World oil supply will rise more slowly than expected by 2013, leaving little spare capacity on the market despite weaker demand growth, the International Energy Agency (IEA) said on Tuesday.

In its Medium-Term Oil Market Report, the adviser to 27 industrialised countries said global supply capacity will reach 95.33 million barrels per day (bpd) by 2012, some 2.7 million bpd less than its previous forecast a year ago.

The outlook signals little relief from high oil prices, which have hit record peaks above $140 a barrel on supply concerns and robust demand in Asia and the Middle East, adding a strain to the world economy.

"Structural demand growth in developing countries and ongoing supply constraints continue to paint a tight market picture over the medium term," the Paris-based IEA said.

High prices and slower economic growth are expected to weigh on world demand, although it is forecast to expand faster on average than additions to global supply in the next five years.

Emerging markets are likely to remain the driver of demand. Some 90 percent of the growth is expected to come from Asia, South America and the Middle East, reflecting rising wealth and growing populations.

Consumption will rise by an average 1.6 percent a year between 2008 and 2013, or 1.5 million bpd on average, the IEA said, down from a previous medium term forecast of 2.2 percent.

Annual supply growth will match or exceed average demand growth through 2010 but slow to less than 1 million bpd from 2011 to 2013. Average total supply growth in the period stands at 1.15 million bpd a year.

Oil extended an earlier gain after the IEA report was released. U.S. crude for August was up $2.36 a barrel at $142.36 as of 1156 GMT.

The agency expressed concern about high prices, which it says are the result of strong demand and supply bottlenecks rather than speculation, a factor blamed by Saudi Arabia and other oil exporters.

"Record prices in the oil market in recent months have become a threat to the global economy and social welfare of millions of people," said IEA Executive Director Nobuo Tanaka at the World Petroleum Congress in Madrid.

"Some are calling it the third oil shock."

Analysts said the report would support prices for delivery in future years, which have been rising sharply in recent months on concern a supply crunch may be looming. The IEA itself said a year ago that was a risk by 2012.

"The report is only going to bolster people's perceptions five years out of the gap between supply coming on and what demand is expected to be, reinforcing long-dated prices," said Harry Tchilinguirian of BNP Paribas.

"Issues regarding future supply availability are clearly going to remain on people's minds."

Accelerated declines at mature oilfields and long delays and cost overruns at new projects account for the lower supply growth forecast.

Output in 2012 from outside OPEC, source of about three in every five barrels, is now expected to be 1.4 million bpd less than previously thought.

Supply will rise to 51.1 million bpd in 2013 from 49.9 million bpd in 2008, the IEA said. Output of non-OPEC crude alone will remain flat or fall in the next five years.

Production capacity in OPEC countries, also facing cost overruns and delays at new projects, is also expected to lag earlier expectations.

OPEC usually holds part of its output capacity in reserve to make up for supply breaks or to meet unexpected rises in demand. That margin is expected to wane by the end of the period.

The group's effective unused production will rise from 2.5 million bpd in 2008 to more than 4 million bpd in 2009, before declining again in 2013 to about 1 million bpd, the IEA said.

"Spare capacity is likely to dwindle to minimal levels by 2013 in the absence of accelerated supply-side investment or further efforts to stem demand growth," it said.

Reuters

LONDON — The price of oil set a record high above 146 dollars a barrel here on Thursday owing to falling reserves of US crude, simmering tensions over Iran and a weak dollar, traders said.

In reaction, Saudi Arabian Oil Minister Ali al-Nuaimi said his country, the world's leading exporter of crude, was "concerned" about soaring prices.

Brent North Sea oil for August delivery surged to a life-time peak of 146.69 dollars a barrel in morning trade after breaching 146 dollars for the first time earlier on Thursday.

New York's main oil contract, light sweet crude for August delivery, leapt to an all-time pinnacle of 145.85 dollars on Thursday.

"There is actually a chance we could see 150 dollars today (Thursday)," said the latest Schork Report on energy markets.

Brent oil later stood at 146.34 dollars, up 2.08 dollars from Wednesday's close. New York crude was up 1.98 at 145.55 dollars.

Oil prices, which have doubled in value over the past year, were partly driven by news that American crude stockpiles fell by 2.0 million barrels to stand at 299.8 million barrels in the week to June 27.

The US government's Energy Information Administration had also revealed Wednesday that crude inventories were 15.3 percent lower than at the same stage one year ago.

"It was the first time inventory fell below the psychologically critical 300-million-barrel threshold since January," said PetroMatrix analyst Olivier Jakob.

The latest record-breaking price surge also came after Iranian Oil Minister Gholam Hossein Nozari said that Iran would react fiercely to any military attack against the oil exporter.

The OPEC oil exporting group said on Thursday that it would be difficult to replace the crude output of Iran should the country face attack.

"If something happened in Iran, it is difficult to replace (Iran's output of) 4.1 or 4.2 million barrels a day," OPEC secretary general Abdallah el-Badri told the daily newsletter of the World Petroleum Congress in Madrid.

There has been a surge in speculation recently that Israel might be planning a military strike against Iran's nuclear sites.

Iran has been locked in a five-year standoff with the West over its nuclear programme. Iran claims it is for generating electricity while Western powers fear the development of nuclear weapons.

On Thursday, the oil market also found key support from the struggling US currency, which makes dollar-priced commodities cheaper for foreign buyers and tends to encourage demand, analysts said.

Dealers said the US currency could slide further against the euro because the European Central Bank, led by president Jean-Claude Trichet, was widely expected to increase eurozone interest rates on Thursday.

"The weaker dollar theme is likely to persist and influence most markets today (Thursday)," said Sucden analyst Andrey Kryuchenkov.

"In the longer run, crude prices are still well supported by geopolitical concerns, persistent supply disruptions and fears over tight supplies."

A group of American advisers led by a small State Department team played an integral part in drawing up contracts between the Iraqi government and five major Western oil companies to develop some of the largest fields in Iraq, American officials say.

The disclosure, coming on the eve of the contracts’ announcement, is the first confirmation of direct involvement by the Bush administration in deals to open Iraq’s oil to commercial development and is likely to stoke criticism.

In their role as advisers to the Iraqi Oil Ministry, American government lawyers and private-sector consultants provided template contracts and detailed suggestions on drafting the contracts, advisers and a senior State Department official said.

It is unclear how much influence their work had on the ministry’s decisions.

The advisers — who, along with the diplomatic official, spoke on condition of anonymity — say that their involvement was only to help an understaffed Iraqi ministry with technical and legal details of the contracts and that they in no way helped choose which companies got the deals.

Repeated calls to the Oil Ministry’s press office for comment were not returned.

At a time of spiraling oil prices, the no-bid contracts, in a country with some of the world’s largest untapped fields and potential for vast profits, are a rare prize to the industry. The contracts are expected to be awarded Monday to Exxon Mobil, Shell, BP, Total and Chevron, as well as to several smaller oil companies.

The deals have been criticized by opponents of the Iraq war, who accuse the Bush administration of working behind the scenes to ensure Western access to Iraqi oil fields even as most other oil-exporting countries have been sharply limiting the roles of international oil companies in development.

For its part, the administration has repeatedly denied steering the Iraqis toward decisions. “Iraq is a sovereign country, and it can make decisions based on how it feels that it wants to move forward in its development of its oil resources,” said Dana Perino, the White House spokeswoman.

Though enriched by high prices, the companies are starved for new oil fields. The United States government, too, has eagerly encouraged investment anywhere in the world that could provide new oil to alleviate the exceptionally tight global supply, which is a cause of high prices.

Iraq is particularly attractive in that light, because in addition to its vast reserves, it has the potential to bring new sources of oil onto the market relatively cheaply.

As sabotage on oil export pipelines has declined with improved security, this potential is closer to being realized. American military officials say the pipelines now have excess capacity, waiting for output to increase at the fields.

But any perception of American meddling in Iraq’s oil policies threatens to inflame opinion against the United States, particularly in Arab nations that are skeptical of American intentions in Iraq, which has the third-largest oil reserves in the world.

“We pretend it is not a centerpiece of our motivation, yet we keep confirming that it is,” Frederick D. Barton, senior adviser at the Center for Strategic and International Studies in Washington, said in a telephone interview. “And we undermine our own veracity by citing issues like sovereignty, when we have our hands right in the middle of it.”

United States officials are directly advising Iraq on a host of issues, from electricity to education. But they have avoided the limelight when questions turn to how Iraq should manage its oil endowment, insisting that a decision must rest with the Iraqi government.

The State Department advisers on the Western contracts say they purposely avoid trying to shape Iraqi policy.

“They have not negotiated with the international oil companies since the 1970s,” said the senior State Department official, who was speaking about Iraqi oil officials and who is directly involved in shaping United States energy policy in Iraq.

The advice on the drafting of the contracts was not binding, he said, and sometimes the ministry chose to ignore it. “The ministry did not have to take our advice,” he said, adding that the Iraqis had also turned to the Norwegian government for counsel. “It has been their sole decision.”

The advisers say they were not involved in advancing the oil companies’ interests, but rather treated the Oil Ministry as a client, the State Department official said. “I do not see this as a conflict of interest,” he said. A potential area of criticism, however, is that only Western companies got the bigger oil contracts. In particular, Russian companies that have experience in Iraq and had sought development contracts are still waiting.

Earlier in the occupation of Iraq, American advisers supported the Oil Ministry’s effort to dismiss claims by the Russian company Lukoil to a large Saddam Hussein-era deal. The ministry maintains that the Hussein government canceled the contract three months before the invasion. Lukoil says the attempt to cancel the deal was illegal because Mr. Hussein had not appealed to international arbitration first, as required in the contract terms.

The new oil contracts have also become a significant political issue in the United States.

Three Democratic senators, led by Charles E. Schumer of New York, sent a letter to the State Department last week asking that the deals be delayed until after the Iraqi Parliament passes a hydrocarbons law outlining the distribution of oil revenues and regulatory matters. They contend the contracts could deepen political tensions in Iraq and endanger American soldiers.

Criticism like that has prompted objections by the Bush administration and the secretary of state, Condoleezza Rice, who say the deals are purely commercial matters. Ms. Rice, speaking on Fox News this month, said: “The United States government has stayed out of the matter of awarding the Iraq oil contracts. It’s a private sector matter.”

Advisers from the State, Commerce, Energy and Interior Departments are assigned to work with the Iraqi Oil Ministry, according to the senior diplomat. In addition, the United States Agency for International Development has a contract for Management Systems International, a Washington consulting firm, to advise the oil and other ministries. The agency’s program is called Tatweer, the Arabic word for development.

“The legal department of the Ministry of Oil passed us a draft of the contract,” Samir Abid, a Canadian of Iraqi origin who is an employee of the Tatweer program, said in a telephone interview. “They passed it to us and asked for our comments because we were mentoring them.”

He added: “It was an exercise in deciding how best to do these contracts. I don’t know if they used our comments or not.”

In a statement, the agency said its advisers had reviewed the oil company contracts, known as technical support agreements: “At the request of the Ministry of Oil, the Tatweer Energy Team has done a review of the format, structure and clarity of language of blank draft contracts.”

The statement said the team did not have access to confidential information from the oil companies.

Consultants said the advice was necessary because the Oil Ministry, like other sectors of the Iraqi government, has experienced an exodus of qualified employees and lacks lawyers schooled in drawing up contracts.

A supervisor with the Tatweer program, who was not authorized to speak publicly and declined to be quoted by name, said that ministry officials, many of them near retirement, needed help.

The American government lawyers provided specific advice, the State Department official said, like: “These are the clauses you may want. You will need a clause on arbitration. You will need this clause to make this work.”

Just as restrictions on visa applications for BP-TNK's non-Russian senior management appeared to be easing yesterday, one of the joint venture's oligarch shareholders stepped up the pressure again with renewed calls for the dismissal of the British chief executive.

The Russian government's Federal Migration Service has now accepted 49 visa applications, including those from the joint venture's senior management, after reports that key staff could be forced to leave the country when their permits expire at the end of the month. But the problems are not entirely resolved. "We are please they have accepted some applications but this is just the first step and we are looking forward to the visas being approved and issued," a spokesman for BP said. "In the meantime, unless there are additional permits accepted and granted, at least half of the non-Russian staff will be ejected from Russia."

But apparent progress in one area was swiftly countered by troubles elsewhere. Viktor Vekselberg, an executive director of the joint venture and one of the four Russian oligarchs whose AlfaAccessRenova (AAR) investment vehicle owns 50 per cent of the company, has called for an extraordinary general meeting of one of BP-TNK's subsidiary boards to cancel the employment of Robert Dudley, the chief executive, and nominate a replacement.

The fight between BP and its Russian partners – over what is one of the world's top 10 oil companies – is becoming increasingly acrimonious and since January the company has been dogged by upheavals, including security service raids and accusations of industry espionage, as well as on-going visa problems and Mr Dudley's questioning by Russian officials over possible labour law violations.

AAR claims that BP-TNK is badly run, that it is constrained by its role as a BP subsidiary, and that it is not being allowed to make the most of significant international opportunities. Stan Polovets, the chief executive of AAR, said yesterday: "Our request to Mr Vekselberg to call an extraordinary meeting is based on serious concerns that Mr Dudley's actions are eroding value and the development of the company, while exposing TNK-BP and its shareholders to legal risk. We continue to believe that the underperformance of TNK-BP will continue unless the changes we have proposed are implemented, including the appointment of an independent chief executive."

But BP continued to give Mr Dudley its full support yesterday, and has consistently fought what it believes are its partners' attempts to wrest control. After AAR's threat to launch two separate lawsuits against the UK oil major last month, Peter Sutherland, BP chairman, branded the oligarchs as "corporate raiders" and called for the Russian President to step in to restore respect for the rule of law.

The EU's external affairs and trade commissioners have brought the row up with Moscow, and Gordon Brown is expected to raise it when he meets President Medvedev at the G8 summit in Japan.

Growing competition for oil may escalate to something as hot and dangerous as nuclear proliferation

Gordon Brown meeting Britain's oil chiefs to discuss higher North Sea output to bring down prices is prompted by oil prices hitting a record high of $135 a barrel, twice as high as a year ago and a staggering 12 times higher than a decade ago. The well-sourced website petrolprices.com is now predicting that petrol will reach £1.50 a litre by September, just 4 months away. Jeff Rubin of CIBC World Markets is forecasting "oil prices almost doubling over the next five years". That would mean $270 a barrel by 2013. It perhaps explains why the government is now strongly backing BP to get a big new slice of the oil drilling licences soon to be issued in Iraq, and – astonishingly – has now also made clear it intends to annex a third of a million square miles of the seabed off Antarctica to pre-empt any rights to the oil it may contain. The fight for oil has begun in earnest.

But is there the oil to go round? The authoritative International Energy Agency foresees an oil supply crunch within 5 years forcing up prices to unprecedented levels and greatly increasing western dependence on Opec. And the oil industry itself in its own report Facing the Hard Truths about Energy, produced by 175 authorities including all the heads of the world's big oil companies, for the first time predicted that oil and gas may run short by 2015.

The geopolitical implications of this gathering crisis for world oil supply 2010-15 are immense. The risk of further military interventions and conflicts in the Middle East is clearly high. Total world oil reserves are estimated at 2.5-2.9 trillion barrels, of which half has now been already consumed, while half of the 51 oil-producing countries reported output declines in 2006. Non-Opec production is expected to peak and decline within the next five years, driven mainly by burgeoning demand from China and the US, together with restricted output from Iraq. Then in the following five years Opec's diminishing spare capacity will probably become increasingly unable to accommodate short-term fluctuations, depending on how fast world demand grows and how extensively Opec invests in new capacity. The latter may well not raise production capacity high enough or quickly enough, whether for political reasons or because internal decision-making is too slow or the security environment too hostile.

There are of course exits from this doom-stricken scenario, though none is at all credible. First, discovery of major new oilfields could alter the picture. However, though billions have been spent on the search for new fields, discovery peaked in the mid-1960s and the last big ones were found in the 1970s. Only Iraq has undeveloped super-giant oilfields – at West Qurna, Majnoon, and East Baghdad – and the capacity to increase production rapidly to 8-10 million barrels a day; but ironically the US invasion, designed to produce this effect, has ruled out this outcome for a long way ahead. Already four-fifths of the world's oil supply comes from fields discovered before 1970, and even finding a field as large as the world's current biggest (Ghawar in Saudi Arabia) – which is anyway almost inconceivable given the huge improvements in geological knowledge in the last 30 years – would only meet global oil demand for another 10 years.

Another option much touted is a large-scale shift to so-called unconventional oil – the Athabascan tar sands (from Alberta, Canada), extra-heavy oil (from the Orinoco belt in Venezuela), oil shale, and mature source rocks. But the almost insurmountable problem is recoverability, whether poor quality oil (extra-heavy oil), poor quality reservoirs (oil from source rocks), or both (oil shale). Worse, production may be uneconomic because of a very low net energy gain, ie it requires almost as much energy to extract the oil as is made available for subsequent use. And the enormous hike in greenhouse gases generated could produce a turbo climate change effect that would wipe out any benefit from a global post-Kyoto agreement.

But even if supply constraints are ineluctable as the explosion of Chinese growth coincides with falling non-Opec oil production and the beginnings of a slow but remorseless slippage in Opec capacity, the coming crisis could still be eased by significant demand restrictions. Clearly there is substantial room for energy-saving when half the energy generated every day is wasted and when propulsion of an average car is only about 20% efficient, heating of a standard oven only 25%, and electricity generated in some power stations only some 35%. The question, however, is whether improvement can be secured globally on the level and timescale required to push back the crisis more than a few years. Equally, taking the CO2 out of fossil fuels, especially coal, may be crucial, but a decade at least is needed even to test the carbon capture technology in pilot projects, let alone begin to mainstream it. But the most direct means of constraining world demand would be the proposed Rimini protocol, which prescribes that oil-importing countries cut their imports to match the world depletion rate (ie annual production as a percentage of remaining global reserves) now running at about 2% a year. Of course, the fundamental political problem remains that the most powerful oil-hungry countries will not agree. If not Kyoto, why Rimini?

What is most disturbing of all is that the big powers, so far from seeking major adjustments of their energy policies on either the supply or demand fronts or making a major switch into renewables, are actually massively intensifying their competitive struggle short-term for the limited oil reserves left. Despite an unwinnable war in Iraq, the US is still constructing at least five large permanent military bases there in order, according to evidence given to a US Congressional Committee, to control access to Gulf oil, including in Saudi and Iran. As one neocon recently put it, "one of the reasons we had no exit plan from Iraq is that we didn't intend to leave". The US is also trying to force through a new Iraqi oil law that would give western, primarily American, oil multinationals control of Iraqi oilfields for the next 30 years.

The US maintains 737 military bases in 130 countries under cover of the "war on terror" to defend American economic interests, particularly access to oil. The principal objective for the continued existence and expansion of Nato post-cold war is the encirclement of Russia and the pre-emption of China dominating access to oil and gas in the Caspian Sea and Middle East regions. It is only the beginning of the unannounced titanic global resource struggle between the US and China, the world's largest importers of oil (China overtook Japan in 2003). Islam has been dragged into this tussle because it is in the Islamic world where most of these resources lie, but Islam is only a secondary player. In the case of Russia, the recent pronounced stepping up of western attacks on Putin and claims he is undermining democracy are ultimately aimed at securing a pro-western government there, and access to Russian oil and gas when Russia has more of these two hydrocarbons together than any other country in the world.

The struggle has also spilled over into West Africa, reckoned to hold some 66 billion barrels of oil typically low in sulphur and thus ideal for refining. In 2005 the US imported more oil from the Gulf of Guinea than from Saudi and Kuwait combined, and is expected over the next 10 years to import more oil from Africa than from the Middle East. In step with this, the Pentagon is setting up a new unified military command for the continent named Africom. Conversely, Angola is now China's main supplier of crude oil, overtaking Saudi Arabia last year. There is no doubt that Africom, which will greatly increase the US military presence in Africa, is aimed at the growing conflict with China over oil supplies.

As Joe Lieberman, former US presidential candidate, put it, efforts by the US and China to use imports to meet growing demand "may escalate competition for oil to something as hot and dangerous as the nuclear arms race between the US and the Soviet Union".

Markets won't correct the soaring prices that threaten our economic wellbeing. So governments must

At the time of the last energy shock in the 1970s, Sheikh Yamani, the shrewd Saudi Oil Minister, famously told his greedier Opec colleagues that they would encourage replacement of oil by other energy sources and kill the golden goose that had made them wealthy if they kept pushing the oil price too high. “Remember,” he said, “the Stone Age didn't end because the cavemen ran out of stone.”

The last three global recessions - in 1974, 1980 and 1991 - were all triggered by an oil shock and it looks as if Opec is now determined to repeat this experience. How many such shocks will it take before we control our addiction to oil? Cynics will say that all the world's oil will have to run dry before we see any decisive action in the US or China to reduce and ultimately eliminate their oil demand. But a confluence of economics, politics, diplomacy, environmentalism and finance has suddenly been created which may unexpectedly prove the cynics wrong. An oil price of $140, never mind $200 or $300, is simply too economically damaging to be tolerated much longer.

The question is no longer whether oil prices will be left to the market, but whether political interventions that override market forces will improve or worsen the situation.

The usual answer to this question is the latter, which is why Western policymakers have been reluctant to do very much so far to curb the oil price. Such, in fact, is the faith in “oil market fundamentals” expressed, for example, by Gordon Brown and the recent Treasury paper he commissioned on the oil shock that one is drawn to a surprising conclusion: the main reason for inaction in the face of the oil shock may not be the lack of political will to implement difficult decisions, such as higher petrol taxes or government guarantees for nuclear construction, but simply the ideology of market fundamentalism, expressed in such slogans as “the market is always right”.

But the market is not always right. It is usually right, but sometimes it is spectacularly wrong - as in the recent sub-prime saga. To acknowledge that governments must sometimes correct market failures is not to reject the economic lessons of the 1980s but rather to apply a proper understanding of economics.

There are three main reasons why the market cannot be trusted in the case of oil. First, there is the enormous gap between the cost of producing oil in areas where it is abundant and the cost of producing any close substitutes for this oil. Easily accessible oil in places such as Saudi Arabia, Venezuela and Nigeria costs only a few dollars a barrel to pump once an oilfield is producing. Even including exploration expenses, the total cost of production of Opec oil is well below $10 a barrel.

However, the cost of any substitute runs to $50 or $60 a barrel, whether the Opec oil is replaced by oil from more hostile environments, such as deep-sea drilling in the Arctic, or by some other energy source such as nuclear or wind power. The gap between cheap Opec oil and any other energy source creates an enormous “rent”, beyond any normal return on capital and costs of production, which either accrues to Opec as profits or to consumers as the benefit they enjoy from an energy source cheaper than any alternative in their own economies.

This rent, currently running at around $2 trillion annually, is at the heart of the perennial struggle between oil-producing and consuming governments. Either Western governments claim most of the rent for themselves by levying high taxes on domestic oil consumers, or Opec governments pocket most of the rent, as they are doing today.

But why shouldn't this rent be distributed “fairly” or “rationally” by market forces? The answer lies in the second “market failure” inherent in the oil business - monopoly power. Because almost all of the world's readily accessible oil is concentrated in a handful of nations, they have been able to achieve almost total monopoly power through Opec. With the supply of oil controlled by a monopoly, there is nothing “efficient” about the level of prices set in the market; and the competition between producers and consumers inevitably becomes an issue of politics, rather than economics.

The rational response of Western governments to this monopoly power is to lower the cost of energy substitutes by accelerating technological advances and increasing economies of scale. This can be done by imposing very high taxes on oil consumption to guarantee high profits for producers of non-oil fuels. At the same time, such taxes can ensure that most of the rent earned from the difference between consumer prices and Opec production costs stays in Western treasuries instead of going to producer governments.

The use of tax policy to capture rents for Western governments would be particularly effective if combined with regulations designed to prevent money being poured into speculative markets for “paper oil” - which brings us to the third reason why price signals are misleading in the market for oil.

The gap between physical trading in oil and the paper markets in oil futures and oil-company shares raises all sorts of financial anomalies. One is the ramping-up of oil prices by institutional investors. Another is the strong incentive for Western oil companies to invest in oil exploration, which is inherently inefficient, when competing with low-cost state-owned producers, instead of investing in new technologies to replace oil, where Western economies have a comparative advantage over Opec.

As a result of these perverse incentives, Western energy executives invariably insist that there is no plausible alternative to oil. For example, Rex Tillerson, chairman of Exxon, remarked last year that he wasn't interested in biofuel research because “I don't have a lot of technology to add to moonshine”. Tony Hayward, chief executive of BP, wrote a few weeks ago that “humankind remains dependent on fossil fuels” because renewable sources now account for only 2 per cent of global energy use. This is hardly surprising, since companies such as BP and Exxon have no special skills in nuclear power, wind turbines or photovoltaics, and they have strong vested interests in political and fiscal support to explore for oil in ever more difficult and hostile regions of the world. But such support cannot be economically justified since Opec will always have an unbeatable comparative advantage in producing oil.

If Western governments play their cards correctly, people such as Mr Tillerson and Mr Hayward will be proved wrong - and ironically Sheikh Yamani will eventually be proved right. The world will wean itself off oil long before the sands of Saudi Arabia run dry.

Oil sands and other previously excluded energy resources would be classified as reserves of oil and gas companies under US regulatory proposals issued on Thursday.

The plan from the Securities and Exchange Commission is a response to significant changes that have taken place in the oil and gas industry in the past three decades.

It aims to help investors obtain a “more accurate and useful” picture of a company’s reserves.

“The more that precise, first-hand information from oil and gas companies is available to investors and the marketplace, the less that the marketplace is forced to rely solely upon information provided by speculators,” the SEC said on Thursday as it issued the proposals for public comment.

Reserves reporting, used as a key measure by investors for assessing a company’s long-term financial prospects, has been hugely sensitive in the past.

The 2004 revelation of misreporting of reserves by the Royal Dutch Shell group triggered official investigations and lawsuits and prompted a shake-up of the company’s management structure.

Many industry executives and experts have argued that SEC rules governing the industry have become increasingly outdated as technology – including alternative extraction methods – has advanced and unconventional resources such as oil sands have become more important.

In addition to allowing previously excluded resources such as oil sands to be “classified” as oil and gas reserves, the proposals would allow companies to disclose their “probable” and “possible” reserves to investors, compared to only “proved” reserves currently.

Oil and gas companies would also be permitted to use new technologies to determine proved reserves if those technologies demonstrated that they lead to reliable conclusions about reserves volumes.

The proposals require that companies file reports when they rely on a third party to prepare reserves estimates or conduct a reserves audit.

Oil and gas reserves would also have to be reported using an average price based on the previous 12-month period, rather than year-end prices.

The SEC said this would maximise the comparability of reserve estimates among companies

A group of American advisers led by a small State Department team played an integral part in drawing up contracts between the Iraqi government and five major Western oil companies to develop some of the largest fields in Iraq, American officials say.

The disclosure, coming on the eve of the contracts’ announcement, is the first confirmation of direct involvement by the Bush administration in deals to open Iraq’s oil to commercial development and is likely to stoke criticism.

In their role as advisers to the Iraqi Oil Ministry, American government lawyers and private-sector consultants provided template contracts and detailed suggestions on drafting the contracts, advisers and a senior State Department official said.

It is unclear how much influence their work had on the ministry’s decisions.

The advisers — who, along with the diplomatic official, spoke on condition of anonymity — say that their involvement was only to help an understaffed Iraqi ministry with technical and legal details of the contracts and that they in no way helped choose which companies got the deals.

Repeated calls to the Oil Ministry’s press office for comment were not returned.

At a time of spiraling oil prices, the no-bid contracts, in a country with some of the world’s largest untapped fields and potential for vast profits, are a rare prize to the industry. The contracts are expected to be awarded Monday to Exxon Mobil, Shell, BP, Total and Chevron, as well as to several smaller oil companies.

The deals have been criticized by opponents of the Iraq war, who accuse the Bush administration of working behind the scenes to ensure Western access to Iraqi oil fields even as most other oil-exporting countries have been sharply limiting the roles of international oil companies in development.

For its part, the administration has repeatedly denied steering the Iraqis toward decisions. “Iraq is a sovereign country, and it can make decisions based on how it feels that it wants to move forward in its development of its oil resources,” said Dana Perino, the White House spokeswoman.

Though enriched by high prices, the companies are starved for new oil fields. The United States government, too, has eagerly encouraged investment anywhere in the world that could provide new oil to alleviate the exceptionally tight global supply, which is a cause of high prices.

Iraq is particularly attractive in that light, because in addition to its vast reserves, it has the potential to bring new sources of oil onto the market relatively cheaply.

As sabotage on oil export pipelines has declined with improved security, this potential is closer to being realized. American military officials say the pipelines now have excess capacity, waiting for output to increase at the fields.

But any perception of American meddling in Iraq’s oil policies threatens to inflame opinion against the United States, particularly in Arab nations that are skeptical of American intentions in Iraq, which has the third-largest oil reserves in the world.

“We pretend it is not a centerpiece of our motivation, yet we keep confirming that it is,” Frederick D. Barton, senior adviser at the Center for Strategic and International Studies in Washington, said in a telephone interview. “And we undermine our own veracity by citing issues like sovereignty, when we have our hands right in the middle of it.”

United States officials are directly advising Iraq on a host of issues, from electricity to education. But they have avoided the limelight when questions turn to how Iraq should manage its oil endowment, insisting that a decision must rest with the Iraqi government.

The State Department advisers on the Western contracts say they purposely avoid trying to shape Iraqi policy.

“They have not negotiated with the international oil companies since the 1970s,” said the senior State Department official, who was speaking about Iraqi oil officials and who is directly involved in shaping United States energy policy in Iraq.

The advice on the drafting of the contracts was not binding, he said, and sometimes the ministry chose to ignore it. “The ministry did not have to take our advice,” he said, adding that the Iraqis had also turned to the Norwegian government for counsel. “It has been their sole decision.”

The advisers say they were not involved in advancing the oil companies’ interests, but rather treated the Oil Ministry as a client, the State Department official said. “I do not see this as a conflict of interest,” he said. A potential area of criticism, however, is that only Western companies got the bigger oil contracts. In particular, Russian companies that have experience in Iraq and had sought development contracts are still waiting.

Earlier in the occupation of Iraq, American advisers supported the Oil Ministry’s effort to dismiss claims by the Russian company Lukoil to a large Saddam Hussein-era deal. The ministry maintains that the Hussein government canceled the contract three months before the invasion. Lukoil says the attempt to cancel the deal was illegal because Mr. Hussein had not appealed to international arbitration first, as required in the contract terms.

The new oil contracts have also become a significant political issue in the United States.

Three Democratic senators, led by Charles E. Schumer of New York, sent a letter to the State Department last week asking that the deals be delayed until after the Iraqi Parliament passes a hydrocarbons law outlining the distribution of oil revenues and regulatory matters. They contend the contracts could deepen political tensions in Iraq and endanger American soldiers.

Criticism like that has prompted objections by the Bush administration and the secretary of state, Condoleezza Rice, who say the deals are purely commercial matters. Ms. Rice, speaking on Fox News this month, said: “The United States government has stayed out of the matter of awarding the Iraq oil contracts. It’s a private sector matter.”

Advisers from the State, Commerce, Energy and Interior Departments are assigned to work with the Iraqi Oil Ministry, according to the senior diplomat. In addition, the United States Agency for International Development has a contract for Management Systems International, a Washington consulting firm, to advise the oil and other ministries. The agency’s program is called Tatweer, the Arabic word for development.

“The legal department of the Ministry of Oil passed us a draft of the contract,” Samir Abid, a Canadian of Iraqi origin who is an employee of the Tatweer program, said in a telephone interview. “They passed it to us and asked for our comments because we were mentoring them.”

He added: “It was an exercise in deciding how best to do these contracts. I don’t know if they used our comments or not.”

In a statement, the agency said its advisers had reviewed the oil company contracts, known as technical support agreements: “At the request of the Ministry of Oil, the Tatweer Energy Team has done a review of the format, structure and clarity of language of blank draft contracts.”

The statement said the team did not have access to confidential information from the oil companies.

Consultants said the advice was necessary because the Oil Ministry, like other sectors of the Iraqi government, has experienced an exodus of qualified employees and lacks lawyers schooled in drawing up contracts.

A supervisor with the Tatweer program, who was not authorized to speak publicly and declined to be quoted by name, said that ministry officials, many of them near retirement, needed help.

The American government lawyers provided specific advice, the State Department official said, like: “These are the clauses you may want. You will need a clause on arbitration. You will need this clause to make this work.”

Iraq said on Monday that it had failed to sign technical support deals with global oil majors hoping to cash in on boosting the war-torn country's extensive but underexploited oilfields.

Iraq is still negotiating with Shell, BP, ExxonMobil, Chevron and Total, and a consortium of other smaller oil companies, to develop six oil blocks and two gas fields, Oil Minister Hussein al-Shahristani told a press briefing.

"We did not finalise any agreement with them because they refused to offer consultancy based on fees as they wanted a share of the oil," he said.

"The TSAs [technical support agreements] are only simple consultancy contracts to help us raise the production during the interim period" before the ministry enters into long-term contracts to develop the oil and gas fields.

The widely expected arrangement was to pave the way for global energy giants to return to Iraq 36 years after Saddam Hussein threw them out, and was seen as a first step to access the earth's third largest proven crude reserves.

The head of British-Dutch oil company Shell nevertheless said he hoped to sign a deal with Baghdad in the next few weeks.

"I hope it [a deal] is within weeks and not months," chief executive Jeroen van der Veer told reporters on the sidelines of the World Petroleum Congress, one of industry's biggest events.

The head of Spanish oil group Repsol YPF, Antonio Brufau, added that "many things have to be clarified before signing in Iraq".

Last week, oil ministry spokesman Asim Jihad told newswire AFP that it would sign the support contracts on Monday and award longer-term deals to 41 other energy companies.

"We chose 35 companies of international standard, according to their finances, environment and experience, and we granted them permission to extract oil," Jihad said.

Six other state-owned oil firms from Algeria, Angola, Pakistan, Thailand, Turkey and Vietnam have also been selected to compete for extraction deals.

Iraq wants to ramp up output by 500,000 barrels per day from the current average production of 2.5 million bpd, about equal to the amount being pumped before the US-led invasion in March 2003.

However, political infighting over how oil revenues should be shared has slowed the process.

Crucially, the passing of the hydrocarbon law that aims to govern profit-sharing as well as foreign agreements has yet to be passed by the nation's parliament.

Exports of 2.11 million bpd currently form the bulk of the war-torn nation's revenues, and the oil ministry is keen to raise capacity over the next five years to 4.5 million bpd.

Iraq has crude reserves estimated at 115 billion barrels but it is sorely lacking in high-tech infrastructure following years of crippling UN sanctions after the 1990 invasion of Kuwait by Saddam Hussein.

Shahristani stressed that Iraq needed the services of experienced companies to realise the potential of its huge crude reserves but added that it was not ready to do so at any price.

"It is not possible for Iraq which has large oil reserves to stay at the current level of production. Iraq should be the second or the third source of oil exportation," he said.

"We went to these global companies and asked them to offer us consultancy but they will have no privileges or will not get a share of oil."

Shahristani said his ministry had invited tenders from the 41 selected foreign firms to enter into long-term services agreements for which the contracts would be signed next year.

The companies have been told to present their offers by April 2009, he said, adding the deals would be signed later in June.

"It is a service contract and not a production-sharing contract," he added.

Shahristani said Iraq would not enter into production-sharing contracts with any energy major, while service arrangements for overseas firms would require locals partners.

"We think there is no need to share Iraq's oil with anybody," the minister said, adding the final offers of the companies would have to be approved by the cabinet.

Those companies that offered higher revenues for the ministry would be preferred in awarding the services contracts, Shahristani said.

July 1 (Bloomberg) -- Iran, the world's No. 2 holder of natural-gas reserves, faces delays in rolling out projects as global lenders cut commercial ties with the country and bureaucracy crimps progress on the fuel's export, a report said.

Shipments of liquefied natural gas from Iran may be postponed by as much as five years to 2014-15 as Royal Dutch Shell Plc and Total SA defer sanctioning projects in South Pars, the largest single natural-gas deposit in the world, FACTS Inc. said in a report yesterday. Output from five blocks in the field is being delayed, the U.S. consultant said.

Investment in new gas projects is needed to expedite export plans, meet domestic demand for the cleaner-burning fuel, and keep power and chemical plants running. The government's $2.5 billion investment in South Pars is "insufficient" for the industry's funding needs, the report said.

"The financing of petroleum projects is one of the most critical issues for Iran," Siamak Adibi, a FACTS analyst, said in the report.

Many banks such as Deutsche Bank AG, Commerzbank AG, Societe Generale SA, UBS, HSBC Bank Plc, ABN Amro Holding NV, Credit Suisse AG, Mitsubishi-UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. terminated all commercial relations with Iran, Adibi said.

Lack of coordination and harmony among Iranian state energy companies such as National Iranian Gas Export Co. and National Iranian Oil Co. is slowing progress. Production from phases 6-10 in South Pars is postponed by three years to 2009 as a result, the report said.

"The slow progress in the gas industry for a country that has increasing domestic demand growth will result in a critical situation in the short term," Adibi said in the report.

Crude Oil

The gas shortage in Iran is hurting crude-oil production, FACTS said.

Re-injection, a process where gas is introduced into an oil reservoir to increase output, enables it to extract a higher percentage of crude.

Iran, which currently produces about 3.9 million barrels a day of crude, recovers 20-25 percent of its oil from underground, the report said.

Russian President Dmitry Medvedev plans to lock up rights to ship natural gas from three Caspian Sea nations that control 3.3 percent of the world's reserves as competition for the fuel from Europe and the U.S. increases.
Medvedev, the former chairman of state-run gas exporter OAO Gazprom who took over from Vladimir Putin two months ago, travels today to Azerbaijan, Turkmenistan and Kazakhstan to review supplies as contracts come up for renewal and Azerbaijan steps up output from its offshore field.

Russia, the world's largest gas producer, provides 39 percent of Europe's pipeline gas supplies, using its dominance to assert a leading role for Russia in determining Europe's security. The European Union wants a pipeline from the region through Turkey, called Nabucco, that would bypass Russia while Gazprom pursues a system that would connect Russia directly to the EU. Both are competing for the same Caspian gas to fill them.

"It's Putin's plan that all the gas from this part of the world should be sold by Gazprom," Mikhail Korchemkin, director of the East European Gas Analysis consulting firm in Malvern, Pennsylvania, said by telephone.

Medvedev is looking for exclusive arrangements to fill the South Stream project as production falls at Russia's biggest fields. Russian natural gas production fell 0.8 percent to 607.4 billion cubic meters last year, and accounted for 20.6 percent of total world output, according to data from BP Plc. Natural gas and crude oil are Russia's biggest exports, fueling a trade surplus of $84.3 billion in the first five months of this year.

Gas Prices

Natural gas has risen 219 percent in the past 12 months in London, trading on the Intercontinental Exchange at 71.02 pence per therm at yesterday's close.

Russia has used its control of shipments as a political weapon, halting deliveries to Ukraine in January 2006 after its neighbor rejected demands from Gazprom to quadruple the purchase price. This year Gazprom cut supplies by 50 percent in early March in a dispute over unpaid gas debt.

Medvedev's visits follow delegations from the European Union and U.S. which sought to secure gas supplies from the region.

Azerbaijan, which imported Russian gas until last year, is Medvedev's first stop today. Relations with Russia soured in December 2006 after Gazprom tried to double the price of gas it sold to the country. Azerbaijan refused, instead increasing production at the BP Plc-run Shah Deniz offshore field and becoming a gas exporter.

Russian Offer

Azerbaijan produced 10.3 billion cubic meters of gas last year, up from 6.3 billion in 2006, according to BP.

Gazprom Chief Executive Officer Alexei Miller offered to buy gas from Shah Deniz's second phase during a meeting with Azeri President Ilham Aliyev last month. The EU wants the fuel for its Nabucco pipeline project.

Turkmenistan, the largest gas producer in Central Asia, which Medvedev is also visiting, is opening to investors after 15 years of isolation. China has started building a gas pipeline to the east, and the EU and U.S. are urging Turkmen President Gurbanguly Berdmukhammedov to open an export route by building a subsea pipeline to Azerbaijan that connects to Nabucco.

Russia, which bought more than 60 percent of Turkmenistan's gas output last year, controls the country's gas exports to Europe through Soviet-era pipelines. Putin last year reached a deal to upgrade existing infrastructure and build a pipeline from Turkmenistan to Russia via Kazakhstan.

Energy Accord

Turkmenistan boosted gas production to 67.4 billion cubic meters last year from 62.2 billion in 2006, according to BP data.

While Russia vies to buy up any additional Turkmen gas, Berdymukhammedov is considering alternatives. Turkmenistan signed an energy accord with the EU in May, a month after Berdymukhammedov offered to make gas available to Europe starting in 2009.

Kazakhstan, Russia's closest ally among the former Soviet Republics and the third stop on Medvedev's trip, is also seeking new export routes. The nation is the largest crude oil producer in Central Asia. Kazakhstan produced 1.49 million barrels of oil a day last year and 27.3 billion cubic meters of gas, according to BP.

Russia and Kazakhstan in May signed a memorandum to more than double crude exports through the Chevron Corp. -led Caspian Pipeline Consortium.

John Hutton, business secretary, yesterday paved the way for a new generation of coal-fired power stations, claiming Britain could not wait for new clean-coal technology to come on stream.

Mr Hutton told the Commons coal would play a vital part in Britain's energy mix and accused the Conservatives of pandering to lobby groups by taking a tougher stance on new coal plants.

He said the Conservative policy on these plants - which would place a limit on carbon emissions - was "a potential threat to our energy security".

Mr Hutton claims the Tories are putting populist policies before Britain's long-term economic future, whether in lukewarm support for nuclear power or in opposing planning reforms to speed up approvals of big infrastructure projects.

But Alan Duncan, shadow business secretary, said the intent of the government to develop coal "at any cost", was a decision that would leave future generations with a "massive carbon headache". He added: "That means they can only keep the lights on by being dirty."

Having become a leading advocate of nuclear power, Mr Hutton is now turning his attention to coal as a vital means for weaning Britain off gas imports.

He said yesterday he was pressing ahead with plans to make coal cleaner by approving one of the world's first commercial-scale carbon capture and storage (CCS) plants, capable of capturing up to 90 per cent of carbon emissions.

Four bidders have pre-qualified in a competition to build a demonstration plant: BP Alternative Energy, Peel Power, Scottish Power Generation and Eon, which wants to build a controversial new coal station at Kings-north in Kent.

But Mr Hutton argues that since this project is not due to be operational until 2014, other coal stations will be needed meanwhile. Operators would have to buy emissions permits from other polluters - meaning there would be no overall increase in carbon - but there would no carbon cuts either.

Mr Hutton signalled yesterday that the government will consider approving a new coal station on the basis of whether it is able to move to CCS at a later stage when the technology is available.

Mr Hutton said Tory emissions limits would place "an effective moratorium on new cleaner coal facilities in the UK" and make the country reliant on gas imports.

But Mr Duncan argued that government delays had already held up the development of CCS programmes in Britain.

The Tories propose backing three CCS projects and maximum limits on emissions "so industry has absolute clarity of how it needs to change".

Almost everyone seems to agree: governments now face a choice between saving the planet and saving the economy. As recession looms, the political pressure to abandon green policies intensifies. A report published yesterday by Ernst & Young suggests that the EU's puny carbon target will raise energy bills by 20% over the next 12 years. Last week the prime minister's advisers admitted to the Guardian that his renewable energy plans were "on the margins" of what people will tolerate.

But these fears are based on a false assumption: that there is a cheap alternative to a green economy. Last week New Scientist reported a survey of oil industry experts, which found that most of them believe global oil supplies will peak by 2010. If they are right, the game is up. A report published by the US department of energy in 2005 argued that unless the world begins a crash programme of replacements 10 or 20 years before oil peaks, a crisis "unlike any yet faced by modern industrial society" is unavoidable.

If the world is sliding into recession, it's partly because governments believed that they could choose between economy and ecology. The price of oil is so high and it hurts so much because there has been no serious effort to reduce our dependency. Yesterday in the Guardian, Rajendra Pachauri suggested that an impending recession could force us to confront the flaws in the global economy. Sadly it seems so far to have had the opposite effect: a recent Ipsos Mori poll suggests that people are losing interest in climate change. Opportunities for energy populism abound: it cannot be long before one of the major parties abandons the pale green consensus and starts invoking an oil cornucopia it cannot possibly deliver.

The British government maintains both positions at once. In his speech last week, Gordon Brown said he wanted "to facilitate a reduction in short-term global oil prices" while seeking "to reduce progressively our dependence on oil". He knows that the first objective makes the second one harder to achieve. The government's policy is to build more of everything - more coal plants, more nuclear power, more oil rigs, more renewables, more roads, more airports - and hope no one spots the contradictions.

Is there a way out? Could we abandon the fossil fuel economy without provoking a blistering backlash? Two things are obvious. We need a global system, and the current one, the Kyoto protocol, is bust. It sets no cap on global carbon pollution, its targets bear no relation to current science and are unenforceable anyway, it contains loopholes and get-out clauses wide enough to sail an oil tanker through.

Until recently I supported an alternative system called contraction and convergence. Every country, this system proposes, should end up with the same quota of carbon dioxide per person. The richest countries must produce much less than they do today; the poorest ones could pollute more. Another proposal flows logically from this one: carbon rationing. Having been assigned its carbon quota, each nation would divide up part of it equally among its citizens, who could use it to buy energy or trade it among themselves. These proposals have the merit of capping global pollution, of being fair, progressive and easy to understand and of encouraging us to think about our use of energy.

But, after reading the proofs of a book by the independent thinker Oliver Tickell, to be published next month, I have changed my view. In Kyoto2: How to Manage the Global Greenhouse, Tickell slaughters my favourite ideas. He shows that there is no logical basis for dividing up the right to pollute among nation states. It gives them too much power over this commodity, and there is no guarantee that they would pass the pollution rights on to their citizens, or use the money they raised to green the economy. Carbon rationing, he argues, requires a level of economic literacy that's far from universal in the most advanced economies, let alone in countries where most people don't have bank accounts.

Instead Tickell proposes setting a global limit for carbon pollution then selling permits to pollute to companies extracting or refining fossil fuels. This has the advantage of regulating a few thousand corporations - running oil refineries, coal washeries, gas pipelines and cement and fertiliser works for example - rather than a few billion citizens. These firms would buy their permits in a global auction, run by a coalition of the world's central banks. There's a reserve price, to ensure that the cost of carbon doesn't fall too low, and a ceiling price, at which the banks promise to sell permits, to ensure that the cost doesn't cripple the global economy. In this case companies would be borrowing permits from the future. But because the money raised would be invested in renewables, the demand for fossil fuels would fall, so fewer permits would need to be issued in later years.

Tickell calculates that if the cap were set low enough to ensure that the world became carbon neutral by 2050, the total cost of permits would be about $1 trillion a year, or roughly 1.5% of the global economy. The money would be spent on helping the poor to adapt to climate change, paying countries to protect forests and other ecosystems, developing low-carbon farming, promoting energy efficiency and building renewable power plants.

But his figure seems too low. Like many of the world's climate scientists, Oliver Tickell proposes that the concentration of greenhouse gases should eventually be stabilised at 350 parts per million (carbon dioxide equivalent) in the atmosphere, and his calculations are based on this target. Last week Lord Stern suggested that meeting a less stringent target (500 parts per million) would cost 2% of world gross domestic product. If the price of the carbon permits sold at auction were much higher than Tickell suggests, the extra money could be used for massive tax rebates and social spending, aimed especially at the poor. But could the world afford it?

This money doesn't disappear, it gets spent. Tickell's proposal could represent a classic Keynesian solution to economic crisis. The $1, $2 or even $5 trillion the system would cost is used to kick-start a green industrial revolution, a new New Deal not that different from the original one (whose most successful component was Roosevelt's Civilian Conservation Corps, which protected forests and farmland). This would not be the first time that business was rescued by the measures it most stoutly resists: there's a long history of corporate lobbying against the kind of government spending that eventually saves the corporate economy.

Do we want to save it, even if we can? It is hard to see how the current global growth rate of 3.7% a year (which means the global economy doubles every 19 years) could be sustained, even if the whole thing were powered by the wind and the sun. But that is a question for another column and perhaps another time, when the current economic panic has abated. For now we have to find a means of saving us from ourselves.

A proposed EU deal, which could force airlines to start paying for greenhouse gas emissions in four years’ time, was on Thursday described by industry operators as “unacceptable”.

The provisional agreement is understood to have been reached among lawmakers in Brussels but will still require approval from member states and the European Parliament over the next few weeks.

It would cover airlines flying routes within the EU as well as those operating internationally which landed or took off within the bloc.

These operators would face a cap on emissions and have to buy some of their carbon permits through the emissions trading scheme.

According to one person close to the situation Thursday, the quota will be set at 97 per cent of average historic emission levels when airlines first join the scheme, although the percentage will reduce over time. Airlines will have to buy 15 per cent of the quota at auction.

Sources said the agreement also meant aviation would be included in the ETS from 2012, instead of 2011 for some flights as previously proposed.

The news brought a strong response from industry organsations. “Fifteen per cent auctioning in 2012 is unaffordable and unacceptable for our airlines given today’s high fuel prices and weakening demand,” said Sylviane Lust, director-general of the International Air Carrier Association, which represents leisure carriers like Air Berlin and First Choice.

The deal is now due to be put to top diplomats from EU member states – where it is believed to have a good chance of being accepted – and could reach a plenary vote in the European Parliament early next month.

The EU has been anxious to expand emissions trading to curb CO2 discharges. But any deal that includes non-European airlines is likely to run into strong opposition internationally.

The FTSE 100 today fell perilously close to bear market territory after it threatened to dive by 20 per cent from its October peak as oil soared to a new record of nearly $146 a barrel.

By 8.30am, the blue chip index was down 54.3 points at 5,372, before regaining some ground to fall by just 22.4 points within the hour.

However, if the FTSE 100 falls back further, it is in danger of declining by more than 20 per cent from October's high. A decline of 20 per cent is the generally accepted definition of a bear market.

The lowest point so far this year was in March, when the FTSE 100 closed at 5,414 points as Bear Stearns, the US investment bank, was close to collapse. It was subsequently rescued by rival, JP Morgan Chase.

Philip Shaw, an economist at Investec, said: "Things are not looking good. There is a new pessimism on cyclicals, particularly after Marks & Spencer's profit warning yesterday and global worries are now putting pressure on the resource stocks.

"Even oils are down despite the fact oil prices are at record highs. It's that combination which is doing the damage."

The price of crude soared to a new high of $145.75 a barrel, while in Asia, oil for August delivery was trading at $144.35 - more than 30 per cent higher than prices at the end of last year.

For much of this year and last, the rising price of oil and commodities has been the main prop of the FTSE 100, buoying up mining stocks and oil companies which account for the bulk of the weighting in the index.

However, the resource sector index fell 2.7 per cent, wiping £5.1 billion off the value of UK listed mining stocks. A sudden plunge in coal prices in Europe was behind some of the falls.

Lonmin led the way, down 5 per cent at £27.28, as did Ferrexpo, the Ukrainian iron ore producer, off 5 per cent at 326.5p after director selling in the past two weeks sparked fears that it may not sell some of its assets at the hoped for price.

More generally, there are worries about falling demand from China and India once the credit crunch hits home there. The oil and gas producing sector index was down 1 per cent with BG Group losing 1.5 per cent and BP 1 per cent.

Funds are not switching out of resources into banks, since the banking sector was also down, 0.7 per cent. HBOS fell further below its rights issue price.

The retail sector was again on the slide. Marks & Spencer's lost another 4 per cent following yesterday's warning to 231.25p. Sainsbury's was down 3 per cent.

LONDON, England (CNN) -- Hundreds of British truckers hit the road to London Wednesday to take their protest about high fuel prices to lawmakers.

UK truckers, protesting at the rising cost of fuel, headed for London to lobby lawmakers Wednesday

Truckers from all over the United Kingdom parked on a motorway in west London before police guided convoys a few miles to parliament.

The high price of fuel also spawned protests Wednesday in India: similar demonstrations have also unfolded recently in France, Spain and South Korea.

UK truckers say the high price of fuel is forcing them out of business. They complain of competition from European truck drivers who can fill up more cheaply on the continent before driving into Britain.

Unleaded gas is now approaching $11 per gallon in the UK: for haulage companies, who use diesel, the cost is even higher. In the United States the average price of gas is around $4.09 a gallon.

"The government needs to realize that the surge in oil prices has changed the world," said Peter Carroll, a spokesman for the pressure group Transaction.

"It is madness to insist on charging the highest level of fuel duty in the EU on top of a world price that has rocketed."

One trucker, Michael Edmunds, from Wiltshire, western England, told The Associated Press: "Business life for us at the moment is hard -- very hard. It's got to the stage where I'm wondering whether it's all worth carrying on. I'm only a small haulier. We are simply getting swallowed up."

Wednesday's protest follows a similar demonstration by truckers a month ago in London -- one of many worldwide as the price of oil continues its underlying rise.

In India union officials said Wednesday that truck drivers had halted work to demonstrate anger at the hike in fuel costs and road tolls, AP reported.

The move came as the government in Bangladesh, which has to import its gas, raised the price of subsidized fuel by 67 percent, the agency added.

In Spain last month truckers blockaded roads across the country, sparking panic buying of fuel and food. Strikers had demanded the government impose measures to soften the impact of fuel hikes.

Similar protests were also seen in France and Portugal, while consumers have also demonstrated in India and Malaysia.

In South Korea more than 13,000 truckers went on strike last month, also calling for fuel to be subsidized and a minimum wage to be introduced.

The stoppage badly impacted the nation's major ports, cutting trade to just over a third of pre-strike levels: South Korea's economy is heavily dependent on exports.

The mass protest crippled industrial activity in many parts of the country and hit food supplies to Kerala, which depends on neighbouring States for staple edibles.

However, transporters maintained supply of essentials such as fuel.

The strike began from Tuesday midnight with truckers stopping ferrying of goods other than fuel and other essential commodities. The essential items have been kept outside the purview of the strike for the time being.

The impact of the strike in terms of disruption of supply chain as a result of non-movement of the goods was not felt immediately as the trucks started going off the roads from midnight only. However, the truckers said that the real effect of their agitation would be known after sometime.

The earlier round of talks between Highways and Road Transport Minister T. R. Baalu and the AIMTC representative too did not yield anything. The Minister is reported to have taken a tough stand. “Yes, the hike in toll tax in February was too much, but it was through an Act of Parliament... it is not possible to roll back the hike,” Mr. Baalu told them.

Mr. Baalu, however, said that his Ministry has talked to the Petroleum Ministry on the truckers’ demand for levying fixed duty on per litre of diesel instead of the prevailing ad valorem duty and that a clarification was expected soon.

Transporters would be provided whatever variety of diesel they want at normal rates, he said and asked them to end their strike.

The Finance Ministry too held discussions with the AIMTC delegation in relation to service tax and other issues falling under its purview. It was indicated that the Ministry was open to offering concessions on service tax.

So far as the issue of removing speed governors from roads were concerned, Mr. Baalu said it was a State subject and he would hold a meeting with the Transport Ministers to resolve the issue.

“We will continue with the indefinite strike,” AIMTC president Charan Singh Lohara said.

Mr. Lohara said: “We are running on losses... the Minister is saying that if you are going on losses, then stop your business. So, we are stopping our business and continuing with the strike.”

Central Board of Excise and Customs member V. Sridhar said the government was ready to consider the demand of goods transport agencies for enhancing the abatement rate from 75 per cent.

A new study by the Pew Research Center suggests that public support for greater energy exploration is spiking amid $4 a gallon gasoline. More Americans are giving higher priority to more energy exploration, rather than more conservation, compared with a few months ago, the study states.

Forty seven percent of those surveyed by Pew in June said they favored oil and gas exploration and new power plants as a priority for the country’s energy policy. That’s up from 35 percent in February.
Meanwhile, people favoring conservation dropped to 45 percent from 55 percent.

Read an overview of the study here. Pew surveyed 2,004 adults nationwide from June 18 to June 29.