argument, and we ought to address ourselves to the paraffin argument for one second. It is only the premium paraffin to which the noble Lord referred. It is not easy to get statistics, but my understanding is that premium paraffin accounts for something less than 1 per cent, of the market. It really seems grotesque to set up an enormous edifice to control one tiny part of the market. It is true that at the present time paraffin represents the cheapest way for low-income people to heat their houses; but I am told that it is only about one in five old people who in fact take advantage of paraffin heaters. I would suggest that here we are now back in the argument that we had once before—and it is a very difficult argument—which arose about the disconnection charges. The argument simply is that if we want to help those in heating need, then probably price control—anyway, very broadly based price control—is not the best way to set about doing it, any more than it really makes sense to suggest that if those in need are unable to pay their bills for gas or electricity you simply say to them, "Never mind; do not bother to pay your bills; we will get somebody else to pick them up". This is simply not a sensible way to proceed, I would suggest to the noble Lord, and therefore I do not believe we should make a great thing about the paraffin argument.

So when do the Government intend to use these powers? Do they envisage using them in what might be called a sub-crisis, a sub-emergency, which does not warrant the full use of the Government's international or domestic emergency powers but yet warrants control over the prices of petroleum products? If the powers are to be used only in a shortage, then why do we not say so in the Bill? The suspicion that therefore lodges in the minds of the cynics—and I, for this purpose, perhaps, must admit to counting myself among them—is that perhaps the Government see this as a way to control the individual prices of petroleum products as a tool in the detailed regulation of the energy market.

If that is the case, why do the Government think that Ministers and Civil Servants can improve on competitive market forces as a way of operating the market?—and since devolution is going to be much on our tongues in the months to come, I would remind him that the market is a means of devolving the decisions down to the consumers in the market rather than centralising them in the Ministries where the Ministers and civil servants try to run the market. We contend that the cost of price control would be three-fold. There is the cost of the administration and the policing of the controls; then there is a danger of the inflexibility and distortion which controls create in the market; and, thirdly, there is the inevitable damage which will be done to the oil industry who need to, and are accustomed to, operate in a free market or, at least, need to be assured that price controls are run in a fair and predictable fashion. That predictability is not, at the present time, laid down in this Bill.

It is sometimes said that industrial consumers want price controls. If that is the argument, I should be interested to find the industrial consumers who do want price controls for I have not met them.

I would prefer, and I believe consumers would prefer, to see the market performing this function. We find all kinds of dangers illustrated by the paraffin argument. There is the possibility, if the price of premium paraffin is forced down too low, that the consumption will rise too high and there will be a shortage of supply. Would it not be better to tackle that kind of problem of those in heating need by getting to the people who are in need rather than to use this blunt-edged weapon which runs the risk of distorting the whole market? If the Government feel so passionately about the need to control paraffin and this tiny proportion of the whole market, it surprises me that they did not take powers to do so in the Bill.


My Lords, I cannot really follow the noble Lord's paraffin argument too far. I do not think the Government feel passionately about this question. It is a part of a parcel in the Bill. I do not think we have ever laid too much emphasis on it—or I hope not.


My Lords, the point is that the only example the Government give of the need for and justification for price control is their need to control premium paraffin. What I am suggesting is that they are building an enormous edifice on a tiny sample of the market, an irrelevant sample and, furthermore, that that is probably the wrong way to tackle that particular problem in any case. I am suggesting that it goes along with the debate we had in this House some time ago about the potential heating needs of people in the coming winter. Price controls of this kind are not relevant to that.

My Lords, I think I had better come back to what our Amendment attempts to do. We are not attempting to strike out the permanent pattern of price controls, however much we might object to them. We leave the Government complete freedom to operate these in emergencies, but we put constraints on the exercise of those powers in non-emergency situations. First, this Amendment confines the Government to the fixing of maximum prices since nobody has suggested that they would want to fix minimum prices. If they needed to be able to fix minimum prices, it would be interesting to know why.

Secondly, and this is important, the Government are confined in so doing to set prices which are justifiable in the economics of the cost of supply by the company. Here we are not suggesting that we need to go into the detail of each individual product because the words, when taken together, give the Government some margin to temper the price of a particular product—it may be premium paraffin—by providing that the totality of the products will cover the cost of supply.

It is an interesting fact that I am assured at the present time the down stream part of the industry in Europe is not covering its costs at the present prices. I have already pointed out that this is the effect of competition and the danger will be that the Government will frighten off the companies. If ever there was a time when we needed not to frighten off the companies, when we are busy mortgaging the potential oil supplies which this country confidently expects to get, I would have thought this was a very bad moment to choose to do anything that might jeopardise the arrival of those supplies.

I hope that the Government will accept this Amendment. The only assurance the Government have given otherwise is to say they will consult the industry before tabling an order for price control. There is the danger that the consultative procedure could even be used for delaying the adapting of prices. I do not need to tell the House the potential damage that this could do in a time of inflation at the present speed we are experiencing it. If this Amendment is rejected, may I ask the Minister if he will give some specific assurances. First, in the spirit of our Amendment, we should like to hear the Government say that the price control will not be administered in such a way as to prevent the oil industry from covering its full economic costs of supply across the board. Secondly, will the Government give an assurance that they will pay full regard to market conditions and not unduly distort the differentials between the various products? If they feel it necessary, it might be desirable to have an appeal to an independent accountant in establishing what these differentials should be.

Thirdly, can the Government give an assurance that they will not subject the oil industry to two parallel sets of controls at the same time; that is one under the Price Code and one under the powers they are taking under this Bill. Fourthly, can the Government give a clear and specific indication of when and in what circumstances they intend to use these powers? Is it only in a shortage not warranting emergency powers, or is it really a dirigiste tool giving them the power to shape the energy market? If the Government cannot answer these questions, I am afraid they will strengthen the already considerable anxiety which exists throughout the industry about the powers which they are taking back to themselves in Amendment No. 2 and to which we have addressed ourselves in Amendment No. 2A. I beg to move Amendment No. 2A as an Amendment to Amendment No. 2.

9.19 p.m.


My Lords, the noble Lord, Lord Strathcona and Mount Royal, has reasonably and properly moved between Amendment No. 2, which the Government commend to your Lordships' House, and his own Amendment, No. 2A. There is a relationship there. From the Government's point of view, I have said all I can say or want to say in support of the Government's Amendment No. 2. I have explained why the Government consider it necessary to take the powers envisaged.

If I may talk for a moment or two about the noble Lord's Amendment No. 2A, it seeks to attach two qualifications to the use of the powers to control oil product prices outside an emergency. The first is that the powers should be used only to set maximum prices and the second is that the average of such maximum prices shall be sufficient to enable suppliers to recover the full economic cost of supply. The Government do not consider it appropriate to write such limitations into the Bill. I believe that the Amendment arises from a continued misunderstanding, if I may say so, of the Government's intention in this matter. It is not the Government's intention to introduce immediately a permanent system of price controls on petroleum products. The noble Lord, Lord Strathcona, asked earlier why the petroleum industry should be singled out, as I think his phrase was, for such treatment. In the Government's view, oil is a unique commodity. The petroleum industry is a key area of our economy and, with its recent history of massive price increases and supply problems, it is important that the Government should have a permanent power available to promote Government policies and to protect the consumer.

What we are seeking in Amendment No. 2 is a reserve power, to be held against unforeseen contingencies. In the Government's view, it would be inappropriate to limit the powers in the way suggested by the noble Lord's Amendment. However, perhaps it would allay the misgivings of noble Lords opposite and of the oil industry if I remind them that the Government already have similar powers to control oil product prices in the 1973 Fuel and Electricity (Control) Act, but are using them only to control the price of paraffin, in the interests of the poor. We are not making a huge issue of this, but we are putting it on the Record that this is what we are doing.

As I am sure your Lordships will recall, it was the present Government which removed the price controls on petrol and DERV that had been introduced by the Conservatives in 1973. In the Government's view, that hardly suggests that we are not mindful of the needs of the oil industry and of the consumer. It is true that a maximum price control is mainly used to protect the consumer, and I concede the point. But it is, of course, capable of being used to restrict aspects of production and retail use. We must face the fact that the oil supply situation can change quickly and unpredictably and the Government must be able to move quickly to protect the national interest, which of course, includes both suppliers and consumers.

It is the Government's view that the noble Lord's Amendment is too restrictive. Furthermore, it would be impossible to operate if only one or two products were controlled in the way suggested. Oil products are produced in conditions of joint supply: that is, they all come out of a barrel of crude oil. Oil companies have stressed that it is difficult, if not impossible, to allocate individual production costs to each product. Distribution and marketing costs are equally difficult to allocate. How, then, ask the Government, can the full economic cost of supply for such a product be calculated? The noble Lord, Lord Strathcona, posed one or two direct questions to me—


My Lords, if the noble Lord is leaving that point, may I say that I do not see anything in my Amendment which suggests that the Government are going to be limited to controlling one product. The whole point of what I was trying to say—and it is written out here quite clearly—is, that such prices, when taken together, enable the suppliers of petroleum products so regulated to recover the full economic cost". If the Government are saying that it restricts the Government to control one product, I must ask him what it is that makes him say that, because that is not in the Amendment.


My Lords, I do not think I said at any point that it would restrict the control of one product. I have been attempting to explain that the oil industry does not seem able to break down its own cost structure, and therefore in the Government's view the Amendment would be difficult to sustain. The noble Lord, Lord Strathcona and Mount Royal, asked of me at least six direct questions. He asked how the Government assess the differentials they establish in a way which would make economic sense. I think that was the substance of his remarks. This is a matter on which we would consult the industry. I give that assurance.

I almost hesitate to return to this, but in exercising paraffin control we have consulted widely to ensure that the appropriate differentials between paraffin and middle distillates were maintained. I will not apologise, but I would emphasise that the Government lay some stress, without in my view being quite so paranoid about it as the noble Lord was suggesting on this question of the control of paraffin. If it is of help to him, I can advise that information extracted from the 1975 Family Expenditure Surrey shows that a larger proportion of the low income households than the better off households use paraffin. I think he admitted that point himself. In fairness, I should say that we on this side accept that a good deal of paraffin is sold to consumers other than the poor, but we consider that the needs of pensioners and others on low incomes are paramount.

To return to the six points placed very clearly before me, I acknowledge that the noble Lord, Lord Strathcona and Mount Royal, was kind enough to give me some intimation that he would at least ask for the four assurances which he seeks from me, and these were contained in his closing remarks. Perhaps he will be prepared to accept an omnibus answer ranging through his four postulates. I think I have already dealt with some of the points in the earlier remarks I made as we have come through Amendments Nos. 1 to 2A. I do not think it is possible to be specific about the criteria which the Government might employ when using these powers, nor in the Government's view is it appropriate to write such limitations into the Bill. I have made some points about that quite recently. I made the point earlier that the Government are seeking here a reserve power to be held against some unforeseen circumstance or set of circumstances. I aver that the Government record in this regard speaks for itself. I mentioned that we terminated the control of petrol and DERV introduced by the last Government, and at the moment we are maintaining only a control of paraffin.

I have explained why we need these powers which apply to specific products as well as the more general powers under the counter-inflation policy. The Government have already given an assurance, and I repeat it and emphasise it, that they would not introduce new controls without full prior consultation with the industry. We already do this so far as paraffin is concerned, where we have regard to the need to maintain the differential between paraffin and the other middle distillates. The points raised by the noble Lord, Lord Strathcona, are matters which we will obviously take into account and I make public the assurance which I have just given.

Amendment to the Amendment, by leave, withdrawn.

9.35 p.m.