Oil: Changes in Global Markets

Question

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.