Orders of the Day — Oil Supplies

– in the House of Commons at 12:00 am on 29th January 1974.

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11.21 p.m.

Photo of Mr Laurance Reed Mr Laurance Reed , Bolton East

The separation of opposing forces in the Sinai is a big step forward and should be welcomed, but we should be deluding ourselves if we were to suppose that this heralds an early settlement between Arab and Jew. The peace talks at Geneva are likely to be a long and drawn-out affair. Yet even if Dr. Kissinger could work some quick and magical cure for the political ills of the Middle East, it would not make much difference to the oil question. A crisis in energy has been building up for a number of years. The latest Israeli-Arab conflict simply brought matters to a head sooner than anybody expected.

The days of cheap and abundant energy are over, and we are launched on an era of shortages and high costs. Just how long this situation will last nobody seems able to say with certainty but it will last until new power sources can be brought on stream in sufficient strength to dislodge desert oil from its commanding position.

During these years the Arab world will exercise great political power and will use it for its own advantage at the expense of the industrial nations which for the most part are poorly endowed with energy resources. The oil weapon, which has been deployed to such effect once, can be used again—and for purposes quite unconnected with the Arab cause against Israel.

The quadrupling of oil prices has imposed a massive external debt on the developed world. I do not know what intelligence the Government have about OPEC's future intentions—Sheikh Yamani made some interesting remarks at the weekend, which were shot down by other Middle East oil producers—but I should have thought it on the cards that we shall see a further increase in prices during the current year. Certainly some oil companies expect this to happen.

At the current price it immediately becomes worth while to exploit alternatives such as offshore oil, tar sands and shale deposits. Unfortunately, none of these resources can be tapped very quickly. Until they become available the Arabs can charge virtually what they like for their oil and we shall be forced to pay.

An article in a recent edition of the Economist argued that the hidden hand of Adam Smith would soon get to work and in next to no time we should have a world-wide glut of energy on our hands. Such theoretical matters may appeal to the minds of abstract economists, but the practical difficulties involved in winning any of these resources suggest a time scale of 15 years before the West as a whole can hope to correct the situation.

The new prices will generate huge cash surpluses for the oil-producing States, and with every increase in the price there will be less and less incentive for them to restore production to former levels. Even if we can find some suitable outlet for these moneys, the Arab rulers remain concerned about the rate at which they are exhausting their oil, and would like to lock more of it in the ground as an investment for the future.

Oil has a greater value as a raw material for industry than as a fuel and, whatever the effect of nuclear power on energy prices in the future, I suspect that the value of oil as a raw material will not diminish as the years pass. If hoarding pays it could be prudent to work upon the assumption that there will be a continuing shortfall in supplies in relation to demand. No doubt in the short run supply difficulties can be overcome by leaving our salt on the ski slopes of St. Moritz but it is quite certain that the Arab world will never again automatically increase production in step with the growth targets we set ourselves in the West. From now on it will not be the gnomes of Zurich but the rulers of Arabia who will dictate the pace of our economic progress.

The domestic implications of this upheaval are so far reaching that we are still trying to fathom out what it all means. The true significance is only just beginning to penetrate the public consciousness. The Governor of the Bank of England has warned us of a decade of "relative austerity" with little scope for improvement in personal living standards. I would not quarrel with his assessment. For three or four years there will be little or no economic growth in our economy, prices will continue to move sharply ahead under the influence of Arab oil, and everybody in Britain, for the first time in many years, will experience a falling off in their standard of living. To be blunt, tomorrow will not be a better day.

During the past quarter century we have lived in the expectation that tomorrow will be a better day and hopes have been built very high on that assumption. So it is now necessary for us to lower our sights and show restraint and discipline in the demands we make. If we do not, then home-bred inflation will be added to inflation generated by Arab oil and other world prices. Expectations remain long after the prosperity which gave rise to them has ceased. It will be only too easy for us to slide into the maelstrom of hyper-inflation.

I suggest that the Government must ensure that the hardships are carried equally by all sections of the community and that there is a fairer sharing of accumulated wealth in Britain. It is one thing to have an incomes policy which holds people back from something they may still hope to obtain in the future. But it is quite a different thing to expect them to accept a lowering in their standard of life unless it is on a share-and-share-alike basis.

There can be no question now of returning to free collective bargaining. In conditions of no growth this would amount to an enforced redistribution of national wealth not according to any principles of social justice but through a random process in which the strong would devour the weak. The Government will also have to curb their own propensities to spend. Expansion in education, health and welfare services will have to be postponed and extravagant projects abandoned. Public funds must be diverted to develop national energy resources, particularly our offshore oil. That will be very costly both in terms of skilled manpower and of cash.

It is no comfort to know that other countries are in exactly the same boat. Some, indeed, are in worse shape. However, we can find consolation in the know ledge that Britain is one of the few industrial nations that can hope to become self-supporting in oil relatively quickly. Japan cannot do that and nor can Germany or France. Even America, despite its great potential, will find it hard to reverse its growing energy deficit. The full potential of oil on the United Kingdom Continental Shelf has still to be proved, but it is now as certain as it can be that enough will be found to satisfy all our own needs. The oil crisis, thanks to our Arab friends, has greatly enhanced the value of these assets. But it has also presented us with something of a dilemma. As an oil-consuming country we have an interest in keeping the price down but as an oil-producing country we may have an interest in pushing the price up.

Should we sell our oil to the highest bidder and reap the maximum benefits for the balance of payments, and huge dividends for the nation from the royalties and taxes charged on the profits? Or should we retain the oil exclusively for our own use, feed our industries with a relatively cheap fuel, and gain the edge over competitiors abroad who will continue to be dependent on Arab oil long after we have ceased to be?

The choice is not an easy one, and needs to be balanced against other international objectives. Nevertheless, it is difficult to believe that, after experiencing several years of austerity, people in Britain will be prepared to pay a price for their own oil that has been fixed by a producers' cartel in the Middle East. It is perhaps too soon to answer the question.

The immediate task is to secure our advantage. First, we must get the oil ashore as quickly as possible. The sooner it arrives, the sooner there will be an improvement in our balance of payments and a return to growth policies. I shall never understand why we had a licensing policy which encouraged the most rapid exploration of the shelf but no policy at all when it came to the delivery of the discovered oil ashore.

Secondly, we must accelerate the pace of exploration in areas to the west of Britain, where only four holes have been drilled to date, and draw up our licensing provisions accordingly. At this stage it is more important for us to unlock the oil in the ground than to unlock the vaults of the oil corporations by seeking to maximise revenues. Risks and costs will be higher in these waters than in the North Sea.

Thirdly, we must build up our own capabilities in offshore engineering. We are dangerously over-dependent on foreign know-how and technology. The energy crisis will give a tremendous boost to undersea oil exploration right across the globe, and many of the rigs currently under construction in foreign yards and destined for use in the North Sea may now never get here.

The United States Government have already set out to achieve self-sufficency by 1980. Bearing in mind that the bulk of offshore drilling capacity is owned and operated by United States companies, it is reasonable to suppose that the exploration programme on the American Continental Shelf will now receive priority. Of 27 rigs drilling in the North Sea last summer, BP owned one, Shell one, all the rest were American.

To achieve self-sufficiency by 1980 we should have to discover enough reserves to produce 200 million to 250 million tons a year. On the current success rate, this means that we shall need to drill a further 600 holes. Yet existing leasing agreements call for only a further 220 holes by 1978. This rate will have to be stepped up.

A rig is normally capable of drilling three holes per season, so we shall need the full-time services of 30 rigs at least. The most recent estimate of semi-submersible drilling rig capacity—made before the recent oil crisis—foresaw a world-wide shortage of 20 rigs by 1982. There are being built 11 semi-submersible rigs for use by United Kingdom opera tors, to come off the line by 1977.

The impact of going for self-sufficiency by 1980 goes far beyond the problem of finding the necessary drilling capacity. The whole approach to platform construction needs to be examined, as does the problem of using steel for line pipe. I doubt whether the Japanese will allow their crude oil to be used extravagantly for the extremely high specification steels so far supplied to the North Sea.

If we are to become self-sufficient in oil, it is clear that we need a major national effort in ocean technology, promoted by the State in conjunction with business enterprise and the universities. We cannot continue to justify the expenditure of hundreds of millions of pounds on fuel-hungry aircraft projects while spending next to nothing on research and development in sea-bed engineering, the technology upon which we now depend for our survival as an industrial Power.

Self-sufficiency in oil will radically transform our position from one of great weakness to one of exceptional influence and strength and by 1980 we could emerge as one of the strongest countries economically, overtaking Germany and Japan. Unhappily, this is today but an enviable prospect.

We might get some oil this year, we shall certainly get a little next year, but we shall not get oil in any volume until 1977–78. In the intervening years we shall face a test of parliamentary democracy, because we can be sure that people of extreme political disposition, as much of the Right as of the Left, will seek to exploit the situation to their own advantage, spread unrest and undermine established order. We must remember that the tension which exists in sections of United Kingdom industry today has arisen under conditions of steady economic progress. One wonders, therefore, just what it will be like when we have no growth and living standards are falling.

This is no time for compromise and retreat. We need a strong but just Government to see us safely through this period, and if national unity is to be preserved all the forces of democracy will have to be mobilised, because what will be challenged in this period is not an individual Government, an individual Prime Minister or an individual policy. What will be challenged is the authority of Parliament itself.

11.37 p.m.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

My hon. Friend the Member for Bolton, East (Mr. Laurance Reed) has raised a number of very pertinent points about our financial, our economic, our industrial and our political stake in the new world energy context. I am sure, however, he will agree that some of the points at least which he raised are outside the immediate scope of the responsibilities of my Department. While I might be tempted to follow him in some of the arguments which he has put before us, it would mean wearing my former hat as a Treasury Minister rather than my present one as Minister for Energy. I can assure the House that I shall resist the temptation because I have quite enough to do in the Department of Energy.

My hon. Friend is quite right in his main thesis that the change in the level of world oil prices that has taken place is nothing short of cataclysmic. It is far too soon, however, to be able to see all the implications. Indeed, it would be wrong to try to reach a quick view of what the consequences will be. I say this because never before in the history of the world, so far as we know, have we seen an increase in the price of energy anything approaching the magnitude of the increase in the price of oil that we have seen during the last 12 months, a quadrupling of crude oil prices in one year. It would be quite impossible for anyone to have reached what I might call a responsible view on the consequences and implications of this within so short a time scale.

Over the last couple of weeks, when I have had the time in between dealing with the immediate crisis, I have been reading a large variety of analyses from various sources, some prepared within government, some by bodies outside government, some originating in this country and some abroad. One of the things that has struck me about these is the extraordinary difference that has existed between the analyses of the different commentators. One can go further. We do not yet know whether prices will stabilise around their present level, whether they may decline, as Sheikh Yamani indicated in Tokyo—I do not altogether agree with my hon. Friend's view as to the extent to which what the sheikh said has been subsequently contradicted—or whether, on the contrary, prices may still increase, as my hon. Friend seemed to think was possible. This uncertainty affects everyone, Governments, oil companies and above all consumers.

My first point is that it is too soon to reach any firm view of the consequences of what has happened. We live in a time of rapid change and we have to continue to watch changing events closely. My hon. Friend mentioned particularly the possible future rate of economic growth. I am sure that we must not plump at this stage for too pessimistic a view. There is a great deal going for us. In the short term a competitive exchange rate will make sure that our goods are competitive overseas and in the longer term the prospects are there for a secure oil supply from the North Sea.

I do not believe that it is fanciful to imagine that the prospect of the supply of oil in the sort of quantities now foreseen will throw its shadow ahead of its actually coming ashore and will generate the confidence, and with it the growth, which it must still be the intention of any British Government to pursue. Our immediate problem is to weather the next year or two. It has been our primary concern to seek an improvement in the difficult supply situation facing us and to achieve some measure of price stability.

The Government are convinced that these aims are in the interests of the consumer and producer States alike. It is for this reason that we gave immediate support to what has been called the Kissinger initiative. We hope to play a full part in the discussions which will begin in Washington on 11th February. We believe that it is important that this initiative should not be seen as a confrontation between the consumer and producer countries but more as a means of improving our understanding of the issues involved in the recent movement of prices and the supply of energy.

My hon. Friend would agree that this should not rule out sensible approaches by nations individually. Britain has for some time been anxious to improve the technological and industrial contribution she can make to the Middle East States. The deal with Iran which my right hon. Friend the Secretary of State for Industry reported to the House yesterday is a valuable result of these efforts. We shall obtain an extra 5 million tons of crude oil from Iran, delivered in the latter part of this year and early 1975 at an attractive price compared with some of the prices that have been quoted recently. We shall be paying about seven dollars a barrel.

Iran is prepared to make this additional supply available to us because our industry will supply goods which are in short supply on world markets, to a value of about £110 million.

Another major uncertainty with which we are faced is the effect of these high prices on the level of demand for oil. Prices have now reached levels where it is economic to invest in alternative sources of energy and even in unconventional sources. My hon. Friend is right when he says that it is bound to take time to produce the energy in the quantities required but perhaps it will not take quite as long as he feared.

There is also the great stimulus which high prices give to the search for new sources of oil in areas as yet unexplored. It is, after all, less than 10 years since we began exploring the bed of the North Sea and the first discoveries of gas were made. My hon. Friend was also right that for the United Kingdom one vital key to the energy problem in the medium term lies in the North Sea and maybe in the Celtic Sea. Already the prospects are for oil flowing ashore by the 1980s by amounts towards the upper part of the range of 70 million to 100 million tons.

This takes account only of the nine proven fields. The other more recent discoveries, the Hutton, Alwyn, Ninian and the so far un-named field in block 2/5 have yet to be fully assessed. Their contribution to our oil supplies is likely to be significant. The forecast based on previous levels of United Kingdom demand suggested that these discoveries might be equivalent to about two-thirds of our needs by 1980. But with the new price levels and in the changed circumstances we could be much more nearly in balance.

I was a little surprised when my hon. Friend said that we, as potential producers might have an interest in raising oil prices still further. I cannot agree with him. Not only shall we be a big importer of oil for a number of years but as a major trading nation it must be in our interest to create stable world conditions, and that means a stable energy price. One of the important tasks of the new Department of Energy will be to work out a proper framework for North Sea oil prices. I have come to realise in the few days in which I have been involved that this is a very complex matter.

But we must look further ahead than 1980. Production at the level I have indicated can be maintained through the following decade only if further substantial reserves become available, and here continued exploration is essential. As at last week there were 14 exploration rigs actively drilling in United Kingdom waters and there will be several more by the end of this year. Successive Governments have timed previous licensing rounds in order to achieve the most rapid exploration and development of the United Kingdom Continental Shelf, and this must continue to be an important consideration, although we have no immediate plans for the next round of licensing.

As my hon. Friend said, rigs are scarce and skilled manpower is scarcer still. It is essential that we do not allow these valuable resources to be diverted to other parts of the world. Incidentally, I cannot imagine anything more calculated to produce a complete hiatus in exploration and virtually to drive the companies elsewhere than the Labour Party's plan for the full nationalisation of the United Kingdom interests on the Continental Shelf.

At the moment the main need is to get production platforms built and launched, and it is hoped to put in position this summer three or four in what one might call the weather window. It is essential to avoid delays, and that is why several hundred companies in this country have been licensed to use electricity for five days a week and why the British Steel Corporation has made special arrangements to make steel available for this purpose. My Department is searching for ways in which the exploration of the Continental Shelf can be accelerated. My hon. Friend mentioned research, a very important matter, and the whole House recognises his great interest and knowledge in this area of our affairs.

One aspect is the location of a new centre of drilling technology. This must be primarily a matter for the drilling contractors and offshore operators with advice from the Petroleum Industry Training Board. But my right hon.

Friend the Secretary of State for Employment is taking the lead in discussions with the industry leading, we hope, to the establishment of such a centre. I am keeping in touch with this matter on behalf of my Department.

This has been a short but useful debate. It has touched on a few of the vital issues affecting our energy supplies in the years ahead. No one can deny that we face formidable problems, but already much is being done to overcome them, and I am confident that with the new thrust which I hope the new Department of Energy will give to these matters we can go on to achieve success.

Question put and agreed to.

Adjourned accordingly at eleven minutes to Twelve o'clock.