HC Deb 08 June 2004 vol 422 cc23-30WH

11 am

Mr. David Stewart (Inverness, East, Nairn and Lochaber) (Lab)

I welcome the opportunity to introduce this debate. Three major interests have led me to request it. First, I have a long-term interest in North sea oil and gas production, particularly due to past constituency interests relating to oil fabrication; however, sadly, there is no longer such production in my constituency. Secondly, I have a long-term interest in the pump price of oil and its effects on motorists and hauliers, particularly in the highlands and islands. A few days ago I looked back at my maiden speech, which I made three weeks after the 1997 election, and I found that I had mentioned the subject then. Thirdly, I have a wider interest in the economy as a whole.

I do not want to start by painting a picture of doom and gloom. The offshore oil and gas industry in the UK supports 260,000 jobs, a third of which are in Scotland. We all know that the UK is the fourth largest producer of gas; crucially, we are still a net exporter. Also, the UK is still the 10th largest producer of oil.

I shall consider three factors that have a bearing on the world price of oil and its effect on our economy. I will first discuss supply issues—basically, that has to do with the Organisation of Petroleum Exporting Countries—and then the demand issues that have caused the spot price of oil to shoot up. Then, I will mention the speculation that has contributed to the trend of increasing world oil prices. I will also touch on some of the worrying issues for not just our economy but industrial western economies in general.

First, what are the supply issues? As we all know, the biggest player is OPEC. It accounts for 40 per cent. of world oil production and two thirds of oil reserves. Perhaps crucially, it contributes nearly all of the world's excess oil production. There are 11 members of OPEC. Hon. Members will be familiar with them; they include Algeria, Indonesia, Saudi Arabia, United Arab Emirates and Venezuela. Saudi Arabia is clearly the most important card in the pack. It is the only member with substantial extra oil capacity. We know from last week's OPEC summit that OPEC has agreed to increase output to between 2 million and 2.5 million barrels a day. Most of that will come from Saudi Arabia.

I will touch on terrorism later, but targeted terrorist attacks, especially against Saudi refineries, clearly have worrying implications for the west, specifically in terms of oil supply, loss of life, damage to infrastructure, and the haemorrhaging of trained western staff essential for the operation of Saudi refineries.

Indonesia currently holds the presidency of OPEC, but ironically it is now, for the first time, a net importer of crude oil. On 20 May, theFinancial Times questioned Indonesia's status as a member of the oil cartel. It has had great difficulties, caused by its inability to attract sufficient investment. It has fields that are in decline, and there has been an increase in domestic gas consumption.

Iraq is another very important country in OPEC. It has the world's second largest oil reserves. I tabled parliamentary questions, which were answered by the Foreign and Commonwealth Office on 27 May in column 1814W ofHansard. According to those answers, oil exports from Iraq increased between June 2003 and April 2004 to 1.8 million barrels a day. That is important. Some experts have estimated that, at peak flow, we could expect about 3.5 million barrels a day from Iraq. The US has estimated that, on a good day—and with much investment in infrastructure, trained staff and so on—we could probably expect about 6 million barrels of oil a day. There is tremendous potential for export from Iraq. Since the fall of Saddam, it has been worth €40 billion to the Iraqi economy.

As hon. Members know, United Nations and other arrangements dictate that 95 per cent. of that income must be spent in Iraq, on food production, and electricity and oil infrastructure, for example. However, following the bombing of a southern Iraq pipeline, exports fell by 1 million barrels a day, which is very worrying in terms of oil supply. That has been one factor in the increase in world oil prices. Apparently, that is just a supply issue, but there are also issues of nervousness and psychology, which I will touch on later.

Neil McMahon is an analyst at Sanford Bernstein. He said:

The reduction of 1 million barrels a day in Iraq exports effectively nearly wipes out any OPEC increase we could get. For completeness, I should add that although Iraq is a member of OPEC, since 1998 its exports have not counted towards the OPEC quota system.

There are also some technical issues to do with a time lag. It tends to take three or four weeks before changes in production hit the American and UK markets. That is partly to do with practical issues about the length of time that the effects take to reach the US, but there are also technical issue. Some of the oil that we have lost because of the bombing is called Basra Light. That is not something that might be found in the Strangers Bar but light crude, which is very important for American consumers. Some of the extra OPEC production from Saudi Arabia is a much heavier crude that is not as useful to western economies.

What about non-OPEC issues? Barclays Capital recently reported that it does not expect there to be any net growth from non-OPEC countries, except Russia. It is the second year in a row that it has made that prediction.

What about supply issues for the UK, which interests all Members present? It is perhaps now a cliché to say this, but oil and, in particular, gas production are at a mature stage of devlopment. Output for oil and gas fell by 10 per cent. for March this year compared with the previous year. Worryingly, it is the 16th consecutive month that it has fallen.

However, it is not all doom and gloom. Paul Blakely, the vice-president of the Canadian company Talisman Energy, estimated that 10 billion barrels of North sea oil is untapped. In 2003, the industry produced 1.3 billion barrels from the UK continental shelf.

The good news, and the crucial strategic news for us, is that in overall terms the UK is still a net exporter of oil. We expect that to last until about 2010, but that is difficult to predict. The UK continental shelf produces a light crude, the bulk of which is exported and, because we need a mixture of grades, we import OPEC crude,

which is a bit heavier. That is good news; there is a balance of payments surplus for the oil and gas production industry.

Miss Anne Begg (Aberdeen, South) (Lab)

Does my hon. Friend agree that there is an irony in this? Large rural constituencies such as his depend a lot on the price of petrol; therefore, the economy is negatively affected when oil prices go up. However, the economy of the north-east of Scotland is made much more buoyant if world oil prices are high. That gives us some hope for the future, provided that we get the balance right between the cost of the oil and the prod action, which will continue if oil prices are high, and ensuring that the knock-on effects of higher petrel prices do not undermine the economy.

Mr. Stewart

I thank my hon. Friend for that. I know that she has a great interest in oil and gas production. She was right to put her finger on that dilemma. North sea oil and gas are extremely good for the north-east—and, indeed, for the highlands. The other side of the coin is that we must ensure that we get the balance right because high petrol prices at the filling stations are bad news for motorists and cause difficulties for hauliers. I will touch on that later.

I want to turn briefly to the United States. Petrol production there reached an all-time high in April of this year. The American Petroleum Institute said that the refineries were operating at 92 per cent. of capacity; that almost full capacity has resulted in 9 million barrels a day of production. I must say that there are some conflicts between the Republicans and the Democrats on the issue. One may say that that is no surprise. For example, the Republicans are pushing for oil production in the Arctic national wildlife reserve in Alaska, which has been defended by many Democrats and environmentalists. The Democrats have argued strongly that the strategic petroleum reserve should be released to try to lower price, as President Clinton did during his Administration.

What demand factors influence price? The US is the world's largest importer of fuel and believes that cheap subsidised oil is a "constitutional right". A bit like the original frontier men and women, it believes that driving and roaming cheaply is important for its economy. China is another major player in the demand issue. It has 1 billion consumers, a massive increase in car ownership and insufficient reserves of both oil and gas. That has caused it to import substantial quantities of fuel. China is becoming even more significant in the world market and is responsible for 40 per cent. of the increase in demand. It buys 7 per cent. of the world's oil supply. I will give hon. Members one comparison. China currently imports 5.5 million barrels of oil a day, which compares with 2 million Just 15 years ago. Therefore, China is clearly an important player. In India there are similar statistical trends. Perhaps the difference is that India has added substantially to its strategic petroleum reserve. Again, that has put a big strain on the world market.

What then is the big picture? Historically, over the past 30 years, there have arguable been three global recessions, which were all pre-dated by an increase in oil prices. The UK, through the good stewardship of my right hon. Friend the Chancellor of the Exchequer, has a strong economy. As we all know, there is low unemployment, low inflation, low interest rates and high employment. That is combined with a flexible labour market and strong social justice policies, such as nursery education. Obviously, there are worries about the continued effect of rising oil prices for consumers, particularly in rural areas such as the highlands and islands. There are also worries about margin squeeze—in other words, that higher oil prices will fuel higher raw material costs—and about higher inflation. I note that the Bank of England, when it explained its higher interest rate charge, cited higher oil price pressures as one of the factors. That is something that we must be careful about.

Speculation is another concern, particularly in relation to global hedge funds. Findlay MacDonald of Britannic Asset Management was quoted inThe Herald on 3 June. He said:

This is not a supply issue, but mainly trader speculation that's driving the prices up. What OPEC is trying to do is prick the speculative bubble, but there are limits—many speculators are gambling that prices will continue to grow, because they reckon demand will remain strong, even if OPEC opens up its taps to full capacity. On that factor, there are clearly worries about the future stability of Iraq and Saudi Arabia.

In conclusion, a stable and relatively cheap and available supply of oil are key foundations to the success of industrialised economies. However, in recent months there have been gathering storm clouds and a triple whammy has led to oil price crunch. There has been a surge in global demand, low inventories of oil and terrorist attacks in both Saudi Arabia and Iraq, which have vast oil production capacity. That combination of events has unnerved traders and that in turn has fuelled speculation. That has not helped the spot price of oil, which is hovering at about $40. None of that will be any comfort to the hard-pressed motorists and hauliers in high petrol price hot spots—black spots—particularly those in the highlands and islands and elsewhere in the UK. However, the situation is not all doom and gloom.

Mr. Alistair Carmichael (Orkney and Shetland) (LD)

The remoter parts of the hon. Gentleman's constituency, no doubt, share a problem with mine: whatever the price of oil in the world or the domestic markets, we routinely pay something in the region of lop a litre extra for fuel at the petrol pump. Does he agree that it is time that the Government did something to tackle that problem within the highlands and islands?

Mr. Stewart

As the hon. Gentleman said, our constituencies share many common denominators. However, his is much more remote, with island issues. It is important that the Scottish Executive should consider this matter; that is why I supported the rural transport fund, which helps support rural petrol stations to set up transport companies that could do something about this issue.

There is widespread concern about the effects of high oil prices. Today, I am trying—hopefully this is coming over to the hon. Gentleman—to put forward some of the macro issues that are affecting the spot price of oil, and the suggestions that I shall make in my conclusion may be of some help and comfort to the hon. Member for Orkney and Shetland (Mr. Carmichael).

It is not all doom and gloom; an extra 2.5 million barrels have been released by OPEC through the recent summit. However, there is a larger, philosophical point. It is not in OPEC's long-term interest, in my view, for the oil price to go above $50 a barrel because of the economic dislocation that that would cause its customers, who are basically the western countries—America and Europe.

There is another positive aspect. New and undeveloped North sea oilfields can and should be developed by smaller oil companies; they would be viable at the current price range of oil. However, I accept that the large players make longer-term decisions on oil not just in a few months but over a longer period. Iraqi oil production has increased month by month since June and the fall of Saddam. That could be tripled from available reserves once investment, capital equipment, staff and security issues have been resolved. That will be one of the major objectives of the new Iraqi Administration, who take office at the end of the month.

I welcome the opportunity to have this debate. This subject will have resonance for motorists, hauliers and all of us who seek, as consumers, a stable, well managed economy. There are wider arguments, which I will touch on but which I have no time to develop today.

In the longer term, we have to consider alternatives to oil. We must reduce our heavy dependency on OPEC, and that would be consistent with our commitments to reduce global warming. For example, we should develop the use of hydrogen, biocells, hybrid vehicles and fuel cells for buses. In my view, the Government should review their policies for strategic gas and oil reserves. We do not have sufficient storage capability for gas. We currently have 12 days' capacity, compared with 55 days' capacity in Germany and France.

On oil, perhaps the Minister could comment on the policy for reviewing the strategic petroleum reserve, apart from the particular arrangements for the Ministry of Defence, which I suspect are beyond the Minister's remit.

I understand that there is an EU proposal to increase our reserves from 90 days to 120 days, but they would be specifically held by oil companies. My own view is that there should be a Government strategic petroleum reserve held by Government alone and not by oil companies. Strategically, for defence against terrorist attacks, that will be very important for the future.

These important issues will impact greatly on the future performance of the economy. As a Government we cannot control external pressures on our economy, but we can develop internal strategies to react to those pressures. Perhaps the key debate should be about how to use less oil in future, not more.

11.19 am
The Economic Secretary to the Treasury (John Healey)

I congratulate my hon. Friend the Member for Inverness, East, Nairn and Lochaber (Mr. Stewart) on securing the debate and on the way in which he made his points. This is a short debate, but he dealt with the issues at stake in a long and wide way and, as he said at the start, he has a long-term interest in the offshore oil and gas industries. He also has a long track record of championing the interests of rural areas.

I am also glad to see my hon. Friend the Member for Aberdeen, South (Miss Begg) and the hon. Member for Orkney and Shetland (Mr. Carmichael); they, too, have a strong interest in such matters and a good track record.

I start where my hon. Friend the Member for Inverness, East, Nairn and Lochaber ended: his principal concluding points, his suggestions for the future. He is right in saying that we need to exploit fully the oil and gas reserves within the UK. Many of the changes to the fiscal regime that we have developed in consultation with the industry have been designed to do just that. The challenges are particularly great given that our reserves are in a mature field on the UK continental shelf.

Secondly, he mentioned the prospect of increases in Iraqi production. I know that he speaks from experience, having visited Iraq as part of the parliamentary armed forces scheme. He is right that we hope that increases in oil production, and more secure production, will came with the greater stability that should result from the handing of control to an Iraqi-led regime this summer. On the question of strategic reserves, he will know that the International Energy Agency, of which the UK is a member, has principal responsibility for holding national emergency oil reserves. Those reserves constitute a supply of 112 days of net imports. He will also be aware that under the obligations of the IEA, net importing countries have a legal obligation to hold oil reserves equivalent to at least 90 days of their oil imports. However, exporting countries, of which the UK is one, have no such legal obligation under EU consumption-based regulations.

I turn to the concerns that have given rise to the debate—the current high oil prices and the nature of the political debate that has been conducted over recent weeks as a result. My right honourable Friend the Chancellor made it clear last week that the Government welcome the OPEC decision to raise production targets in July and August, and the Saudi and United Arab Emirates announcements that they will bring forward increases in production. As my hon. Friend said, Saudi Arabia is the most Important card in the OPEC pack. He mentioned the scale of the Saudi plans to increase oil production, but oil stocks are already building at current levels.

Those announcements are both welcome and essential for the much-needed stability in the oil market that we have sought. So far, their impact on oil prices has been positive, taking prices down to about their lowest for a month Last night, the spot price in New York was $38.43 a barrel, and this morning at 10 am the price of Brent crude was $35.67 a barrel. In recent weeks, the Chancellor has been at the forefront of discussions with OPEC. He and other international Finance Ministers will continue to press OPEC both on meeting the increased production targets and on the case for raising the levels further. Because the world oil price has been rising, it is in the British national interest that the focus should he on oil supplies, OPEC and its responsibilities.

As my hon. Friend indicated, high demand on the Asian and US markets, plus short-term instability in the middle east and the accompanying speculation that that has triggered, have meant that no country can buck the global price. For Britain, it is in nobody's interests to have higher than expected petrol prices. I understand the concern of motorists, hauliers and business. I regularly meet the haulage associations and representatives of business and, like many others, I drive a car.

However, this is a problem of world fuel prices, not UK fuel duty. It is worth remembering that over half the oil that we use in the UK bears little or no fuel duty—that used for industrial production and home heating and by airlines and trains, and the fuel used off-road for farming and construction.

Mr. Carmichael

I fear that little, that the Minister is saying will give any comfort to motorists in my constituency or in that of the hon. Member for Inverness, East, Nairn and Lochaber (Mr. Stewart). The Minister told me recently that the Treasury was not capable of implementing a variable rate of duty such as that given to peripheral communities in Greece and Portugal. If that is the case, does he have any alternatives or does he expect us simply to live with a continuing premium on the cost of fuel in the highlands and islands?

John Healey

If the hon. Gentleman looks at the full picture, he will see that we support rural areas—for example, the maintenance costs on rural roads are higher than elsewhere, given the relatively low usage—and that we support farming and other rural communities. The problems with differential road duties make them an inappropriate and impractical solution to the problem that the hon. Gentleman describes.

A large number of people and businesses in the UK pay little or no fuel duty on the oil that they use, but they are still affected when oil prices are high. That is why it will continue to be important, in the run-up to the next OPEC meeting on 21 July, to concentrate on the source of the rise in world oil prices, and in particular on world production targets.

We have already postponed the inflation-only increase in domestic UK fuel duties until 1 September, at a cost to the Exchequer and a saving to the motorist and haulier of £300 million. We have also confirmed our plan to give a special incentive for the introduction and use of sulphur-free fuel, to reduce the environmental damage and local air pollution caused even by current ultra low-sulphur fuel. We have been working closely with the oil industry, which has made significant investments in advance of September. We therefore expect a universal switch to sulphur-free diesel within days and to sulphur-free petrol within months.

All the Chancellor's tax decisions take into account a balance of economic, social and environmental factors. We propose the usual annual inflation rise in order to maintain the resources available for investment in schools, hospitals and public transport and to meet our commitments to the environment, while taking into account the impact of the world price of oil on economic stability and the impact of fuel prices on different sectors of society and the economy in Britain. It is important for the British economy that we have the strength to get the balance right between a fair deal for the motorist and the haulier, the needs of the public services, the stability of public finances, and our environmental responsibilities.

My hon. Friend the Member for Inverness, East, Nairn and Lochaber drew comparisons with the past and he was right. In contrast with previous periods of high world oil prices under the last Government, the UK economy now has a foundation of stability and strength. In late 1980, when oil prices also reached $40 a barrel, inflation was more than 15 per cent., interest rates were 14 per cent. and GDP had contracted by 4 per cent. over the year. In 1990, when oil prices also reached $40 a barrel, UK inflation was almost 11 per cent., interest rates stood at 14 per cent. and the economy had again entered recession.

Today, of course, as a result of Labour's macroeconomic management, the UK economy now enjoys the longest continuous expansion on record, the lowest sustained inflation for 40 years and the lowest levels of unemployment in a generation. Today, the UK is therefore better placed to deal with the challenges of the global economy, including those posed by higher oil prices. Having fought so hard over the past seven years to achieve the stability of the economy and of the public finances, the Chancellor has vowed not to do anything that will put that at risk. Some may make and change their policy positions on the basis of day-to-day events and opportunism, but we will not take short-term decisions. That is why both the Chancellor and Prime Minister have said that in August we will look at what progress has been made in dealing with this period of high and unsustainable oil prices. We will then be able to reach a judgment on our own fuel duty change, based on an assessment of all the factors, including the level and trend of oil prices at that point. Until that time, the focus of all responsible Governments should be on OPEC and other oil producers, and on their responsibilities to meet their own targets for sustainable oil prices.

11.29 am

Sitting suspended until Two o'clock.