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Petrol Supplies (Highlands And Islands)

Volume 281: debated on Wednesday 17 July 1996

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12.21 pm

I am grateful for the opportunity to discuss the supply and price of petrol in the highlands and islands, as the matter is causing increasing concern not only to those who live in the area, where cars are not a luxury but a vital lifeline for people to go to work, to shop, and to visit the doctor or chemist. There is no choice when public transport is minimal or non-existent. The matter also concerns bodies involved in rural affairs, particularly those responsible for promoting the economic and social welfare of the area, such as the local enterprise councils and local authorities.

I am well aware of the widespread concern about high petrol prices and continuity of supply in other parts of rural Scotland, particularly in the Borders area represented by my right hon. and hon. Friends; but, as the title of this debate suggests, I shall concentrate today on the highlands and the unique situation of the many islands.

First, I shall give some examples of real prices and real places. I have brought along a map to assist the Minister, who may wish to refer to some of those places. The average cost of leaded petrol in the highlands and islands is 65.5p a litre, whereas the average cost in Edinburgh is 57p a litre. The average cost of unleaded petrol in the highlands and islands is 60p a litre, whereas, in a place like Dunfermline, it is 52p. For leaded petrol, a village in Shetland pays 66p a litre; Dornoch pays 67p; Ullapool pays 62p; and Tiree, an island in my constituency, pays 74p.

Someone heading to Tiree from Glasgow may fill up his car at Dumbarton and pay 54p a litre. He will travel through Tarbet on Loch Lomond, where the price goes up to 60p, on to Inverary where it costs 63p, and to Oban, where it goes down a little to 60p. He then drives his car on to the ferry, and pays a single fare of £65 and an extra £9.85 if he has a passenger. He arrives on the island of Tiree, to be faced with a price of 74p a litre. On the island of Colonsay in my constituency, Mr. Charles Mackinnon, who operates the school bus, would pay 49p a litre for diesel in Glasgow but must pay 86p a litre on the island.

A number of recent reports and surveys reflect growing anxiety at spiralling petrol costs and the future of supplies. The Rural Scotland Price Survey gives definitive figures showing the knock-on effect on the cost of living in those areas. In a paper published last month, the Scottish Consumer Council makes a telling statement:
"All of the 15 least accessible travel-to-work areas in the UK are in Scotland. Ten are in the highlands and islands."
A report issued last January by Halcrow Fox for the Highlands and Islands Action Group on Hydrocarbon Fuel Issues found that petrol prices in the highlands and islands
"are up to 11 per cent. greater than in urban locations in Scotland."
The excellent submission by the Western Isles council to the Trade and Industry Select Committee draws attention to the fact that, in 1981, despite a lot of pressure, the Office of Fair Trading declined to take action, but eventually did so in 1987 by referring the matter to the Monopolies and Mergers Commission. However, it declined to conduct its own investigation into rural prices, and the MMC conclusion at that time was negative.

The Petrol Retailers Association, which gave evidence to the Trade and Industry Select Committee on the subject on 4 June, criticises the role of the Office of Fair Trading, and accuses it of failing to provide details of its market monitoring. I believe that it should be much more responsive to the concerns of those who want answers to the problem of petrol costs.

The Office of Fair Trading may not have much in the way of resources, but I hope that the Minister will encourage it to monitor the market. That would be easier to do if pricing were more transparent at wholesale level. Despite the fact that petrol prices have been falling at forecourt pumps throughout the UK, they have remained unacceptably high in the highlands and islands. The MMC has said in the past that it is all due to sparse populations and geographical factors, but that is no answer. The problem does not appear to rest with the small retailer who may put only up to 3p on a litre, simply to stay in business.

My second point—I hope the Minister will address it—is about the rapid closure of retail outlets for petrol, which is happening at an alarming rate, for a number of reasons, including the cost of upgrading petrol stations to meet increasingly stringent requirements such as storage tank testing and modifying pipe work as demanded by the petrol recovery directive; and increases in the real price of petrol to encourage the switch from private to public transport. That is laughable, because there is no public transport in many areas.

I have been told, but I cannot confirm the information, that Shell will not renew its contracts with garages that sell fewer than 2 million litres of petrol and diesel a year. The closure of petrol stations will have disastrous consequences for the availability of fuel and for jobs. It has been estimated that more than 600 jobs could be lost in the highlands and islands in the next 10 years, with four out of every 10 filling stations facing closure.

At the end of June, the Pier garage on the island of Jura in my constituency closed, leaving the island without any petrol or diesel. The owner has been offered a grant, but cannot find the rest of the money required to make up the total for capital investment. The island of Coll is in a similar position, because the cost of replacing the antiquated pump and tank is beyond the means of the retailer who provides the only outlet on the island.

I have a copy of a letter that was sent to my hon. Friend the Member for Inverness, Nairn and Lochaber (Sir R. Johnston)—I am glad to see him in his place—earlier this month about the non-existence of petrol and diesel outlets in the Acharacle area. The writer states:
"About forty years ago, there were five petrol pumps in this area, and hardly any cars. Now most households have at least one car, and there is no petrol in the Acharacle area … Tourists coming into the area now are having great difficulty, not knowing about the petrol situation."
Apart from the effect on people living and working in the area, the lack of petrol outlets will have a detrimental effect on the tourist trade, which is such an important industry in the highlands and islands.

Will my hon. Friend stress to the Minister that the problem, as she has argued throughout her speech, affects the whole highlands and islands area? For example, Miss Wallace, who runs the Kinlochewe service station in the Wester Ross area in my constituency, has been to see me. Her letter to me states:

"My own fate after 28 years in this business is bad enough, but the demise of numerous stations will inevitably send shock waves through all the businesses as all are dependent on the tourist trade."
Those comments, and those that my hon. Friend has quoted from her constituents, underscore the need for the action that she has recommended.

I am grateful to my hon. Friend for that example. There are many such examples, and an increasing number of letters in our post bags stress what is happening in the highlands and islands.

I have tried to give the Minister a picture of what is happening, and I would like him to tell me what can be done. Will he refer the matter to the MMC, so that we can find out what the oil companies and supermarket chains intend to do in the light of threats to continuing supply, as a result of—it appears—private price wars in urban areas?

Can he also say why there is no national distribution network, and will he consider a derogation from the strictest legal requirements to upgrade petrol stations in remote areas? Will he also consider realistic financial support directed towards investment in the petrol stations and to the pump price of fuels? Will he consider establishing an investment fund, financed by the oil companies, to assist the small retailer? I thank the Minister for listening to the debate, and I hope that I have impressed on him the gravity of the situation. I look forward to his reply.

12.35 pm

I congratulate the hon. Member for Argyll and Bute (Mrs. Michie) on securing the Adjournment debate. I am also pleased that, as I reply to her, my right hon. Friend the Minister of State, Scottish Office is in his place.

I may be an Englishman, but I take no persuading that Scotland is arguably the most beautiful country in the world. The hon. Lady may be surprised to learn that I have visited Orkney, Shetland, Skye, Harris, Lewis, North Uist, South Uist, Benbecula and Barra, and have travelled extensively in mainland Scotland. I realise that not all those places are in her constituency, but when I looked across the Pentland firth, I strongly suspect that I was in the constituency of the hon. Member for Ross, Cromarty and Skye (Mr. Kennedy).

The Minister did not get the Tory nomination in any of those places.

No, I did not, to my lasting shame. It is hard to repair my frailty and inadequacy in that regard, and it is extremely uncomfortable to be reminded of my failures in such a public forum.

The grandeur of Scotland is matchless, and remoteness is a part of it, but it is also also part of the problem of petrol and petrol pricing. If I fail to answer any of the points that the hon. Member for Argyll and Bute raised so gracefully in her eloquent speech, I invite her to meet me, and perhaps she would write to me to let me know the key points on which she would like further comment.

The hon. Member spoke about the need for an MMC investigation into petrol supplies in the highlands and islands. As she knows, the commission reported on the supply of petrol by wholesale in the United Kingdom in February 1990. It examined petrol prices in the highlands and islands in detail, as an example of the problem of petrol prices in rural areas. The MMC found that average prices in the highlands and islands were higher than in the rest of the United Kingdom, and higher than in the rest of Scotland.

It has been argued that customers are paying high prices for petrol because of lack of competition. It is true that petrol stations are not thick on the ground in the highlands and islands, and the nearest competitor to every station may be some distance away. However, a number of factors may contribute to the higher prices for petrol in the highlands and islands than elsewhere in Britain.

The MMC concluded that the higher prices charged in the highlands and islands were primarily the result of loss of economies of scale, which resulted from low turnover at individual petrol stations, which itself resulted from low population density. The average site volume in the highlands and islands was about one fifth of the United Kingdom-wide average.

Fixed costs spread across low volumes of sales tend to mean that higher prices for individual sales must be achieved if outlets are to make a profit or break even. Therefore, their profits may be the same as, or even lower than, outlets in other areas, despite the fact that their prices may be higher. Higher costs of transport to remote locations and less intense competition at both wholesale and retail level are additional factors. The Monopolies and Mergers Commission found no evidence that wholesalers were making excessive profits from sales.

The hon. Lady will be aware that, under the competition legislation, responsibility for considering and, if appropriate, investigating allegations of anticompetitive behaviour or abuse of monopoly power lies with the Director General of Fair Trading, John Bridgeman. It is for the director general to consider whether the situation warrants a reference to the Monopolies and Mergers Commission. The independence of the director general is a fundamental part of our competition framework.

The Office of Fair Trading has been keeping the supply and pricing of petrol under review, and has been investigating individual complaints about petrol pricing in the highlands and islands. It has found no evidence that the conclusions reached by the Monopolies and Mergers Commission in 1990 no longer hold good.

Madam Deputy Speaker, you may be aware that the Director General of Fair Trading gave written evidence to the Trade and Industry Select Committee hearing on petrol pricing on 26 June. He reported that he had looked into recent developments in petrol retailing, including Esso's "Price Watch" campaign, and had found that price competition was strong but not predatory. Furthermore, he considered that consumers were benefiting from cheaper petrol prices as a result of this competition between the oil majors and the supermarkets. However, if the hon. Lady or any other hon. Member has evidence of anti-competitive practices by petrol retailers or wholesalers in the highlands and islands, I urge them to bring it to the attention of the Office of Fair Trading.

In recent years, there has been a widening of the retail price differential. It has been suggested that this is because the MMC was given misleading information about the price of petrol in the highlands and islands during its investigation, and that this should be investigated. I have not seen sufficient evidence to justify any such review. Rather, the widening of the retail price differential reflects the fact that prices have been falling in urban areas as a result of increased competition between the large oil companies and the supermarkets.

It is undeniable that price competition in petrol retailing is very keen at the moment. This is particularly true in areas of high outlet concentration, where the major oil companies and the supermarket-owned petrol stations are competing for market share—this is particularly true in the suburban part of the west midlands that I represent. This has resulted in the bottom of the price range being pushed down, rather than the top of the price range being pushed up.

Oil suppliers already give support to retailers through solus-tie agreements. This is an exclusive contract between the retailer and petrol supplier, usually for five years, which gives the retailer various advantages—ranging from help with infrastructure costs, guaranteed supplies of petrol, advantages from marketing under a brand name, and financial incentives. There are other incentives, including the retailer receiving advice on environmental issues and improvements to the retail outlet.

Other types of contract are available to the retailer, such as licenses and franchises, each giving different advantages and flexibilities. Some retailers may decide not to have any contract at all, preferring instead to negotiate with suppliers as and when they require deliveries. It is for individual retailers to decide what type of contract they want, and to negotiate with oil suppliers accordingly.

It has been suggested that petrol retailers in the highlands and islands might be subject to lower rates. The hon. Lady will no doubt be aware that the Scottish Office published a consultation paper about a business rates relief scheme for village shops on 7 June 1996.

The paper proposes that certain small general stores and post offices in rural villages will in future be entitled to at least 50 per cent. relief on their rates bills, and local authorities will be able to top this up to 100 per cent. In addition, local authorities will have wide discretionary powers to grant relief to other rural shops and businesses that are of benefit to the rural community. It will be for individual local authorities to determine whether independent rural petrol stations fall into this category.

I understand that many petrol stations in the highlands and islands are a number of years old, and the costs of replacement and upkeep will be high. Outlets may need to be upgraded to offer additional services, to keep existing customers or to attract new customers. Improvements must be made to comply with health and safety, and environmental, regulations. For example, the European Community directive on the recovery of petrol vapour during the storage and distribution of petrol requires outlets to have their pipework modified to minimise pollution by petrol vapours.

However, the directive applies only to outlets with a throughput of more than 100,000 litres of petrol per year. Also, it is possible to provide exemptions for outlets with a throughput of up to 500,000 litres per year in areas where emissions are unlikely to contribute significantly to environmental and health problems. The requirements of the directive do not apply to existing stations below 500,000 litres a year until 2004 and we would expect the exemptions to cover a large percentage of petrol stations in the highlands and islands.

There is a Health and Safety Executive requirement that storage tanks be tested after 20, 25 and 30 years, and biennially thereafter. There is a fee for the testing, and tanks that fail will have to be improved or replaced. As I mentioned earlier, fuel suppliers may well be able to offer financial assistance to their retailers for infrastructure improvements.

It has been reported in the press that the metrication changes that took place last October have imposed significant costs on petrol stations that sold petrol by the gallon. I understand that a large proportion of the costs referred to in press reports are probably related not to metrication but to the necessary upgrading of petrol stations to meet safety standards, which I mentioned earlier. The cost of converting a petrol pump from imperial to metric can he relatively modest—in most cases, I understand that it should not exceed £ 1,000. My Department has ensured that advice on conversion is made available through the National Weights and Measures Laboratory.

The hon. Lady has called for public sector support for investment in petrol station infrastructure. I do not see this as a workable proposal. If rural petrol stations were given special treatment, why not rural shops or rural pubs? Where would we stop? The money would have to come from somewhere, and the generality of taxpayers would have to pay.

However, the recently created Scottish rural challenge fund offers £500,000 to promote and support innovative new projects that would make a significant impact on particular social and economic problems in rural areas. This could include projects such as community petrol stations offering significant benefits to the local area.

It seems clear that higher petrol prices in remote and rural areas are not the result of anti-competitive practices by the wholesalers or the retailers, but reflect the supply and demand conditions in those areas.

The higher cost of supply and the low demand resulting from low population density lead to higher costs and thus to higher prices. The Office of Fair Trading will continue to keep the market under review, but I am afraid that low population density is not something that the Office of Fair Trading or the MMC can remedy. I thank the hon. Lady for her debate this morning. I note her concerns, and I understand them.

12.50 pm

Sitting suspended.