Crude oil dropped from a record in New York on concern that energy demand may fall at a time of increased supplies.

Oil futures fell as traders sold to lock in the 26 percent gain since prices started a rally on Feb. 6 sparked by declines in the dollar against the euro and the yen. U.S. crude inventories last week rose more than analysts forecast, while gasoline supplies jumped to the highest since 1993.

High stockpiles "are an indication that demand is slowing down in the U.S.," said Victor Shum, senior principal at Purvin & Gertz Inc. in Singapore. "That's a perfect example of the disconnect between fundamentals and oil pricing."

Crude oil for April delivery fell as much as 73 cents, or 0.7 percent, to $109.60 a barrel in after-hours trading on the New York Mercantile Exchange. It was at $109.80 at 2:09 p.m. Singapore time.

Futures yesterday settled at a record $110.33 a barrel after reaching $111, the highest since trading began in 1983, as the dollar fell below 100 yen for the first time since 1995 and dropped to an all-time low against the euro.

Brent crude for April settlement fell as much as 90 cents, or 0.8 percent, to $106.64 a barrel on London's ICE Futures Europe exchange. It was at $106.97 at 2:07 p.m. Singapore time. The contract yesterday closed at an all-time high of $107.54 a barrel after reaching an intraday record of $107.88.

'Downside Risk'

The April contract expires today. The more-active May futures were down 61 cents at $105.84 a barrel at 2:30 p.m. Singapore time.

"With the ongoing divergence between the weakening fundamentals and the rising price, we see clear elements of a bubble in the crude oil market," said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. "While that bubble may expand further before it pops, we definitely see less upward potential here against a growing downside risk."

Stockpiles of crude and oil products in the developed economies of the Organization of Economic Cooperation and Development, or OECD, rose by 32.6 million barrels in January, reaching 2.62 billion barrels, the International Energy Agency said on March 11.

Gasoline inventories in the U.S. rose 1.69 million barrels to 236 million barrels last week, the highest since 1993, the Energy Department said March 12 in its weekly report. Crude oil stockpiles climbed 6.18 million barrels to 311.6 million barrels versus a forecast of 1.68 million barrels.

Tumbling Dollar

The tumbling dollar has drawn investors to the crude market as commodities become cheaper for buyers with other currencies.

"It's been financially driven," said Rowan Menzies, head of research for Commodity Warrants Australia Ltd. in Sydney. "When you think it's going to drop, the dollar weakens and takes it back up again."

The dollar dropped as low as $1.5651 per euro, the weakest since the European currency's debut in 1999. It traded at $1.5620 at 2:06 p.m. in Singapore. The dollar fell as low as 99.85 yen, the second day it has gone below 100 yen and near the weakest level since October 1995.

Traders expect the U.S. Federal Reserve to lower its benchmark rate by 0.75 percentage point to 2.25 percent, based on futures prices. The Federal Open Market Committee's next regular meeting is March 18.

"The weak dollar is a factor, but investors also believe that supplies of natural resources are stretched," said Purvin & Gertz's Shum. "If the dollar continues to weaken, then the bubble may get bigger before some air comes out of it."

Inflation Adjusted

On Oct. 15, prices passed the previous all-time inflation- adjusted record reached in 1981 when Iran cut oil exports. The cost of imported oil used by U.S. refiners averaged $39 a barrel in February 1981, according to the Energy Department, or $92.50 in today's dollars.

Crude oil may fall next week on signs that U.S. inventories will rise as the slowing economy curtails fuel consumption.

Sixteen of 37 analysts surveyed by Bloomberg News, or 43 percent, said prices will drop through March 20. Thirteen of the respondents, or 35 percent, said futures will rise and eight forecast that prices will be little changed. Last week, 45 percent said oil would decline.

The International Energy Agency has convened talks with global oil experts to help determine “whether current oil prices are justified by market fundamentals”.

The meeting is being hosted by the western countries’ watchdog as oil prices hit a fresh high of nearly $110 a barrel on Tuesday, boosted by a forecast of relatively robust demand and investors buying oil as protection against US dollar weakness.

The talks, to be held in Paris on Monday, highlight concern among rich countries’ policymakers about the causes of the recent oil price rises and its implications for inflation and monetary policy.

Participants will include representatives from oil companies ExxonMobil, Total, Repsol, Shell and ConocoPhilips; central banks including the European Central Bank; Nymex, the US energy exchange and the Intercontinental Exchange; market regulators including the US Commodity Futures Trading Commission and Britain’s Financial Services Authority; as well as the International Monetary Fund and World Bank.

“Following the large flows of money into hedge funds and commodity index funds since 2003, there is concern that the oil price no longer retains its role as the best leading indicator of market conditions,” said the IEA in a document setting out the agenda for the meeting.

Lawrence Eagles, head of the IEA’s oil markets division, said that not all the blame should be put on speculation. He said previous rises had also been blamed on speculation, such as when prices moved above $50 a barrel in 2004, but that had turned out not to be the case. “With hindsight, those prices now seem to reflect the increasing cost of accessing and developing reserves. If it was a speculative push in prices, the speculators were right,” Mr Eagles said.

In its monthly oil report, the IEA said on Tuesday that the global economy had moved into an era of higher oil prices. “Prices are unlikely to return to levels seen in the early part of this decade,” it said.

Although it did not say whether current prices above $100 a barrel were justified by market fundamentals, the IEA warned that “only a protracted and severe global recession would justify a sustained dip in oil prices below” $60 a barrel.

Crude oil prices broke above the $60 a barrel level only two and half years ago.

West Texas Intermediate crude oil on Tuesday surged to a high of $109.72 a barrel, and in late-afternoon trading was 40 cents higher, at $108.3 a barrel.

In spite of record prices and the US economic slowdown, the IEA said oil demand would be relatively robust this year, boosted by emerging economies such as China and the Middle East.

World oil demand will grow by 1.7m barrels a day this year, up from a 0.9m b/d in 2007, according to the IEA. Demand will reach an annual average of 87.5m b/d, down just 80,000 b/d from its February estimate.

LONDON (Reuters) - World oil demand will be less than expected this year because of slower economic growth in industrialized countries and record prices, the International Energy Agency said on Tuesday.

The latest monthly report from the IEA adds to evidence that a slowing economy in the United States and record oil prices above $100 a barrel are denting fuel consumption in some of the world's biggest economies.

But the IEA also said that the baseline for oil prices has moved higher and that only a severe world recession would send oil back below $60 a barrel for a sustained period. Oil has climbed from below $20 in early 2002.

"We are in an era of higher oil prices, and so if we look at $100 oil we have to do so with an understanding that prices are unlikely to return to levels seen in the early part of this decade," it said.

World consumption will average 87.5 million barrels per day (bpd) in 2008, 80,000 bpd less than the previous forecast, said the IEA, adviser to 27 industrialized countries. Demand in the OECD was cut by about 190,000 bpd.

"There's quite a big downward revision to demand in industrialized countries," Lawrence Eagles, head of the IEA's Oil Industry and Markets division, told Reuters.

"Some of that weakness is related to slightly milder weather. There is also an effect from economic weakness and high prices."

Despite forecasting lower oil demand than expected this year, the IEA kept its 2008 estimate for growth in world oil demand little changed at 1.72 million bpd because of a revision to the previous year's figure.

The Paris-based agency also pointed to a rise in oil inventories in January and forecast a further increase in coming months following OPEC's decision last week to leave supply unchanged.

Oil was little changed after the IEA report was released and later in the session hit a fresh record high over $109 a barrel.

HIGHER STOCKS

Oil inventories in member countries of the Organization for Economic Co-operation and Development rose by 32.6 million barrels in January from an upwardly revised figure for December, the IEA said.

OPEC supply will be 960,000 bpd higher than demand in the second quarter following its decision last week to leave output unchanged and assuming steady Iraqi supply, allowing inventories to rise further, the IEA said.

"Stock cover has improved but the market still seems to be tight," Eagles said. "We should see a partial replenishment of stocks over the second quarter."

World oil demand usually slows in the second quarter as consumers in the northern hemisphere use less heating fuel. In previous years, that slowdown has sometimes prompted OPEC to cut production in the spring.

The Organization of the Petroleum Exporting Countries pumps more than a third of the world's oil and produced 32.1 million bpd in February, 120,000 bpd less than in January, the IEA said.

Oil markets are well-supplied despite record-high prices and experts have consistently overshot their estimates of future oil demand, Yasser Mufti, a corporate planner at Saudi state-owned oil company Saudi Aramco, said today.

The White House has said tight supplies are behind record-high prices near $110 a barrel and called on Opec to boost output.

Yasser Mufti reiterated Saudi Arabia's insistence that market prices are disconnected from fundamental factors like supply and demand.

"On the fundamental side there is not enough to explain this price," Mufti told reporters on the sidelines of a Washington DC oil conference hosted by George Washington University and the World Bank. "There is a statistically significant element of non-fundamental contribution to that price."

Mufti pointed to recent data from the International Energy Agency (IEA) that shows global oil inventories rising.

"That means the market is well-supplied," Mufti said. "These prices are going to have an impact on the economy and on demand."

In his presentation, Mufti pointed to a wide range of estimates on the 2010 "call" on Opec, and said billions of dollars in development costs could be wasted if planners miss the mark.

Estimates by the IEA, Opec and US Energy Information Administration of the implied demand for Opec oil in 2010 range from 36 million barrels per day to about 41 million bpd. The difference - about 5 million bpd - would cost about $45 billion to build, using a conservative development cost of about $10,000 per barrel, Mufti said, Reuters reported.

Oil analysts have consistently over-estimated the need for Opec oil, Mufti said, pointing to a 1996 estimate from the EIA that Saudi Arabia would need to pump about 21 million bpd in 2015 to keep markets balanced. A 2007 estimate from EIA put the 2015 number closer to 15 million bpd.

"That is quite a range or a reduction and you see the bias is toward the upside," he said.

ALGIERS (Reuters) - Oil prices will stay at current high levels for the rest of this year due to speculation and geopolitical tensions, Algerian state media on Monday reported OPEC President Chakib Khelil as saying.

Prices could retreat in 2009 with a recovery of the U.S. dollar in foreign exchange markets following the election of a new U.S. president, and as fundamentals reassert themselves as major market forces, he was reported as saying by government newspaper El Moudjahid and state news agency APS.

"Just like the current surge in oil markets, the (world economic) crisis, will last until the end of the year," he was quoted as saying by El Moudjahid.

"The oil market will stay above $100 during the current financial year, according to the assessment of Mr Khelil," APS said in a report on his remarks to Algerian reporters on Sunday.

It was not immediately clear which fiscal year APS was referring to.

Khelil, who is also Algerian Energy and Mines Minister, said the factors driving the market at present included "speculation, geopolitical tensions, particularly due to the Iranian nuclear affair and the crisis between Venezuela and ExxonMobil," APS reported.

The world economy could get some help with the arrival of a new U.S. president, and possibly a new economic policy, "and with this new situation it is very probable that the dollar will start to recover and thus permit a readjustment of the (oil) market," El Moudjahid quoted him as saying.

OPEC members meeting in Vienna last week decided to hold production flat, insisting markets were well supplied and blaming record prices on factors outside the group's control, including speculators and what Khelil called the "mismanagement" of the U.S. economy.

Speculators have piled into oil and other commodities as a hedge against the weaker dollar and inflation as the U.S. economy slows due to a credit crunch, the mortgage crisis and high energy costs.

Khelil said OPEC had left output unchanged because it wanted to assist global economic growth, El Moudjahid and APS reported.

The group made its decision in the knowledge that demand was expected to dip by 1.4 million barrels per day (bpd) in the second quarter of the year and that stocks in consuming countries were at comfortable levels, Khelil said.

"If we had increased our production given all these factors, you wouldn't have been able to miss the impact on prices," he said, suggesting prices would have slid.

"We left our output unchanged so as not to disturb the market further and to help the world economy resume its momentum of growth," El Moudhajid quoted him as saying.

OTTAWA - The federal government has announced stricter standards on oil-sands projects and coal plants built after 2011 as a key plank of its plan to reduce greenhouse gas emissions.

After that point the oil-and-gas and coal sectors will be forced to employ carbon capture and storage or other green technologies by 2018 in each of those new developments.

Environment Minister John Baird described the measures as part of a get-tough approach with the oil industry. His critics in opposition and in the environmental movement dismissed that as empty rhetoric.

While the government promises to enforce tough new rules at home, it's been lobbying the U.S. administration to relax the environmental standards of its Energy Independence and Security Act.

"The government claims to care about pollution from the tar sands," said NDP Leader Jack Layton.

"We hear that today, but let us just look at the truth of the matter, because what the Conservative members are saying does not amount to anything more than hot air."

The timing of the announcement held some political benefits for the government.

After days of being pelted over scandal in the House of Commons and facing an NDP non-confidence motion over its handling of the environment, the government fought back with a good-news green message.

The Tories reaffirmed Monday that 16 different industrial sectors will share similar targets: 18 per cent cuts in emission intensity by 2010, with absolute annual cuts of two per cent thereafter.

The government says those cuts would result in a 20 per cent reduction in greenhouse gases from 2006 levels by 2020. But countries that have respected the Kyoto accord calculate their emissions cuts using 1990 as a baseline year - not 2006.

More detailed targets for individual companies - along with the penalties for missing them - will only be published later in the year.

"We are taking real action," Baird said.

"(This is) the toughest action ever taken in Canadian history and among the toughest industry regulations in the world."

The government says the new requirements on the oil-and-gas and coal sectors will by themselves account for more than half of the total cuts expected from industry by 2020.

The announcement Monday also carried additional information for companies that will be subjected to the new regulations.

To help them achieve their targets, companies that over-pollute will be able to buy offset credits in environmental programs that reduce emissions elsewhere.

The offset system will be administered through the Canadian Environmental Protection Act, and eligible programs will need to be verified and approved by Environment Canada.

The government would then issue offset credits to companies - with each credit representing one tonne of carbon dioxide equivalent.

Environment Canada will publish eligibility guidelines for project developers by this summer, and will begin reviewing specific projects by the fall.

Also Monday, the government said it will give industries credit for past steps taken to reduce emissions.

Companies that took action between 1992 and 2006 must prove their actions went beyond usual business conditions, and will be eligible for a one-time maximum credit of 15 megatonnes spread over three years.

Environmental groups said there's no indication from Monday's announcements how existing tar sands projects would see their pollution curbed.

If anything, one said, they just encourage oil companies to develop faster to avoid the stricter regulations that will come into force over the coming decade.

"The message here is basically, 'Get your shovels in the ground,' " said Dale Marshall of the Suzuki Institute.

"Look at these rules - they don't do anything. . . They aren't intended to slow down the tar sands in any way."

ANKARA - Baghdad will block any contracts signed by foreign oil companies with Iraqi Kurdish regional authorities, Iraq's Oil Minister Hussein Shahristani said on Saturday.

"All contracts will be handled by the central government," he told a joint press conference in Ankara with his Turkish counterpart Hilmi Guler.

"No contracts signed by any regions in Iraq will be recognized by the government of Iraq. Companies will not be allowed to work on Iraqi territory unless their contract is approved by the central government in Baghdad."

The government in Baghdad and authorities in the autonomous Kurdish region of northern Iraq have been at loggerheads over the issue for months.

In November the minister announced he had cancelled around 15 oil contracts signed by the authorities in Iraqi Kurdistan.

In response, Kurdish Prime Minister Nechirvan Barzan insisted the contracts would be honored, saying ""nobody can cancel contracts signed by Kurdistan"", as his government approved the signature of seven more oil contracts.

The autonomous Kurdish regional government in northern Iraq has signed 15 exploration and export contracts with 20 international companies since it passed its own oil law last August, infuriating the Baghdad government.

Shahristani has repeatedly said he considers the contracts "illegal".

He has threatened the companies concerned that they would not in future have the chance to work with the Iraqi government, threats which have so far have not been carried out.

Gazprom and Ukraine on Thursday reached agreement on natural gas supplies, putting an end to last week’s tense standoff in which the Russian energy company halved supplies to Ukraine, a key transit artery to Europe.

The accord removes controversial middleman companies from the multi-billion dollar gas trade between Russia, Ukraine and central Asian gas suppliers – an apparent victory for Yulia Tymoshenko, prime minister of Ukraine, who has been highly critical of intermediaries. It also preserves a purchase price for central Asian gas this year of $179.5 per 1,000 cubic metres.

But Naftogaz Ukrainy, Ukraine’s state energy monopoly, agreed to pay Rosukrenergo – the Swiss-registered intermediary that supplied Ukraine with gas in previous years – a rate of $315 for Russian gas it consumed without a contract in January and February.

Naftogaz agreed to Gazprom selling up to 7.5bcm of gas to industry. Both will compete in Ukraine’s vast domestic market, which consumes 70bcm a year.

Gazprom spokesman Sergei Kupriyanov said the deal would grant it 25 per cent of Ukraine’s industrial market, which consumes 30bcm of gas a year. Access was fixed for future years and prices are bound to rise, he added.

The accord follows a row last week in which Gazprom halved supplies to Kiev over its refusal to finalise supply agreements and pay $600m (£295m, €385m) in debt. Gazprom backed down late last week after Ukraine warned the reduction could dent shipments to Europe. Russia supplies 25 per cent of Europe’s gas needs, mostly through Ukraine.

The struggle had centred on Ms Tymoshenko’s refusal to sign off on a handshake agreement clinched in February by Viktor Yushchenko, Ukraine’s president, and Vladimir Putin, his Russian counterpart. Then, the two sides had agreed for gas sales to Ukraine to be funnelled through two companies owned jointly by Gazprom and Naftogaz.

Ukraine’s economy is struggling to adjust to consecutive gas price rises since the country shifted away from Moscow following the Orange revolution of 2004.

Ukraine satisfies much of its gas requirements with central Asian gas resold by Gazprom.

Kazakhstan, Uzbe­kistan and Turkmenistan this week warned they would sharply increase prices in 2009.

Mr Yushchenko on Thursday criticised the agreement for failing to shed light on next year’s price. Naftogaz said exact details on supplies for this and next year were still being finalised.

The gas talks have been complicated by a rivalry between Ms Tymoshenko and Mr Yushchenko, who has accused the prime minister of straining relations with Moscow.

Taras Kuzio, a research associate from the Institute for European, Russian and Eurasian Studies at George Washington University, said the agreement was “a major victory” for Tymoshenko, Ukraine and “European security”.

MOSCOW: Russia's natural gas monopoly says that former Soviet Central Asian countries will begin selling their gas at European prices next year.

In recent years, Kazkakhstan, Uzbekistan and Turkmenistan have sold gas to Russia's OAO Gazprom at prices below the usual Western European level. The gas is transported to Europe in pipelines controlled by Gazprom.

The announcement indicates a price hike is in the offing for Western European customers because Gazprom buys Central Asian gas at lower prices than it sells to Europe.

Ofgem on Thursday paved the way for the first shake-up of gas and electricity transmission and distribution for 20 years by launching a two-year review of the regulatory regime governing the energy networks.

The regulator will consider replacing the “RPI minus” system, which gives incentives to the owners of energy networks to keep costs below the rate of inflation, with one that will encourage more investment.

Alistair Buchanan, Ofgem’s chief executive, said the review should not be taken as criticism of the achievements notched up by the existing regime.

“The current RPI minus X regime has delivered much greater efficiency from the network operators with better quality of service, improved reliability and lower costs to consumers. But we need to know that the regime can continue to promote innovation from the companies at the level that is required for the future,” he said.

The regulatory regime was introduced in the late 1980s, after privatisation of the energy industry.

One industry executive said on Thursday it had been “very successful” in making the former state-owned businesses more efficient. “But if you have such a regime in place for 20 years it becomes harder to reduce operational expenditure and capital expenditure.”

Steve Smith, managing director of Ofgem’s networks division, said there were still cost savings to be made in the UK’s gas networks, but in electricity “most of the operational efficiencies post-privatisation have now been realised, the lemon has been squeezed dry”.

Mr Smith added that the government’s targets for expanding renewable energy “may require our energy companies to do things they haven’t had to do for 20 years”, and make significant investments in the networks in order to connect up new power generation projects.

“Companies want a simpler set of incentives and a clearer idea of what they are supposed to do.”

The cost of energy transmission and distribution contributes a relatively small part to customers’ energy bills compared with the cost of fuel.

But as investment in networks went up, there was “no doubt” that the cost to consumers would rise, said an energy consultant. “The interesting question will be the rate of return allowed for the companies,” he said.

Energy companies including National Grid, which owns the gas and electricity transmission networks in England and Wales, welcomed the review, which is not expected to lead to regulatory changes until 2015.

The government has been criticised for its "confusing" climate change policy after ministers signalled support for a new coal-fired power station as a committee was launched to ensure that by 2050 the UK reduces carbon emissions by 60%.

Business secretary John Hutton said power generation from fossil fuels would continue to play a key role despite the planned expansion of nuclear and renewable power. He said ministers had yet to decide whether to let German energy giant E.ON go ahead with a giant power plant at Kingsnorth, Kent, and whether the company would be required to commit itself to the use of carbon capture storage (CCS) technology as a condition of the licence.

CCS has yet to be tested commercially and some fear that the technology is being used as a smokescreen to make coal-fired stations politically acceptable. Greenpeace has described the outcome as the single most important climate change decision facing Gordon Brown as prime minister.

Critics including Jonathon Porritt, chairman of the government's Sustainable Development Commission, said that if Kingsnorth went ahead without the CCS licence condition, ministers' commitments to significant future carbon reduction would be "greenwash". Kingsnorth, operating as a traditional coal-powered plant, could add 5% to UK carbon emissions. He said his commission would investigate the possibilities of CCS.

Porritt said ministers had not decided whether they would require the new coal-fired station to use carbon capture storage. A final ruling is expected in May.

Hutton said the UK was the only country in the EU committed to a commercial-scale demonstration of a CCS project, but admitted this would not be ready for another seven years. He told a London conference: "For critics, there's a belief that coal-fired power stations undermine the UK's leadership position on climate change. In fact the opposite is true."

The issue has become doubly charged after Greenpeace used the Freedom of Information Act to disclose emails between Hutton's department, Business, Enterprise and Regulatory Reform, and E.ON officials in which government officials removed the requirement to use CCS as part of the contract within six minutes of the company making the demand.

Hutton said a mix of energy sources would be needed for the foreseeable future, adding: "Our leadership role is best promoted by the actions we take on capping emissions, carbon pricing and supporting the development of new carbon capture and storage technology. Not by gesture politics. A third of Britain's existing power stations need replacement, and in that mix, it is inevitable that we consider fossil fuel because there is no prospect ... we can survive without fossil fuels."

Hutton said fossil fuels would ensure a flexible electricity generation system.

Climate change poses serious security risks for the European Union, ranging from sharper competition for global energy resources to the arrival of numerous “environmental migrants”, warns a report prepared for an EU summit this week.

“The core challenge is that climate change threatens to overburden states and regions which are already fragile and conflict-prone,” says the report, drafted by Javier Solana and Benita Ferrero-Waldner, the EU’s two highest-level foreign policy officials.

Leaders of the 27-nation bloc are expected to endorse the report’s conclusions at their summit in Brussels on Thursday and Friday and to ask for recommendations for follow-up action by December at the latest.

The report is the EU’s first in-depth study of the impact of global warming on the bloc’s foreign and security policies. It identifies several regions where climate change appears all too likely to threaten the EU’s security or damage its political and economic interests.

In the Middle East, for example, “existing tensions over access to water are almost certain to intensify ... leading to further political instability with detrimental implications for Europe’s energy security and other interests”.

The report hints at possible problems with Russia over the Arctic’s vast energy and mineral reserves, recalling how Russian scientists last year planted a Russian flag on the sea-bed under the North Pole: “A further dimension of competition for energy resources lies in potential conflict over resources in Polar regions which will become exploitable as a consequence of global warming.”

The report adds the EU must expect a substantial increase in the number of migrants attempting to enter the EU because millions of people will flee poverty, political and ethnic conflicts, ill health and environmental damage in other parts of the planet, especially Africa.

Higher temperatures, less rainfall, rising sea levels and worse harvests are increasing migratory pressures from Africa to Europe, the report says.

“Already today climate change is having a major impact on the conflict in and around Darfur.”

As global warming submerges land, perhaps even causing some island states to disappear, and as coastlines recede, “more disputes over land and maritime borders and other territorial rights are likely”, the report predicts.

It warns of environmental disasters and humanitarian crises in Asia, the Caribbean and Central America that will place “immense pressure on the resources of donor countries” such as the EU’s member-states.

Competition for resources will intensify because of “reduction of arable land, widespread shortage of water, diminishing food and fish stocks, increased flooding and prolonged droughts”, it says.

Climate change could also fuel conflicts between ethnic and religious groups, turn populations more radical in their political views and make it harder for the EU to uphold its vision of a rule-based international order.

“The multilateral system is at risk if the international community fails to address the threats. Climate change impacts will fuel the politics of resentment between those most responsible for climate change and those most affected by it ... and drive political tension nationally and internationally,” the report warns.

Rich countries need to do more to fight climate change because the worst-affected communities are often too poor to make the necessary changes, the Queen will say today.

She will use her annual message to the 53 countries in the Commonwealth to warn that environmental issues, such as the lack of clean water, could lead to future conflicts.

Her words are particularly aimed at the young, whom she says are leading the battle to save the planet.

However, there are doubts that her message will have as much impact as royal aides wish.

A survey for Saga magazine yesterday revealed that half of those aged 16 to 24 do not even know the Queen is head of the Commonwealth - compared with just one out of ten over-50s.

The monarch will say: "Awareness of environmental issues is now widespread, with a determination that future generations should enjoy clean air, sufficient fresh water and energy without risking damage to the planet.

"The impact of pollution falls unequally: it is often those who pollute the least - notably in the world's least-developed nations - who are closest to the razor's edge: most affected by the impact of climate change and least equipped to cope with it."

The Queen's environmental message will form part of the Commonwealth Observance at Westminster Abbey today.

She will talk about last year's meeting of the Commonwealth's heads of government on the edge of Lake Victoria in Uganda, where they agreed to work together on climate change.

"It was an appropriate place to do so," the Queen will say. "From there, the waters of the River Nile begin a three-month journey to the Mediterranean.

"A single incident of pollution upstream may affect the lives of countless numbers downstream."

She will add: "The example of the Nile illustrates many of the challenges facing the global environment.

"The competition for fresh water by a growing population is itself becoming a source of potential conflict."

Alistair Darling on Wednesday signalled that the British economy is at the mercy of events in the financial markets as he unveiled a modest maiden Budget, ratcheting up borrowing and raising taxes on drinkers, motorists and business to help fill a hole in the public finances.

Even as he downgraded his growth forecasts, the chancellor struck an optimistic tone on the likely duration of the credit squeeze. However, the Treasury admitted that protracted turmoil in the financial markets could further dent growth prospects.

In spite of his desire not to take too much money out of the economy, Mr Darling was forced to raise taxes to pass the government’s self-imposed rule on public debt and make progress towards its goals on reducing child poverty.

Presenting what he described as a “responsible Budget“ that will secure stability in these times of global economic uncertainty”, the chancellor downgraded growth forecasts for this year and next, and raised the borrowing forecast by £20bn over the next four years.

Higher borrowing will raise public sector net debt to 39.8 per cent of national income in 2010-11, just a squeak below the Treasury’s ceiling of 40 per cent.

Transcript of the chancellor’s speech - Mar-12Had Mr Darling not raised taxes by £2bn in the same year, rising to £2.5bn in subsequent years or had forecast slower economic growth, he would have hit his debt limit.

The most striking tax increases were on alcohol, with 9 per cent increases to be introduced on Monday. This will add 4p to a pint of beer, 14p to a bottle of wine and 55p to a bottle of spirits. The increases would be followed by further hikes of 2 per cent above inflation until 2013.

Other significant tax increases came from new higher rates of vehicle excise duty for “gas guzzlers” and an abolition of lower duty rates for biofuels. As part of what he presented as a package of eco-friendly measures, he announced that from 2010, owners of the most polluting cars will pay £950 in road tax in the year of purchase, double the rate for subsequent years, while biofuel will lose the 20p per litre subsidy it currently enjoys.

Mr Darling also aimed to raise another £600m from clamping down on tax avoidance schemes used by some companies.

The chancellor’s aides were satisfied that the Budget was perceived by many as boring, having endured “a little too much excitement” over the past six months. But David Cameron, the Conservative leader, said the borrowing figures were “truly dreadful’’.

However, the Tories were privately delighted with Mr Darling’s announcement of a continued public spending squeeze from 2011 to 2013, with growth of just 1.9 per cent a year in the early part of the next parliament.

That squeeze will make it easier for Mr Cameron to fight the next election promising to match Labour’s tight public spending plans, while facing down calls from the Tory right to cut spending – a policy he regards as political suicide.

Economists warned that the Budget arithmetic relied heavily on Mr Darling’s judgment that the global credit crunch would be temporary. The Treasury itself highlighted the risk the squeeze “could detract from the average rate of output growth over the medium term” if the problems were more persistent.

Central banks around the world made a second co-ordinated attempt to ease the credit crisis, three months after their first efforts failed to kickstart lending across the financial system.

After days of gathering fears that falling mortgage bond prices could trigger a wave of forced selling by highly indebted hedge funds and other investors, the Federal Reserve said that it would lead a global effort to inject around $250bn (£125bn) of replacement securities into the system.

The Bank of England, the European Central Bank and the central banks of Switzerland and Canada also joined the effort, which stoked a rally by battered stock markets yesterday.

The Fed is to auction $200bn of US government bonds – the safest debt securities available – and will take in unwanted mortgage bonds as collateral. A collapse in the value of these mortgage bonds was behind last week's market turmoil, as fears grow that even apparently robust mortgages could go into default if the US economy falls into recession and borrowers lose their jobs.

The latest actions come on top of last Friday's announcement that the Fed is increasing the size of its so-called "term auction facility", an emergency facility introduced in December that lends cash directly to the banking system, by $140bn.

Behind all the central bank's innovative moves is an attempt to flush the financial system with money and safe government bonds so that banks will feel comfortable lending to each other. Banks that have too many volatile mortgage bonds on their books, whose value is uncertain, have been reluctant to continue lending at historic levels. As a result, highly leveraged hedge funds are being told to sell assets to meet margin calls, and the cost of borrowing has risen across the financial system, threatening to make it more costly for even robust businesses to invest. That in turn threatens turning a financial crisis into a trigger for a recession in the real economy.

"Since the co-ordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets," the Fed said yesterday. "Pressures in some of these markets have recently increased again."

The Bank of England said it would lend another £10bn in cash to the banking system, in return for a wider range of collateral that includes mortgage-backed securities, extending a facility that it offered as part of December's co-ordinated efforts. The new three-month loans will be offered next week, with another offering of an as yet undetermined size to follow in April. The ECB is to make $15bn available.

Meanwhile, the Fed is expanding currency "swap lines" with the ECB and the Swiss central bank, respectively, sending them dollars that can be lent to troubled European banks. A dwindling of dollar assets in Europe has contributed to the high inter-bank interest rates being charged for dollar-denominated lending, particularly the closely watched London inter-bank lending rate, Libor, off which many other types of loans are priced.

Stock markets jumped on the announcement of the co-ordinated moves. The FTSE 100 closed up 61.3 at 5,690.4 in London. The Dow Jones Industrial Average closed up 417 points, or 3.6 per cent, at 12,156.8 in New York. The dollar also rose and in the credit markets, investors moved out of safe assets such as Treasuries into riskier debt instruments.

Analysts were split on whether the moves might be enough to end the downward spiral in the debt markets. Joseph Brusuelas, economist at IDEAglobal, said: "By permitting borrowers to put up devalued collateral that currently contaminates the balance sheets of financial institutions, this should provide a generous bout of temporary relief to portfolios overweight with distressed assets. But we do not see this as a panacea. For now, the current Fed move will purchase a fortnight of peace."

Shares in Bear Stearns, Fannie Mae, Freddie Mac and other leading housing financiers plunged on Monday amid widening concerns about the health of the US mortgage market.

Fannie fell 13 per cent, Freddie 11.5 per cent and Bear 11.1 per cent as housing concerns helped send the broader market lower. The S&P 500 lost 20 points – or 1.55 per cent – to 1273.37, its lowest level in more than 18 months

“If liquidity is the elixir of life for any Wall Street firm, the current market certainly has the potential to be lethal,’’ said Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets, in a note to clients.

Bear shares were down as much as 14 per cent during a day in which the investment bank – a big underwriter of mortgage-backed securities – publicly confronted rumours that it could be facing a liquidity crisis.

Such rumours have circulated since Bear ran into trouble in the summer.

Ace Greenberg, chairman of Bear’s executive committee, dismissed speculation as “totally ridiculous”.

Fears about Fannie and Freddie were sparked by a report in the magazine Barron’s that suggested Fannie’s leverage left it with “little room for error” and speculated that a government bail-out might be necessary. Credit Suisse slashed its share price target for Freddie amid concerns that the company might have to take up to a $5bn writedown on its subprime mortgage bonds.

Fannie and Freddie have posted huge losses as falling home prices and rising foreclosures have increased credit costs, while credit market volatility has led to losses on their derivative port­folios.

Countrywide shares tumbled 14 per cent amid concerns that an investigation by the Federal Bureau of Investigation into possible securities fraud might derail Bank of America’s take-over of the lender.

Freddie reported a record loss of $2.5bn for the fourth quarter of 2007, while Fannie posted a $3.6bn fourth-quarter loss.

The companies’ regulator – the Office of Federal Housing Enterprise Oversight – last month gave Fannie and Freddie the green light to expand their mortgage portfolios by removing caps put in place after past accounting scandals.

Jean-Claude Trichet, European Central Bank president, has sounded the alarm over the relentless rise of the euro – signalling policymakers’ heightened concern about the economic damage threatened by the currency’s recent surge.

“In present circumstances, we are concerned about excessive exchange rate moves,” he said in prepared comments after a meeting of the world’s central bank governors in Basel, Switzerland. “Excessive volatility and disorderly movements…are undesirable for economic growth.”

The comments mark a change of tack. The ECB took a hard-line on interest rates at last week’s policy-setting meeting, when the bank made clear that combating eurozone inflation – at a 14-year high of 3.2 per cent – was its priority. Mr Trichet had failed to express concern about the euro at that point, sending the currency above $1.54 for the first time.

Monday’s intervention, which pushed down the euro, appeared to be aimed at calming market movements. Full-blown central bank intervention – which would almost certainly require US support to succeed – still seems unlikely.

The ECB’s anxiety has been heightened by fears that US authorities have unintentionally exacerbated the dollar’s weakness. Comments by Ben Bernanke, US Federal Reserve chairman, on possible US bank failures have raised eyebrows in Europe, for instance.

Mr Trichet said in Basel that he “noted with extreme attention” the US authorities’ interest in a strong dollar. But Julian Callow, of Barclays Capital, said the ECB’s frustration was “born out of concern that the US is condoning dollar depreciation”.

While eurozone official borrowing costs have remained unchanged since last June, the US Federal Reserve has slashed interest rates – contributing to the euro’s rise and increasing fears about global inflation.

Mr Trichet’s decision to wait until Monday before commenting on the euro suggested he had been anxious last week not to confuse the central bank’s message on combating inflation.

Analysts said his attempt at verbal intervention – which brought the ECB’s position closer to those of eurozone finance ministers – would counter the main anti-inflation message. “It is pretty lame and inconsistent with the rest of his policy attitude,” said Marco Annunziata, at Unicredit, the Italian banking group.

It suggested that the ECB was more worried about eurozone economic growth than it had previously acknowledged, added Mr Annunziata.

Germany on Monday reported stronger than expected export growth in January while French and Italian industrial production in the same month also exceeded expectations.

By midday in New York, the euro had come off its session highs to trade 0.1 per cent lower against the dollar at $1.5333.

The price of food is soaring. The threat of hunger and malnutrition is growing. Millions of the world's most vulnerable people are at risk.

An effective and urgent response is needed.

The first of the Millennium Development Goals, set by world leaders at the U.N. summit in 2000, aims to reduce the proportion of hungry people by half by 2015. This was already a major challenge, not least in Africa, where many nations have fallen behind. But we are also facing a perfect storm of new challenges.

The prices of basic staples -- wheat, corn, rice -- are at record highs, up 50 percent or more in the past six months. Global food stocks are at historic lows. The causes range from rising demand in major economies such as India and China to climate- and weather-related events such as hurricanes, floods and droughts that have devastated harvests in many parts of the world. High oil prices have increased the cost of transporting food and purchasing fertilizer. Some experts say the rise of biofuels has reduced the amount of food available for humans.

The effects are widely seen. Food riots have erupted from West Africa to South Asia. In countries where food has to be imported to feed hungry populations, communities are rising to protest the high cost of living. Fragile democracies are feeling the pressure of food insecurity. Many governments have issued export bans and price controls on food, distorting markets and presenting challenges to commerce.

In January, to cite one example, Afghan President Hamid Karzai appealed for $77 million to help provide food for more than 2.5 million people pushed over the edge by rising prices. He drew attention to an alarming fact: The average Afghan household now spends about 45 percent of its income on food, up from 11 percent in 2006.

This is the new face of hunger, increasingly affecting communities that had previously been protected. Inevitably, it is the "bottom billion" who are hit hardest: people living on one dollar a day or less. When people are that poor, and inflation erodes their meager earnings, they generally do one of two things: They buy less food, or they buy cheaper, less nutritious food. The result is the same -- more hunger and less chance of a healthy future. The U.N. World Food Program is seeing families that previously could afford a diverse, nutritious diet dropping to one staple and cutting their meals from three to two or one a day.

Experts believe that high food prices may be here to stay. Even so, we have the tools and technology to beat hunger and meet the Millennium Development Goals. We know what to do. What is required are political will and resources, directed effectively and efficiently.

First, we must meet urgent humanitarian needs. This year, the World Food Program plans to feed 73 million people globally, including as many as 3 million people each day in Darfur. To do so, the program requires an additional $500 million simply to cover the rise in food costs. (Note: 80 percent of the agency's purchases are made in the developing world.)

Second, we must strengthen U.N. programs to help developing countries deal with hunger. This must include support for safety-net programs to provide social protection, in the face of urgent need, while working on longer-term solutions. We also need to develop early-warning systems to reduce the impact of disasters. School meals -- at a cost of less than 25 cents a day -- can be a particularly powerful tool.

Third, we must deal with the increasing consequences of weather-related shocks to local agriculture, as well as the long-term consequences of climate change -- for example, by building drought and flood defense systems that can help food-insecure communities cope and adapt.

Last, we must boost agricultural production. World Bank President Robert Zoellick has rightly noted that there is no reason Africa can't experience a "green revolution" of the sort that transformed Southeast Asia in previous decades. U.N. agencies such as the Food and Agriculture Organization and the International Fund for Agricultural Development are working with the African Union and others to do just this, introducing vital science and technologies that offer permanent solutions for hunger.

Simply improving market efficiency can have a huge effect. Roughly a third of the world's food shortages could be alleviated to a significant degree by improving local agricultural distribution networks and helping to better connect small farmers to markets.

But that is for the future. In the here and now, we must help the hungry people hit by rising food prices. That means, for starters, recognizing the urgency of the crisis -- and acting.

The writer is secretary general of the United Nations.

NEW DELHI: The Great Wheat Panic of 2007 saw global prices shoot up by over 92 per cent during the year. Rice and corn prices also rose as sharply. Food riots have been reported from Kolkata to Namibia, Zimbabwe, Morocco, Uzbekistan, Austria, Hungary and Mexico.

And the Food and Agricultural Organization declared that 854 million people go hungry around the world. Things are expected to get worse in 2008.

Is mankind peering down an abyss of hunger?

Global consumption of wheat and rice has outstripped production for the past seven years running, except in 2004-05. Production is growing, but population is growing faster.

If production is less than demand, then how do people get enough food? Each year, a certain portion of foodgrains is kept in stock, to be used next year. This is now getting used up for meeting excess demand.

Global wheat stocks were down to 107 million MT (metric tonnes) in 2007, compared with over 197 million MT in 2001; rice stocks were just 71 million MT compared with 136 million MT.

All this means that the future supply of both wheat and rice is becoming more uncertain. That means prices are likely to keep going up.

India stands at a tipping point, especially as foodgrain production is stagnating. Wheat output was 72.8 million MT in 2002.

This year it is estimated at about 74 million MT. Rice output was 93.3 million MT in 2002 and this year it is estimated at about 90 million MT. Meanwhile, population has increased by about 88 million. So, there will be need for imports.

This, in turn, will fuel global prices. Grain economist Mike Woolverton of Kansas State University told TOI that as soon as India bought 795,000 MT of wheat at a record price of $389.45 in August 2007, wheat futures in Europe rose by 70 per cent on expectations of more orders.

Greg Wagner, director of a grain trade consultancy in Chicago told TOI , "With global economies continuing to expand, the demand base has been increasing while the supply has been decreasing. As a consequence, prices must go high enough to cut back on demand otherwise there will not be any wheat left."

In 2007, the world supply of wheat was affected due to drought in Australia, a freeze in US and lower production in Ukraine. The price surge was also fuelled by the new US law saying the use of ethanol for automobiles should be doubled to 15 billion gallons by 2015. Ethanol is made from corn. So, corn prices surged.

According to David Victor, an agricultural economist at Stanford University, "Corn prices are rising, in large part because a growing fraction of US corn production is going into ethanol biofuels, mainly because of ill-conceived energy policies. Since the US is the largest corn exporter, this affects the world market. In turn, this has some effect on wheat because, for example, wheat can be used in feed grain instead of corn."

· Pressures from population growth and affluence
· 'Profoundly stupid' to cut down forests for biofuels

Food security and the rapid rise in food prices make up the "elephant in the room" that politicians must face up to quickly, according to the government's new chief scientific adviser.

In his first major speech since taking over, Professor John Beddington said the global rush to grow biofuels was compounding the problem, and cutting down rainforest to produce biofuel crops was "profoundly stupid".

He told the Govnet Sustainable Development UK Conference in Westminster: "There is progress on climate change. But out there is another major problem. It is very hard to imagine how we can see a world growing enough crops to produce renewable energy and at the same time meet the enormous increase in the demand for food which is quite properly going to happen as we alleviate poverty."

He predicted that price rises in staples such as rice, maize and wheat would continue because of increased demand caused by population growth and increasing wealth in developing nations. He also said that climate change would lead to pressure on food supplies because of decreased rainfall in many areas and crop failures related to climate. "The agriculture industry needs to double its food production, using less water than today," he said. The food crisis would bite more quickly than climate change, he added.

But he reserved some of his most scathing comments for the biofuel industry, which he said had delivered a "major shock" to world food prices. "In terms of biofuels there has been, quite properly, a reaction against it," he said. "There are real problems with unsustainability."

Biofuel production is due to increase hugely in the next 15 years. The US plans to produce 30bn gallons of biofuels by 2022 - which will mean trebling maize production. The EU has a target for biofuels to make up 5.75% of transport fuels by 2010.

But Beddington said it was vital that biofuels were grown sustainably. "Some of the biofuels are hopeless. The idea that you cut down rainforest to actually grow biofuels seems profoundly stupid."

Before taking over the chief scientist post from Sir David King nine weeks ago, Beddington was professor of applied population biology at Imperial College London. He is an expert on the sustainable use of renewable resources.

Hilary Benn, the environment secretary, said at the conference that the world's population was expected to grow from 6.2bn today to 9.5bn in less than 50 years' time. "How are we going to feed everybody?" he asked.

Beddington said that in the short term, development and increasing wealth would add to the food crisis. "Once you move to [an income of] between £1 a day and £5 a day you get an increase in demand for meat and dairy products ... and that generates a demand for additional grain." Above £5 a day, people begin to demand processed and packaged food, which entails greater energy use. About 2.7bn people in the world live on less than £1 a day.

There would also be increases at the higher end of the wage scale, he said. At present there are 350m households on £8,000 a year. That is projected to increase to 2.1bn by 2030. "It's tremendous good news. You are seeing a genuine prediction from the World Bank that poverty alleviation is actually working."

But he cautioned that the increased purchasing power would lead to greater pressure on food supplies. Global grain stores are currently at the lowest levels ever, just 40 days from running out. "I am only nine weeks into the job, so don't yet have all the answers, but it is clear that science and research to increase the efficiency of agricultural production per unit of land is critical."

Beddington's in-tray

Animal diseases
Surveillance for bird flu, foot and mouth disease, bovine TB, bluetongue and others will need to be maintained.

Nuclear power
The chief scientist will have a key role in implementing the policy to plug the energy gap when existing power stations reach the end of their lives.

Severn barrage
The government is reviewing the feasibility of a tidal barrage in the Severn estuary which could provide 5% of the country's energy needs.

GM crops
Senior government sources hinted last year that they wanted to expand the planting of GM crops.

UK astronauts
The government has all but closed the door on the prospect of a UK astronaut corps in the near future. But there is still a strong lobby for it from some scientists as a way to enthuse the public about science.

Last month's blizzards, the worst in China for half a century, wrought havoc, but as well as causing massive human misery the snowstorms drove food prices to record highs, forcing the biggest rise in inflation in 11 years.

Consumer prices rose a higher-than-forecast 8.7 per cent year-on-year in February, another surging increase straight after a 7.1 per cent rise in January. A survey by the People's Daily Online showed that most Chinese now describe inflation as "unbearable".

Wary of its destabilising effect, the senior leadership in Beijing has identified inflation and the overheating economy as China's two biggest threats. To make things worse, prices haven't stopped rising yet, and there have been warnings that inflation could continue to rise for some time yet.

And the price rises are hitting the Chinese where they can least afford it – in their shopping baskets. The main component in the rise in inflation was food costs, which soared 23 per cent after blizzards destroyed crops and blocked transport links, causing shortages.

At China's annual parliament, the National People's Congress, President Hu Jintao urged local governments to ensure that food prices remained stable and guarantee an adequate supply of major farm produce. "We must ensure stable production and prices of 'vegetable basket' products (non-staple food) for urban and rural consumers," Mr Hu told a session at the NPC.

The inflation figures put further pressure on China's central bank to raise interest rates. As global economic growth splutters, China has taken on a leading role in driving the world economy, and the government is in a tricky situation, trying to deal with overheating even though export growth is weakening on the back of a US slowdown.

Last year China hiked interest rates six times to try to keep a lid on inflation. Analysts are forecasting rates to rise by 2 or 3 per cent. The key one-year lending rate is at a nine-year high of 7.47 per cent. The deposit rate is 4.14 per cent, which is less than half the pace of inflation.

"We need to stay calm and take effective measures," said the Statistics Bureau, adding that the storms would make it "more difficult to control full-year inflation." There are fears that rising prices could undermine China's remarkable economic growth – the economy grew 11.4 per cent in 2007, a 13-year high, and is expected to expand by at least 9 per cent this year.

But for now, food prices remain the primary concern. The breakdown of the inflation data makes for grim reading in a country where food is a national obsession.

Pork prices soared 63 per cent from a year earlier, vegetables climbed 46 per cent, and edible oil rose 41 per cent, adding to the burden on the 300 million people that the World Bank reckons are still living below the poverty line in China.

A street seller in Baodingin Hebei province, using a traditional Chinese weighing scales to weigh out oranges, tells of how she has seen a sharp rise in fruit prices. "Prices have trebled in a year, it's tough enough. People want fruit obviously, but they really have to pay for it," says the fruit merchant, who wears a bright orange jacket and gives her surname only, Zhang.

A nearby food-stall owner, who smoothes the batter for a traditional bing pancake on to a hot plate with admirable dexterity, says he has the same problems. Food is getting expensive in China, especially if it comes from far away.

Further down the crowded streets of the town, a vegetable seller says one jin (a Chinese measure for half a kilo) of green peppers will cost four yuan (28p), which is double what they cost a year previously.

The peppers come from southern China, and the prices have been driven up since the coldest winter in half a century back in January meant moving goods around the country became a difficult proposition. Eastern and southern China were blasted by the blizzards and supply is only getting back to normal now.

"The mushrooms are local, so they do quite well, but a lot of people cannot afford to eat these foods from the south, especially laid-off factory workers," said the stall-holder, who comes from Henan province and is surnamed Chang.

Inflation has led to social unrest in China historically. It was dissatisfaction with prices spiralling out of control after the Second World War that led to strikes and social instability, which ultimately led to the failure of the Nationalist KMT leader Chiang Kai-shek to assert control after the end of the war.

While the demonstrations in Beijing and other cities in China in 1989 are generally linked in the popular imagination to the student pro-democracy movement, it was soaring grain prices over the course of the late 1980s that mobilised many factory workers and peasants in China to join in the anti-government wave.

Concerns over food shortages in the Arab world are of paramount importance, according to Bahrain’s Prime Minister, who again called for the implementation of a common strategy to protect against an imminent crisis.

“We need to draw lessons from the current spiralling inflation hitting the world and start seriously thinking about ensuring food security in the Arab world, particularly that our countries have immense potential and resources that can be used to ensure a better future for our people,” newspaper, Gulf News, quoted Sheikh Khalifa Bin Salman Al Khalifa as saying.

“The hike in commodity prices was sparked by decisions by the producing countries,” Sheikh Khalifa said, adding that Arab countries “…needed to achieve self-sufficiency in food-production and reduce dependence.” Rapidly increasing demand from developing nations such as China and India has driven up prices internationally, with the cost of soft commodities like wheat, corn and sugar reaching record levels in recent trading.

Droughts and floods in the world’s largest food producing nations - the US, Australia, Canada and China - have also stifled crop forecasts, adding further upward pressure to prices.

In January, Sheikh Khalifa urged GCC member states to present a united front to battle soaring food prices across the Gulf by using the newly-established common market as a launching point to develop a common strategic food stock.

The Arab Organisation for Agricultural Development said Arab countries imported $10 billion worth of food products per year, placing enormous pressure on locals in the region as global prices rise.

Gulf residents have struggled as runaway prices add to the mounting pressure of inflation, which has hit record levels across the region.

The tumbling value of the dollar, to which most Gulf States have their currencies pegged, has also been blamed for the escalating cost of living.

The falling US currency has reduced Gulf States’ purchasing power at a time when sourcing goods from economies with strong currencies such as the euro zone.

The price of a shopping basket of staple food items is expected to have risen again when figures are released this month by the Office for National Statistics.

Prices have already risen by 17 per cent in two years and further increases are expected in items such as bread and pasta since wheat prices have doubled from £90 to £180 a tonne.

The higher cost of feed for poultry and pigs is also likely to bring increases in the cost of eggs, chicken, bacon, pork and ham.

Shoppers have already faced higher bills in the past year. Figures compiled by the price tracking website Mysuper-market.com show that in the 12 months from February 2007, the price of a 500g pack of fusilli pasta rose by almost 50 per cent, a 250g pack of butter was up 62 per cent and 12 medium free-range eggs rose by 30 to 40 per cent.

Pig farmers, who gathered in their hundreds to protest outside Downing Street this week about poor prices, made it clear that they need to receive an extra 10p from supermarkets on the cost of a 500g pack of bacon to cover their costs. Similar demands are being made by other fresh poultry, meat and egg producers.

Retail experts say that price pressure on food driven by global demand for key commodities will continue for at least two years. Despite this, analysts believe that consumers may be cushioned from the higher price of raw materials. Clive Black, food analyst at Shore Capital, said:“Big supermarkets will look after their customers in 2008 more than last year. We would expect that manufacturers will find it very difficult to increase their prices.”

Anthony Gibson, of the National Farmers’ Union, said: “Supermarkets have done well out of the cheap food era, now they will just have to take less.”

Ministers are discussing a new long-term strategy for British agriculture. A Cabinet Office investigation into food policy is to be published in the spring and Hilary Benn, the Environment Secretary, will begin an online discussion today on the Rural Economy and Land Use website.

From next year the regime for Vehicle Excise Duty will be expanded by six new bands to thirteen, creating a new top "M" band that will charge the highest polluting cars £440 a year. Cars that emit more than 255g of carbon dioxide per kilometre - such as 4x4s and Ferraris - will be charged the top rate and cars that emit less than 150g of carbon dioxide per kilometre - such as the Toyota Prius and Mini - will pay a reduced standard rate.

Just in case first time buyers are undeterred by the hefty tax increase, the VED rate in the first year of owning a gas-guzzling car will more than double to £950 - effectively levying a "showroom tax" on 4x4 buyers.

Buyers of "L" band cars, which include family-sized vehicles, will be hit by a purchasers' levy of £750. Buyers of the greenest vehicles will, by contrast, pay no tax in the first year of ownership in a quasi-subsidy of the green car market. The first-time buyer proposals will come in from 2010.

Edmund King, president of the AA, said the VED overhaul would "catch out many motorists" and warned that a clampdown on the most polluting cars could be used by the Treasury and local authorities as an excuse to take more cash from drivers. The chancellor also published the final report of a review of low-carbon cars by Professor Julia King and announced a £40m research programme into low-carbon vehicles.

The RAC Foundation warned that incentives, rather than big tax increases, were the best way to wean motorists off gas guzzlers.

"Measures that make people think carefully about choosing a vehicle that matches their needs are always welcome. However, we believe incentives for choosing a more efficient car are more likely to win the public over than swingeing taxes. The government should monitor the effectiveness of this tax and be prepared to drop it if it is not working," said Sheila Rainger, acting director of the foundation.

The government will also invite businesses to set up road pricing trials, "based on charging by time of day, distance traveled and route chosen". The trials will study whether road pricing persuades motorists to drive less, or avoid the busiest roads at peak times.

The AA's King said: "Motorists are being hit with road pricing already due to the record price of fuel - perhaps this 'road pricing funding' would be better spent immediately by getting rid of bottlenecks on motorways and main roads."

NEW YORK - The number of Americans hopping buses and grabbing subway straps has climbed to the highest level in half a century as soaring gasoline costs push more commuters to take mass transit.

U.S. mass transit ridership began to surge when gasoline hit the $3 a gallon level in 2005 and has continued to rise steadily ever since as pump prices top record after record, according to a report released on Monday by the American Public Transit Association.

"As people are struggling with the increase in fuel prices, they have to make adjustments, and one of the ways they are doing that is driving less and taking public transportation more," said William Millar, the president of the APTA.

Mass transit use increased by more than 2 percent in 2007 to the highest level in 50 years, with Americans taking more than 10 billion trips on public transport while the number of vehicle miles traveled was flat in the first 10 months of the year.

Even when gasoline prices dipped last year and some people returned to driving, others appear to have switched to public transport permanently, according to Millar.

"We started seeing gas prices consistently go above $3 a gallon (in 2005) and we noticed that overall transit ridership was going up," Millar said.

"When gas prices moderated, some of those people said, 'Hey, this works pretty good for me, I'll stick with it.'"

The largest area of mass transit growth was in light rail use, which includes street cars and trolleys, with a 6 percent increase during 2007. Commuter rails were second with an increase of 5.5 percent in ridership and subway ridership had an increase of 3.1 percent.

Cities with less than 100,000 people also saw a large increase - 6.4 percent - in public transportation use.

With many analysts predicting $4 gasoline this summer, mass transit use is likely to become even more popular.

"If past experience is any indication, as the price of fuel goes up and particularly as it hits a psychological milestone, which I expect $4 is, I would expect that we would see a spurt in ridership," Millar said.

The Environment Agency has added its weight to the growing criticism of the proposed expansion of Heathrow airport by saying the government has failed to prove that plans for a third runway will not breach EU rules on air pollution. A dramatic increase in the number of flights could also increase mortality rates across the south-east, the agency warned.

The government's key environmental adviser said the consultation process - which critics have already said is "fixed" in favour of a third runway - had not fully weighed up the potential impact on air quality for people living below the flight path and further afield. A leaked document from the agency also questioned how "robust" the economic analysis for expansion was.

In a damning conclusion, the agency said the consultation process, which ended last month, had not proved that the scheme would not breach EU directives on nitrous dioxide pollution. "After full consideration of the documents our conclusion is that overall we do not think the evidence presented is sufficiently robust to conclude that the proposed Heathrow development will not infringe the NO2 directive, bearing in mind the uncertainties that need to be addressed.

"This is because the assessment of air quality pays insufficient attention to these uncertainties and to the range of possible future scenarios, like road traffic, meteorological variability, climate change, background air quality and atmospheric quality," the report said.

Even if the third runway met EU guidelines there would still be a potentially severe impact on the health of people in the south-east, the agency concluded.

"It is likely that worsened air quality will result in increased morbidity and mortality impacts ... These air quality impacts will be present irrespective of whether air quality remains within EU guidelines, and are likely to be especially important given the high population density of the SE region."

BAA, Britain's largest airports operator, also plans to enlarge Stansted airport with a second runway and the agency questions whether the government had conducted a "robust" analysis of the options in the air transport white paper.

A spokeswoman for the Department for Transport said last night the government had always been clear it had to strike a balance between the "desire to travel and its environmental impact ... That is why one of the many things we are consulting on are obligations around air quality which we agreed with other government departments, including the Department of Health and Defra."

Deutsche Lufthansa AG, Europe's second-biggest airline, will raise the fuel surcharge for domestic and European flights by 21 percent this month because of rising crude oil prices.

The charge will be increased by 3 euros to 17 euros ($26) a flight as of March 13, the Cologne, Germany-based airline said in a statement today. The fee for long-haul flights will remain at 77 euros.

Crude oil traded in New York has advanced 78 percent in a year and surpassed $106 a barrel Friday. Lufthansa said today it "continually monitors oil prices" and may adjust the surcharge further.

British Airways issued a profit warning yesterday, caused by its failure to foresee that the price of oil would hit record levels.

BA told investors that continuing high oil prices meant that its fuel bill would rise 20 per cent this year to £2.5 billion. Oil hit another record high yesterday of $105.97 per barrel.

It is unlikely that there will be any substantial price falls after Opec this week refused to increase supply, meaning that passengers can expect higher ticket prices as it is highly likely that BA will pass some of the extra costs on in the form of fuel surcharges.

BA gave warning that, under its current predictions, the higher cost of fuel would erode profit margins to 7 per cent, wrecking a promise made by Willie Walsh, the chief executive, to achieve double-digit margins.

Concern about the future profitability of the British flag carrier resulted in £250 million being wiped off its value as its shares plunged 20p to 245p.

BA said yesterday that revenue would grow by up to 4.5 per cent in 2008 to £9.1 billion. A margin of 7 per cent indicates profits of about £635 million. This would be 25 per cent lower than the £870 million BA is forecast to report for the 2007 financial year, which ends this month.

The airline is particularly vulnerable to sustained high oil prices because it has not sufficiently hedged its requirements for next year. Airlines use hedging to lock in prices, giving them a degree of certainty about costs.

BA hedged 90 per cent of its fuel requirements for the 2007 financial year but during the first six months of the next financial year the airline hedged only 60 per cent.

The situation is even worse in the second half of 2008, with just 45 per cent hedged so far, which means BA is likely to have to buy the majority of its fuel needs later this year at prevailing market prices.

Keith Williams, finance director, said: “Given the prices we are on everyone wishes they were more hedged. With fuel prices up £450 million it has become 30 per cent of our cost base.”

Analysts said that BA's ability to pass on fuel costs to consumers might be limited compared with previous years because of the introduction this month of the “open skies” agreement.

Open skies will liberalise air travel between Europe and the United States, increasing the level of competition on BA's most profitable routes.

The airline said yesterday that its profitability would also be hit by the move to its new Heathrow base at Terminal 5 this month.

It must also resolve an industrial dispute with pilots over a new European subsidiary and it may be fined if allegations that it conspired to fix cargo rates are proved.

Mr Walsh reiterated his interest in acquiring British rival bmi. Other airlines, including Virgin Atlantic and India's Jet, have also indicated that they would be interested in buying out Sir Michael Bishop, bmi's controlling shareholder.

However, Lufthansa, the German national carrier, has pre-emptive rights on the stake and no decision has been made on whether bmi will change hands.

BA wants control of bmi to gain access to its valuable Heathrow landing slots, but any deal would be scrutinised by competition authorities.

The biggest danger facing the airline industry is the global oil price, easyJet warned today, after it released strong passenger numbers.

The no-frills carrier said the passenger load factor, or proportion of seats sold per flight, was 84.6% in February compared with 82.8% for the same month last year. Passenger numbers, driven by the airline's acquisition of more jets, rose by nearly a quarter to 3.2 million.

Its upbeat numbers came a day after British Airways issued a profit warning on the back of spiralling fuel costs. However, it said passenger numbers on its most lucrative routes, particularly transatlantic business class, were still strong.

An easyJet spokesman said the airline was suffering no knock-on effects from recent indicators of a weak UK economy, such as falling house prices and a slowdown in household income growth.

"Currently we are not seeing any impact. Demand is holding up. The issue for us is the price of oil," he said. Like the rest of the airline industry, easyJet has minimal protection next year against a global oil price of more than $100 (£49.63) a barrel. Hedging, or betting on the future price of oil, is no longer an option because airlines are unwilling to peg their fuel costs at $100 a barrel - one analyst said today that BA's profits will be wiped out next year if oil moves to $120. EasyJet has hedged 40% of its fuel needs until September at $75 a barrel, but thereafter it will have to buy most of its fuel at market prices.

Andrew Lobbenberg, analyst at ABN Amro who has the shares on a "buy" rating, said easyJet's figures were good news given the prevailing economic conditions, but the market remained uncertain about its performance in the summer - a key trading period for easyJet and Ryanair.

"The performance is good. People are still travelling and forward bookings also look OK. We think easyJet's trading will remain solid, but the debate is certainly whether this demand strength will continue into the summer."