asked Her Majesty’s Government:

What assessment they have made of the effect on the United Kingdom economy if the price of oil remains at its current level.

My Lords, the effects on the UK economy of oil prices remaining at their current levels would depend on the factors driving oil prices—for example, the extent to which prices were maintained due to demand pressures or supply constraints.

My Lords, I am grateful to my noble friend for that illuminating Answer. Is he aware—presumably he is—that the DTI and the Treasury still use a figure of $35 a barrel, reducing after 2010, compared with today’s price of somewhere between $75 and $80 a barrel? Does he not agree that such a difference must affect industry and transport costs and appraisals, and is it not time that the Government joined most analysts in at least looking at the effect of a price that is currently double the one given in their own assessments?

My Lords, according to my information, the oil price included in the Budget 2006 forecast was $57.40 a barrel; that price is determined by an average from independent forecasters and is audited by the NAO. As my noble friend indicated, since then prices have become more volatile and moved upwards, trading recently between $66 and $75 a barrel. I am sure that he will agree with me that having the near doubling of oil prices in the past 18 months accompanied by a still expanding economy and by inflation running at just over 2 per cent is an astonishing achievement in the Government’s economic policy.

My Lords, now that the motorist has to pay nearly £1 a litre for fuel, how much extra tax is the Chancellor raking in from that increase in oil price? Would it not be fairer to reduce the cost of fuel by reducing the tax to what the Chancellor originally expected to collect?

My Lords, it is a myth that an increase in oil price will produce additional revenues for the Exchequer. The oil duty is not ad valorem but is based on a price per litre. Prices going up means that consumption declines. The estimate for 2005-06 was a reduction in oil duties of about £300 million. With VAT, generally people consume less of one good or service that generates VAT to cater for the extra VAT in the oil price.

My Lords, there used to be something known as balance of payments crises. Are the Government concerned about balance of payments if the oil price stays at its present level and, if so, what do they plan to do about it?

My Lords, the balance of payments issue is one of the factors that the Government take into account when making a range of judgments. When we look at the inflows that we get from outward investment, we do not see that there is a particular problem in sustaining an appropriate level for the currency.

My Lords, last September, when the Chancellor ruled out cutting fuel duty to ease the impact of rising oil prices, he was quoted in the Financial Times as saying:

“the first action that we must take is to tackle the cause of the problem: ensuring concerted global action is taken to bring down world oil prices”.

I think that the Minister will agree that that first action is not looking very good, so will he now commit to bringing down fuel duty?

My Lords, noble Lords will be aware that there was an announcement last week that the fuel duty increase proposed for this year would not be imposed and that it would be reviewed at the time of the Pre-Budget Report. High oil prices are a global problem that requires a global solution. That is why the Chancellor has been leading on a number of initiatives, working with other finance Ministers throughout the world and improving transparency on oil market data with a strong commitment to dialogue between consumers and producers. I have outlined the position on fuel duty, which in real terms is below the level for 1999-2000.

My Lords, what about the reduction for the motorist?

My Lords, the Government take into account the price at the pump for the motorist, which is why they have deferred the increase proposed in the Budget. The Government cannot unilaterally determine what happens to world oil prices. Naturally, fuel duty is partly a tax revenue-raising issue, but it is also to do with meeting our Kyoto commitments and seeking to deal with emissions.

My Lords, would it be very green if we started reducing the duty?

My Lords, it is interesting that not increasing the duty had an impact of something like 0.15 million cubic tonnes of carbon, whereas the impact of the oil price has apparently been to reduce emissions by something like 0.5 million cubic tonnes.

My Lords, I congratulate the noble Lord on his birthday. Have the Government assessed the likely impact on North Sea investment, development and production if the oil price is sustained above $70 a barrel?

My Lords, I thank the noble Lord for his kind wishes. So far as concerns the North Sea, we have recently seen an increase in forecast total expenditure. Indeed, the recent 24th licence bidding round produced a record number of bidders for licences. The forecast for capital investment for 2006 has increased by 35 to 50 per cent, or from $1.2 billion to $1.7 billion, over the same period, so the oil price will obviously have a positive impact on the North Sea regime.

My Lords, what assessment has been made of the effect of oil price rises on home-based food production and our agriculture industry?

My Lords, oil price increases have an impact on the whole economy. For sectors that can take advantage of rebated fuels, duty obviously has a significantly lesser impact. There is a negative impact on the economy, but that has to be balanced against all the other factors that affect our economy, which will be updated at the next PBR.

My Lords, as my noble friend pointed out in his original Answer, oil prices are affected not only by supply constraints but by demand. Does he agree that it would be an act of consummate folly to follow the advice offered by the Conservative Party this afternoon to reduce the price of oil and therefore to stimulate demand?

My Lords, my noble friend is right: it would be folly to follow the advice of noble Lords opposite—certainly in this matter. We should recognise that oil prices have increased sharply since 2004, principally because of stronger-than-expected demand, particularly from the growing economies of China and India. More recently, the high prices have reflected potential and actual supply disruption in the Middle East and north Africa.

My Lords, I follow on from the question of the noble Lord, Lord Barnett, on the balance of payments. Given that the deficit has increased every year since the Government came to office, does not the sustained high level of oil prices cause concern that there will continue to be increasing deficits?

My Lords, a number of things have an impact on the deficit. There has been a spurt in our export activity, which will help balance of payments issues, but you have to look at the capital account as well as the trading account to evaluate the overall impact on the balance of payments.