Skip to main content

Oil: Changes in Global Markets

Volume 803: debated on Thursday 21 May 2020


Asked by

To ask Her Majesty’s Government what assessment they have made of the changes in global oil markets and the implications of those changes for (1) trade, (2) addressing climate change, and (3) international security.

The Question was considered in a Virtual Proceeding via video call.

My Lords, I beg leave to ask the Question standing in my name on the Order Paper and draw attention to my interests as listed in the register.

The global Covid-19 pandemic has resulted in unprecedented falls in demand in global energy markets and increased market volatility. The Government are closely monitoring developments and assessing the implications, including for the UK’s oil and gas sector and for climate change, with an emphasis on the importance of a clean, resilient recovery and international security. In doing so, we are in regular contact with international partners.

I thank my noble friend for that reply. Does he agree that, with the average spot price of crude oil now around $25 to $30, having been down to almost zero the other day in the US, we are back at about the same cost per barrel as in 1970, which at that time was about $3 to $4, before the rise of OPEC? Is it not likely to stay that way, given the worldwide supply surplus, together with the huge demand reductions that he has just referred to? Do the Government see this as a good prospect? Could relatively cheap energy and low petrol prices help post-Covid economic recovery and maybe clip Mr Putin’s wings as well, or are there some dangerous costs and disadvantages, such as a further blow to the North Sea and the transformation to green energy being made a lot more difficult?

As my noble friend has implied, there are of course advantages and disadvantages. Around 11% to 13% of our domestic oil demand and around 47% of domestic gas demand are currently met through domestic hydrocarbon reduction. Any significant impact on oil production and prices would lead to an increased reliance on imports and therefore a loss of revenues from the North Sea. Of course, there are benefits as well—certainly regarding motoring costs and so on.

My Lords, the Minister will recognise that there is a perverse logic in that low oil prices reduce incentives for companies to move to cleaner technology. Will he consider the case for a higher carbon tax price or a tax as part of the future carbon pricing system to counter the slump in the oil markets and to retain pressure for green growth?

Of course, the UK already levies two carbon prices on fossil fuels, both through the European Emissions Trading Scheme and with a separate carbon price support mechanism. Over the summer of 2019 we consulted on options for long-term carbon pricing and we intend to publish a reply shortly.

My Lords, I refer to my interests as declared in the register. The oil markets have responded positively to the latest OPEC agreement, but does my noble friend agree that high on the list for the Government’s investment strategy will need to be an urgent and supportive top-down, bottom-up review of the UKCS oil and gas industry, including those involved in decommissioning?

We understand that this is a troubling time for this vital sector for the economy. We are in regular contact with the industry. It is taking advantage of our unprecedented financial recovery packages and we will continue to monitor the situation.

My Lords, as the economy picks up following the Covid-19 pandemic, the UK, with its considerable technical knowledge, has an opportunity to lead the world in producing sustainable energy. The Minister referred to contacts with other countries. Can he say a little more about those contacts, which will help to ensure that we benefit from this extraordinary situation?

As well as maintaining contacts with other countries, we invest considerable funds in helping countries in the transition and in promoting their domestic carbon reduction targets. The noble Baroness makes an important point and we will keep that in mind.

My Lords, oil was trading at over $34 a barrel for West Texas Intermediate and $32 for Brent Crude by early Monday—up from a month ago, but 50% less than at the beginning of the year. The impact on fracking has been huge. There are fewer rigs now operating in the USA—some 600 or so less than at the beginning of the shale revolution. Low prices and market volatility have serious implications for countries that rely on oil exports, with, I believe, considerable impact on global security. The volatility also strengthens the need for the UK to speed up development of nuclear elements of our electrical energy supply. Can the Minister tell me when Hinkley Point C and the next new nuclear power station after that will be connected to the grid, and confirm that work continues despite the Wuhan virus?

The noble Lord is right to draw attention to the implications for international security from low prices and the impact that it will have on producing countries. We will continue to monitor the situation closely. We believe in a diverse energy supply in the UK, including nuclear. I cannot yet give him a specific date, but we will want to get the new nuclear power station on stream as quickly as possible.

Can the Minister assure us that the Government will resist the siren voices of those proffering a false choice between action to tackle climate change and action to rebuild the economy? Will he confirm the Government’s commitment to net zero by 2050 and that they will urgently establish schemes to promote a job-rich green recovery?

I can agree with all the points that the noble Lord has made. We are committed to our 2050 target and we are committed to a green and resilient recovery.

How will we help the Arab world to adjust, particularly our friends in Saudi Arabia and Qatar? Alongside that, as far as the UK is concerned, does Covid-19, on top of these changes, mean that domestically we will have to reappraise the rate at which we can implement climate change policies?

Our 2050 targets are now legally binding. We are committed to them and do not believe that there is any need to review them. We believe that we can continue with those targets and prioritise economic recovery at the same time; we do not believe that they are mutually exclusive.

My Lords, as Nigeria, Africa’s biggest country, seeks $7 billion of emergency funding from the IMF to offset the crash in oil prices—from which Nigeria receives 70% of its revenue—what assessment have we made of the effects of the crash on the economy and social cohesion of Nigeria and of how we might use some of the £800,000 which the UK gives Nigeria every day in overseas aid to help it address the deep-seated structural problems and reliance on oil exposed by Covid-19?

The noble Lord makes an extremely good and valid point. The Foreign Office and the Department for International Development will be closely monitoring the situation. We have a close affinity with people in Nigeria and we will do all that we can to help them; he will be aware of our very large aid budget in that country.

The one constant in the oil market is increasing volatility and falling demand as the world economy has to move towards zero-carbon systems. Realising this, large oil companies will need to accelerate zero-carbon plans to diversify their portfolios away from oil without causing redundancies. Given the climate challenge, what are Her Majesty’s Government now doing to encourage this?

The noble Lord is right. Companies across all sectors will be vital in our work to meet our 2050 net-zero targets. We want all business leaders in all sectors to make ambitious emissions reduction plans to help meet the commitments that we have set out under the Paris agreement.

Given oil-related job losses and the likely continuing reduced oil demand, will the Government promote faster repurposing of UK oil-related industries, especially in the light of the EU revisiting the idea of building champion industries through joint state aid?

We want to encourage those industries to diversify as quickly as possible. Many are doing so and have already announced plans, but, ultimately, of course, this will be market led with government incentives being provided; we are doing that.

At the time of the Scottish independence referendum, oil was running at over $100 a barrel. Given the steep fall in the price of oil, what estimates, if any, have the Government made of the present state of the Scottish economy with respect to strengths or fragility?

The noble Lord makes a powerful point. The independence plans of the SNP have been thrown into disarray by the low oil price—we all know the economic forecasts it made at the time. We are of course in close contact and collaboration with the Scottish Government on all these matters. We will continue to assist and help them in their plans going forward.

That brings this group of questions to an end. Again, I congratulate the Minister and colleagues on getting in all 10 questioners on the list.