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Fuels

Volume 479: debated on Monday 1 September 2008

To ask the Secretary of State for Defence pursuant to the answer of 7 February 2008, Official Report, column 1492W, on fuels, (1) what percentage of the £80 million was paid for from the Treasury Reserve; (204557)

(2) how much his Department spent on fuel in each year from 2005-06 to 2007-08, broken down by type of fuel;

(3) what estimate his Department has made of the effect on the cost of British military operations abroad of each US $1 increase in the price of oil.

We are currently collating the necessary information. I will write to the hon. Member once this process is complete.

Substantive answer from Bob Ainsworth to Liam Fox:

I undertook to write to you in answer to your Parliamentary Question on 19 June 2008, (Official Report, column 1095W) about fuels. I apologise for the delay in replying, but the way we purchase and account for fuel is complex, and it has taken some time to assemble the information you requested.

In my reply on 7 February 2008 (Official Report, column 1492W) I stated that fuel price changes (predominantly affecting maritime and aviation fuel) were estimated to have added outturn costs of around £80 million over the period 2005-06 to 2007-08 to the Department’s fuel bill. This figure was based on a costing model. More up-to-date information now available indicates, through this cost model, that the additional cost incurred by the Department over the period 2005-06 to 2007-08 through fuel price rises was some£120-130M.

The table below provides the amount the MOD spent on fuel in each year from 2005-06 to 2007-08, broken down by type of fuel. The information is derived from Top Level Budget Holders’ submissions to the overall Departmental Resource Accounts.

£ million

2005-06

2006-07

2007-08

Aviation fuel1

255

265

270

Fuels (non-utility)2

200

255

305

Total

455

520

575

1 For 2005-06 and 2006-07, some aviation fuel expenditure was accounted for in the stock consumption line of the published departmental resource accounts for those years.

2 Defined as petroleum-based liquid fuels meeting internationally recognised specifications that are used to power ships and vehicles.

I would stress that these figures cannot be comprehensive, as local purchase arrangements are not always visible at higher levels of accounting: for example, while systems are in place to ensure propriety by recording local purchase of fuel for military vehicles at commercial petrol stations, these do not feed into higher financial management systems. Additionally, the figures do not include utilities (for example, natural gas and heating oil used to heat buildings), which are accounted for separately. There may also be other, smaller elements of fuel expenditure which Departmental financial management systems do not enable us to identify.

Assuming that volumes consumed in core Defence activity such as non-operational exercising have remained broadly constant or increased only marginally over the period, a large proportion—possibly around two-thirds—of the estimated outturn cost increase of £120-130M is likely to be attributable to Request for Resources 2 (RfR2—the Department’s claim against the Reserve for operations). I would stress that this is an estimate, not an absolute measure of the impact of fuel price increases on either Defence or the Exchequer.

Where fuel prices increase, there will naturally be an impact on the cost of operations, depending on the volume of consumption at the time and the extent to which any local purchasing arrangements reflect global $ price increases: a broad estimate suggests that this effect could be around £1-2M for every US $1 increase in the price of crude oil.

I am placing a copy of this letter in the Library of the House.