Oil recovered from three-month lows to rise by more than $2 on Thursday as supply concerns returned to centre stage in a market that has come under pressure from growing evidence of slower fuel demand.

U.S. crude rose $2.18 to $120.76 a barrel by 1134 GMT, after the contract recovered from a three-month-low hit in the previous session.

London Brent crude climbed $2.05 to $119.05.

Supply concerns came to the fore again, as the Baku-Tbilisi-Ceyhan pipeline with a capacity of one million barrels per day of Azeri light crude remained closed following a fire, for which Kurdish separatists claimed responsibility.

A source in Turkey's state-owned pipeline company Botas said the pipeline fire would last for two more days and it could take up to two weeks for the pipeline to restart.

The pipeline explosion in Turkey highlights the growing influence of geopolitical factors on the oil market.

Oil supplies from OPEC member Nigeria have been repeatedly disrupted by militant attacks, while escalating tension between Iran, the world's fourth largest producer, and the West over Tehran's nuclear programme has the potential to cripple global oil supplies.

However, oil is almost 20 percent off the record of $147.27 a barrel hit on July 11 and prices have fallen across the commodities complex.

"While in our view many of the fundamentally bullish elements of the market remain in place, buying interest has for now taken a step back," Harry Tchilinguirian, oil analyst at BNP Paribas, said in a research note.

UBS analyst Jan Stuart said oil market fundamentals did not warrant "this sudden and significant bearish turn" and the supply risk had not reduced and could provoke a whiplash price surge.

Data from the U.S. government's Energy Information Administration on Wednesday showed a much steeper than expected build in crude stocks, the latest sign soaring fuel costs and an ailing economy have reduced oil demand.

Crude oil inventories rose by 1.7 million barrels in the week to Aug. 1, beating expectations of a 300,000-barrel build. Distillate stocks, including heating oil and diesel, rose by 2.8 million barrels, also above forecasts.

However, gasoline stocks fell by 4.4 million barrels, much steeper than the 1.2 million barrel draw analysts had predicted.
Additional reporting by Chua Baizhen; Editing by Barbara Lewis and Anthony Barker

Barack Obama has laid out an ambitious energy plan under which US dependence on foreign oil would end within 10 years.

The Democrat contender's policy is seen as an attempt to blunt the apparent progress his Republican opponent John McCain is making with US voters who are struggling with high energy costs.

During a speech in Lansing, Michigan, Mr Obama performed a U-turn by calling for the release of 70 million barrels of crude oil held in federal stockpiles as a short-term means of lowering gasoline prices.

Last week, the Illinois senator also changed his position on his opposition to ending a quarter-century ban on drilling for oil along America's coast. He said he could accept limited and environmentally sound offshore exploration as part of a larger energy compromise that was being formulated in Congress.

The struggling US economy and rocketing energy costs are top of voter concerns, and Mr McCain has made headway in the White House contest by calling for an end to the drilling ban.

Mr McCain's campaign team described Mr Obama's policy switch yesterday as a "flip-flop".

Tokyo: Chevron, faced with falling oil output, and its partners may be forced to delay the start of a $2.8 billion oil project in Brazil by three months because a platform and rig will be delivered behind schedule.

Chief executive officer David O'Reilly has postponed eight major developments in the past two years due to equipment failures and escalating costs, and may struggle to fulfil his pledge to boost production by three per cent annually through 2010. The second-largest US oil company said on August 1 it may miss this year's output target.

Production at the offshore Frade field in Brazil may only begin in March and reach a peak of about 100,000 barrels a day in two years, said officials at one of the project partners, who asked not to be identified before an announcement. "If there are any more delays, March sounds right,'' said Luis Felipe Reis, Chevron Brasil's communications manager.

Demand for deepsea rigs and platforms has increased order backlogs at shipyards in Asia to record levels, with deliveries stretching into 2012. Crude oil's 64 per cent gain in a year and depleting reserves in shallower waters are prompting oil companies including Chevron, Exxon Mobil and Total to step up exploration and production.

Bullish cycle

"It's not unusual to have some slippages in this tight labour and materials market,'' said Victor Shum, senior principal at energy consultant Purvin & Gertz in Singapore. Delays in commissioning of new fields are "contributing to the bullish cycle for oil,'' he said.

Frade, operated and 51.74 per cent owned by Chevron, is expected to start in 2009, partner Petroleo Brasileiro said in a written reply to questions. Brazil's state-controlled Petrobras owns 30 per cent of the project and Japanese investors led by Inpex Holdings the remaining 18.26 per cent.

The field, discovered in 1986, was expected to start pumping oil by December this year, Chevron Brasil's Reis said. A floating production, storage and offloading vessel, or FPSO, that is being built in Dubai and is delayed, as is a drill rig from Singapore, Reis said in an interview.

The FPSO ship being built in Dubai is due to arrive in Brazil in September, Petrobras's press office said. Inpex's Tokyo-based spokesman Kazuya Honda said the field will start some time next year, declining to elaborate.

Frade is located in the north of the Campos Basin, a region responsible for more than 80 per cent of Brazil's oil output.

Protesters are aiming to shut down Kingsnorth power station on the Medway estuary in Kent this weekend.

They oppose the decision of its owner, the energy company E.ON, to replace the ageing site with a brand-new coal-fired power station - the first such to be built in Britain for 30 years.

The protesters are hoping that their week-long demonstration will inspire others to follow in their green footsteps.

To get to the Camp for Climate Change Action, visitors need to negotiate at least three police checkpoints.

Officers in stab vests and purple latex gloves question and search all visitors. Other police dressed in black coveralls search roadside ditches. Overhead, a police helicopter hovers.

The sense of paranoia is compounded by the knowledge that on the previous day there had been violent protests on the site - a sheep field about two miles from the power station - which ended in nine arrests.

That morning police announced that they had found a stash of weapons - including a knife and a "throwing star" in nearby woods - protesters deny involvement.

But once through the checkpoints and over the barrier - a makeshift stile at the bottom of a field - a whole new vista of tents and brightly-coloured flags opens up.

Climate Change Camp volunteer James Holland shows reporters around the site and points out the eco-toilets ("one for poo and one for pee"), the children's play area, the "bicycle-powered" cinema, and the 11 "neighbourhoods" - large tents where protesters from different UK localities can meet and spend time together.

Stand in a certain spot, and the power station at the focus of the protest can be glimpsed through the trees - an aging 1960s relic whose useful life, everyone admits, is nearly over, but whose replacement opponents are determined to thwart.

Kingsnorth, the protestors accept, is just one medium-sized power station, and any forced shutdown is likely to happen - if it does happen - for one day only.

But, says James, it has an important "iconic" value - both for the protesters and for those who wish to see it being built.

He says: "The government and the energy companies have decided that replacing Kingsnorth will be a symbol that Britain is able to use a form of energy generation that produces massive amounts of harmful CO2.

"But we determined that our protest will also be a symbol.

"If we can stop this power station being built then we will make it much harder for the authorities to defy public pressure and build other coal-fired stations in the future."

The stage is thus set for a clash in the Kent hillsides when the demonstrators hope that their local action will help build national opposition to what they say could be a dangerous and misguided energy choice.

They are entirely candid about their tactics - and also about their willingness to act illegally if necessary.

The freely-available Climate Camp handbook predicts that a group of demonstrators will approach the power station "looking for weak points in the perimeter fence." It adds: "When the time is right, they will move together, streaming into the power station to shut it down."

Says James: "If the law protects the right of industries to destroy the planet, then it is up to people like us to prevent that - even if it means breaking the law."

It's a view that worries E.ON's Emily Highmore, who says her company has been aware of, and preparing for, Saturday's protest "for months".

"While we completely respect the protesters' right to campaign peacefully, what is not acceptable are their plans to invade the power station.

"Power stations are not adventure playgrounds, and if anyone does get in they will be putting their safety, and the safety of our workers, at risk."

Equally important is the campers' belief that their week-long protest is setting an example to others of how to lead a better life.

They maintain they are organised entirely without "leaders". Instead, all important decisions are made "consensually" through an exhaustive, and to an outsider somewhat baffling, series of meetings.

The system has impressed Claire Rogers - a housewife from the nearby village of Wainscott who has never taken part in a protest before.

She and three fellow members of a local campaigning group, Kingsnorth Climate Action Medway (KCAM), have joined the campers for the week.

"We came here to learn," she says. "What we have found is a bunch of intelligent and articulate people who have set a real example to us."

The group have been fighting to close down Kingsnorth because of concern about pollution levels - it says local childhood asthma rates are among the highest in the UK.

But protesters are equally determined that a replacement will not be built. They reject E.ON's estimate that the new power station will be 20% more efficient.

"All that means is that more coal will be burned - and the pollution will remain," says KCAM member Simon Marchant.

Says Emily Highmore: "No-one actually knows how much coal we will need to burn when the new power station is built - that depends on market conditions."

The company is also stressing that it intends to close down an additional two fossil fuel power stations elsewhere in the UK - one of which will be replaced by a more carbon-friendly gas-fuelled station.

The Camp boast that no CO2-producing fossil fuel energy is used to make electricity on the site.

A total of 18 solar panel arrays, plus a wind turbine, is supposed to take care of all the camp's power needs - the dozen laptops in the media tent; the PA system in the main meeting tent and mobile phone chargers.

But when the sun fails - as it did on this day - so the power drops. Signs appeared in the media tent informing that the camp was on "red" status - meaning that the laptops and other electrical devices could not be used.

It neatly encapsulated Britain's future energy dilemma - do we rely totally on renewable energy sources and risk the lights going off when the sun goes in or winds and waves fail?

Or do we continue to burn fossil fuels that produce CO2 emissions, and risk harming the environment?

No kettles

For "Chan" - the solar power engineer who maintains the arrays around the site - the solution is tough, but simple: use renewables, encourage everyone to use less energy, and if necessary accept that standards of living will fall.

"That means no electric kettles or extra TVs," he says. "The alternative is the end of the human species."

Other climate campers are more circumspect, maintaining that energy conservation - better home insulation, more efficient power generation - will provide a large part of the answer.

But one camp organiser, Alex Harvey, is in no doubt that changing the way Britain produces and uses its energy will involve a fundamental rethink of everyone's priorities.

She is not afraid to describe herself as a revolutionary - although she accepts that the term has for others unfortunate "historical connotations".

"We are about challenging the growth economy," she says. "We are about pushing for radical social change, about the whole way the economy works.

"But I have to admit - we don't yet have a blueprint for a peaceful, just and sustainable society."

As soon as I have finished this column I will jump on the train to Kent. Last year Al Gore remarked: "I can't understand why there aren't rings of young people blocking bulldozers and preventing them from constructing coal-fired power plants." Like hundreds of honorary young people, I am casting my Zimmer frame aside to answer the call.

Everything now hinges on stopping coal. Whether we prevent runaway climate change largely depends on whether we keep using the most carbon-intensive fossil fuel. Unless we either leave it - or the carbon dioxide it produces - in the ground, human development will start spiralling backwards. The more coal is burnt, the smaller are our chances of future comfort and prosperity. The industrial revolution has gone into reverse.

It is not because of polar bears that I will be joining the climate camp outside the coal plant at Kingsnorth. It is not because of butterflies or frogs or penguins or rainforests, much as I love them all. It is because everything I have fought for and that all campaigners for social justice have ever fought for - food, clean water, shelter, security - is jeopardised by climate change. Those who claim to identify a conflict between environmentalism and humanitarianism have either failed to read the science or have refused to understand it.

Our government could lead the world in one of two directions. Roughly one third of our power stations will come to the end of their lives by 2020. It could replace them with low-carbon plants or it could repeat - this time in full knowledge of the consequences - the disastrous decisions of the past. E.ON's application to build a new coal-burning power station at Kingsnorth is the first for many years. At least five other such proposals hang on the outcome. Between them they would account for 54 million tonnes of carbon emissions a year: as much as the entire economy would produce if the UK, in line with current science, were to cut its emissions by 90%.

The government seems determined to make the wrong decision. It has inherited the party's traditional love for coal, but, being New Labour, now supports the bosses instead of the workers, and has colluded with them to make the case for a new generation of power stations. It has one justification for this policy: that one day dirty coal will be transformed into clean coal by means of carbon capture and storage (CCS). All that is needed to effect this transformation is a sprinkling of alchemical dust, in the form of the future price of carbon. The market, it claims, will automatically ensure that coal plants bury their carbon dioxide, as this will be cheaper than buying pollution permits.

Last month the House of Commons environmental audit committee examined this proposition and found that it was nonsense. It cited studies by the UK Energy Research Centre and Climate Change Capital which estimate that capturing carbon from existing coal plants will cost €90-155 (£71-£122) per tonne of CO2. Yet the government predicts that the likely price of carbon between 2013 to 2020 will be around €39 (£31) per tonne. Even E.ON believes that it won't rise above €50. "The gap between the carbon price and the cost of CCS," the committee finds, "is enormous." The energy minister, Malcolm Wicks, confessed to MPs: "I hope that the strengthening of carbon markets ... will bring forward a sufficiently good price for carbon that it will provide some of the financial incentive for CCS. Will it be enough? I do not know."

This is the sum of government policy: to cross its fingers and hope the market delivers. If it approves a new coal plant at Kingsnorth, it will do so on the grounds that the power station will be "CCS-ready". CCS-ready seems to mean nothing more than this: that there is enough space on the site for a carbon capture plant, should the developer deign one day to build it. The committee warns that this meaningless promise could be used "as a fig leaf to give unabated coal-fired power stations an appearance of environmental acceptability".

The government has already shown us what it wants to do. In January, Gary Mohammed, a civil servant at the Department for Business, emailed E.ON to ask whether he should include CCS as a condition for approving its new coal plant. (This gives a fascinating insight into how government works: companies are asked to write their own rules.) E.ON replied that the government "has no right to withhold approval for a conventional plant". Six minutes later Mohammed answered thus: "Thanks. I won't include. Hope to get the set of draft conditions out today or tomorrow."

There is a simple means by which the government could ensure that our future electricity supplies would not commit the UK to stoking runaway climate change. It would do as California has done and set, by a certain date, a maximum level for carbon pollution per megawatt-hour of electricity production. This would have to be a low one: perhaps 80kg of CO2. Then, in line with the government's precious principles (or absence thereof), it could leave the rest to the market. I have now reached the point at which I no longer care whether or not the answer is nuclear. Let it happen - as long as its total emissions are taken into account, we know exactly how and where the waste is to be buried, how much this will cost and who will pay, and there is a legal guarantee that no civil nuclear materials will be used by the military. We can no longer afford any rigid principle but one: that the harm done to people living now and in the future must be minimised by the most effective means, whatever they might be.

But I believe the likely response would be more interesting than this. Several recent studies have shown how, through maximising the diversity of renewable generators and by spreading them as far apart as possible, by using new techniques for balancing demand with supply and clever schemes for storing energy, between 80% and 100% of our electricity could be produced by renewables, without any loss in the reliability of power supplies. Unlike CCS, wind, wave, tidal, solar, hydro and geothermal power are proven technologies. Unlike nuclear power, they can be safely decommissioned as soon as they become redundant.

A policy like this requires both courage and vision. So look at the current cabinet - Brown, Straw, Darling, Hutton, Blears, Kelly, Hoon - and weep. Every man and woman with backbone was purged from this government years ago, leaving those who know how to appease the interests that might threaten them. These people won't stand up to business, even when the future prospects of mankind are at stake.

If fear is the only thing that moves them, we must present them with a greater threat than the companies planning new coal plants. We must show that this issue has become a political flashpoint; that the public revulsion towards new coal could help to eject them from office. You could do no better than joining us at Kingsnorth this week.

One good thing about the drop in house prices (after years of moaning that they were too high), the credit crunch (after years of moaning about over-use of credit cards) and the decline in retail sales (after much moaning about consumerism gone mad) is that these problems divert attention from the Government's somewhat incoherent energy policy, one important part of which is its effort to sell Britain's nuclear industry to a state-owned French company, EDF.

If that sale is consummated, it would transfer to France's politicians power over the allocation of capital and other resources between the needs of French and British consumers.

These are the same free-traders who decided that Danone yogurt is a key infrastructure company, not to be sold to foreigners.

There is worse. EDF would end up with a virtual monopoly of sites on which new nuclear plants can most easily be built, creating another nightmare for regulators already struggling to cope with a market in which integrated energy suppliers have every incentive to deny operators of wind farms and other independents access to their transmission facilities.

So mourn not if this deal remains switched off, even though the Government announced on Monday that a sale to EDF is its preferred option.

Whatever finally happens in the negotiations with EDF is only one small part of the policy morass that the Government has created.

To be fair, it should be noted that Britain is not alone in finding it hard to come to grips with reconciling the need for energy to fuel economic growth with the emerging consensus that something must be done about global warming, while moving away from the dependence on oil.

The Democratic-controlled Congress slunk out of Washington last week without even voting on the various policy proposals before it.

So be kind to your own politicians. Making energy policy is a tough job, made tougher by politicians' refusal to acknowledge facts.

The most basic is that the promotion of nuclear, solar, wind and other forms will do nothing in the near or medium term to end reliance on oil to propel cars and lorries.

For as far ahead as a planner should try to see, we will depend on oil to move ourselves and our products around the country.

You can't fill up at a wind machine or a nuclear plant - and won't be able to until the electric car becomes economic, and that is a long way off.

Which means that one ingredient of energy policy is the ability to defend oil supply routes, a job that the world has so far largely out-sourced to America.

No good saying Britain has plenty of oil in the North Sea - which might prove to be the case if oil prices stay high enough to make development of smaller, more difficult-to-access fields profitable, and if the Government resists the siren call of windfall taxes.

Oil markets are international, and if the Iranians try to close the Straits of Hormuz, or the crazies take over Saudi Arabia, prices would reach levels that will have us pining for the good old days of $150 oil.

Which is why the Government's decision to go ahead with the construction of new aircraft carriers is a sensible form of energy policy, assuming it does not come out of an already stretched military budget.

The next reality check is to accept that nuclear power is far dearer than the Government is anticipating. The cost of a nuclear plant is now estimated to be significantly more than twice the figure put about by the industry only five years ago - and rising.

Many nuclear advocates have been pinning their hopes for cost reductions on the next-generation nuclear plant being built in Finland by Areva, a French company that Gordon Brown has announced might be allowed a monopoly of nuclear plant construction.

The Finnish project is two years behind schedule and $1.5 billion-plus over budget.

High construction costs mean that electricity from nuclear plants can be competitive with the output of fossil fuel plants only if the price of carbon emissions rises and if investors are somehow guaranteed that those prices will stay high for the 20- to 40-year life of the nuclear plants.

No such guarantee is possible, given the volatility of carbon markets, so pay no heed to industry promises that it will not seek subsidies.

Most likely, owners of the massive amounts of capital required to build these facilities will insist that they be guaranteed above-market prices for their power, a covert subsidy that will be hidden on electricity bills.

Nuclear's need for subsidies is not unique.

Wind and solar, currently receiving large inflows of investment capital, also remain heavily dependent on subsidies. As does ethanol, part of the programme that has contributed to soaring food prices by giving farmers an incentive to transfer acreage to growing fuel.

Which leaves only natural gas, an efficient fuel, but one on which western Europe is overly dependent, to Vladimir Putin's delight - and coal. The world has limitless supplies of coal, most located in nations friendly to the West. But coal is an abomination in the eyes of environmentalists because of its alleged contribution to global warming.

Nevertheless, it will be a key ingredient in the world's energy future: India and China between them have 700 plants planned or under construction; the Government has sensibly authorised a new plant in Kent; and European countries plan to build 50 new coal stations in the next five years.

That makes it important that energy policy focus on making coal cleaner.

In the end, Britain, like America, has an energy policy that depends on the Government to subsidise the technologies that politicians select as "winners".

But there is a path not taken: tax carbon so as to force consumers to pay the environmental and security costs of burning fossil fuels, and refund the money to taxpayers by lowering taxes on incomes and jobs.

That would allow the most efficient technologies to win the race to provide new sources of energy, and methods for cleaning up fossil fuels.

But ministers rarely cede power to markets.

As I say in a longer piece soon to be published by the Hudson Institute, when it comes to energy policy, "Abandon hope all ye who enter here".

· £50m dividend likely despite fall in earnings
· Plans to produce 500MW from sustainable sources

Drax has seen its profits plunge by almost half as it pays the price for running the UK's biggest single carbon polluting power station in an era of rising CO2 prices.

Last year Drax, the owner of the 4,000 megawatt (MW) coal-fired plant in North Yorkshire, which supplies about 7% of the country's electricity, spent £11m buying CO2 emission allowances to cover its carbon pollution.

But the company has already spent £107m this year under a second phase of the European emissions trading scheme (ETS) when its allocation was reduced.

The higher cost of acquiring carbon credits helped cut pre-tax profits from £273m in the first six months of 2007 to £150m this time round and Drax admits full-year earnings will be considerably lower than before. Additional costs to the group came from the rising cost of its basic feedstock coal, which was 34% higher at £23.6 a megawatt hour.

The company, which plans to hand out £50m to shareholders in dividends despite the profit slump, is now looking to increase the amount of plant-based fuel it burns alongside coal.

The company banged the drum yesterday in favour of Britain building more coal-fired power stations despite deepening worries about climate change.

Dorothy Thompson, (below) chief executive of Drax, said the UK still needed more coal-fired generation because neither nuclear nor wind provided the kind of "variable" power that was needed for a constant supply of electricity.

"I firmly believe that long term, coal will be a key component to global energy supply," she explained .

The whole debate around coal-fired power stations has become increasingly fractious with climate campaigners protesting at the Kingsnorth site in Kent where the German-owned utility E.ON wants to build a new 1,600MW facility, with or without clean coal technology.

Thompson, whose Drax plant near Selby was the target of a similar demonstration last year, said she was convinced that "clean coal" - using carbon capture and storage - was technologically within reach. The only question remained at what price it could be done.

Despite her enthusiasm for coal, Thompson said she was looking at providing 500MW of output from a broad range of sustainable sources, up from a previous target of 400MW.

She said biomass was not as cheap as burning coal but it reduced CO2 emissions, adding: "I am confident we will earn a sufficient economic return on the investment." The technology for burning higher amounts of biomass will be ready by June 2010, later than a previous target of 2009.

The company is building a straw pellet plant in Yorkshire and considering further similar facilities, while also burning elephant grass, wood off-cuts and peanut husks.

Thompson said she would consider burning more crop-based fuels if there were not government caps on coal-fired power stations doing so. Drax has itself been looking at expanding outside of the coal arena by considering whether to buy gas-fired power stations but recently turned down the chance to buy a facility on Teesside because it was deemed too expensive.

Analysts at Deutsche Bank noted the lower financial results but said it remained positive about the future. "Drax is now facing higher prices for CO2, while receiving less free credits, following the start of phase 2 of the EU ETS. However, the outlook for Drax has improved substantially over the last 6-12 months, with higher oil prices more than offsetting the impact of higher coal prices and leading to higher forward margins for Drax," they said.

Backstory

The collapse in half-year profits at Drax, the UK's biggest single carbon polluter, is proof that the European Union's emission trading scheme (ETS) is working better. The owner of the North Yorkshire coal-fired electricity generator, run by Dorothy Thompson, pictured, saw the allocations it received under the scheme reduced, obliging it to pay more to cover its emissions.

A second phase of the ETS came into force at the start of the year, three years after the first - much criticised - phase got under way. It was widely deemed to have been far too lenient.

Installations in the energy and industrial sectors obtain a ration of free allowances and must buy any more they need on the open market, where the price of carbon has been rising. The current scheme, which runs till 2012, still covers only half of all EU emissions of CO2.

China's central province of Hubei, which has the world's largest hydropower station, has started rationing electricity to meet demand during the Olympics and the summer after fuel supplies fell.

The provincial government decided to cut power supplies to the capital city of Wuhan by 34 percent, the city of Huangshi by 31 percent and Huanggang by 16 percent, the local economic commission said in a statement posted on its Web site.

China, facing its sixth year of electricity shortages, mothballed 3 percent of its coal-fired generating capacity as of July 25 after fuel supplies dwindled, State Grid Corp. of China said last week. Coal stockpiles at Hubei's power plants have fallen below the "caution line" of 750,000 metric tons, the provincial government said.

"Insufficient coal supplies forced the closure of an increasing number of power plants in the province," the commission said. "We decided to start rationing power supplies from Aug. 5 in order to ensure basic power demand for the summer and Olympics are met."

Some high-energy-consuming companies will be shut to curb demand, the provincial government said. Supplies to "small" steelmakers, petrochemical producers and cement plants will be stopped, it said, without providing details.

Households, agricultural users, hospitals, schools, banks and military agencies will be ensured power, it said.

Caution Line

State Grid said last week 46 percent of the power stations on its network have coal stockpiles below the "caution line" or seven days of consumption. More than 1 billion people rely on State Grid for their power.

The coal shortage may worsen in winter as power demand remains high and hydropower output falls to a seasonal low, it said.

China's Shandong province is facing its worst electricity shortage in a decade and is unable to meet a third of the region's power demand, Qilu Evening News reported Aug. 4, citing Shandong Electric Power Corp.

The Three Gorges hydropower station in Hubei had a daily output of 440 million kilowatt-hours yesterday, or 5 percent of the nation's total consumption, the Xinhua News Agency reported today. The generation was for the 24-hour period starting at 8 a.m. yesterday.

Fears are growing among people living in the Gulf region that power supplies may not be able to cope with demand during the hotter than normal summer months.

An Arabian Business online poll conducted on Monday revealed that almost 70 percent of respondents were worried about the situation.

Of those, more than 25 percent expected the worse-case scenario with many regions experiencing a power meltdown, especially as air-conditioning units were more widely employed during the summer.

We ran the poll following news that industry experts had predicted $10 billion needed to be invested in power plants in the UAE to meet soaring power demand.

Tripp Lite, a manufacturer of power protection and connectivity equipment, said the swelling demand for power in the UAE is being fuelled by the rapid increase in population and unprecedented growth in the nation’s economy.

And last week, several areas of Saudi Arabia suffered blackouts, resulting in the loss of 3,400 megawatts from the network that links the Eastern and Central Regions of the kingdom, some 15 percent of the total supply of the network.

Saudi Basic Industries Corp (SABIC) also revealed last weekend that a power outage had affected production at some of its polyethylene and polypropylene plants in Jubail.

And many fear that blackouts could spread throughout the Gulf region unless urgent action is taken by governments.

Although the UAE government has announced plans to expand its 10-gigawatt production capacity by more than 50 per cent by 2017, 43 percent of poll respondents thought power plant proposals needed to be speeded up and made the number one priority.

Statistics obtained from the country's Ministry of Energy in the UAE in June showed that electricity demand is projected to hit 18,593MW in 2009, against a committed capacity of only 17,500MW.

But Ministry officials rejected suggestions that the emirates would suffer power shortages and blackouts, insisting instead that utility providers were doing their utmost to improve efficiency and reliability and to encourage consumers to use electricity more responsibly.

Seventeen percent of respondents agreed with this view, saying they hadn't experienced a blackout for months and did not expect to in the near future.

A further 15 percent said while they are normally confident about power supplies, they were more worried while the extreme heat continued and air-con units were working overtime.

The poll results come just a day after Egypt revealed it is to supply power-starved Lebanon with 200MW of electricity to help it meet a drastic shortfall.

According to state-run utility company Lebanon Electricity (EDL), the country needs 2,200MW of electricity to meet its daily needs but it currently generates only 1,700MW. However it also draws 100MW from Syria.

The country suffers daily power outages, including in the capital Beirut where many businesses have bought generators to tide them over during lengthy blackouts.

EDF’s attempt to become the UK’s biggest power generator was in tatters after its offer to buy British Energy, the UK nuclear group, fell through just hours before a deal was due to be announced.

The French group had been preparing to unveil on Friday an agreed takeover bid worth about £12bn, the culmination of a lengthy and tortuous negotiation process.

A member of EDF’s board confirmed on Thursday that it had made an offer for British Energy, but declined to comment on the details. Another person close to the situation said the offer comprised two options – 765p a share in cash, or 700p cash plus a “contingent-value rights component” that would pay out if British Energy performed in line with its targets.

EDF’s offer was put to British Energy’s board late on Thursday, with the French group confident of winning a recommendation.

But in a surprise late development, it appeared that British Energy’s board rejected the offer.

“There was a last-minute hitch,” said a person familiar with the negotiations. EDF put out a late statement saying that “after in-depth discussions, EDF considers that the conditions for a major development in Great Britain are not met to date”.

Dow Jones reported that investor demands may have led to the breakdown. “Two UK pension funds – big shareholders – requested EDF put more money on the table, and EDF refused. So British Energy turned the offer down,” it quoted a person familiar with the matter as saying.

British Energy on Friday said: “Advanced discussions with a party have continued but without agreement to date. A further announcement will be made in due course. There can be no certainty that the discussions will lead to an offer being made.”

It was not clear if a deal could be salvaged in the coming weeks, or if British Energy and the UK government – owner of a 35 per cent stake in the group – will have to revert to its back-up plan of forming joint ventures with several different energy companies to build new nuclear reactors in the UK. This could mean that new reactors are developed more slowly than if EDF had bought British Energy and co-ordinated the next wave of nuclear development.

British Energy held talks with several energy companies earlier this year, including RWE of Germany, Iberdrola of Spain and Vattenfall of Sweden, but EDF became the frontrunner to buy the group after making an offer of 680p a share in May.

This was rejected as too low, but the two sides carried on talking and the French group indicated it was prepared to pay slightly more to reflect the rise in power prices in the UK.

British Energy is the UK’s largest generator of power, with a 19 per cent market share. But EDF’s main reason for wanting to buy the group is that the UK’s new nuclear reactors are expected to be built on existing nuclear sites, and British Energy owns what are seen as the best locations.

The UK government has said that it wants to see an expansion in nuclear capacity to reduce carbon emissions. Shares in British Energy closed up 9½p or 1.3 per cent at 729½p on Thursday in anticipation of a deal with EDF.

The Government appeared to pour cold water on Centrica's revival of its proposed all-paper merger with British Energy yesterday by coming out strongly in favour of the languishing EDF deal.

After speculation at the weekend that Centrica was to renew is proposition for a merger after the collapse of the French take-over talks last week, the comp-any said yesterday that it was in discussions with a third party with a view to taking a minority ownership position in British Energy, subject to various conditions – one of which is that the third party successfully acquires the nuclear group.

Although not confirmed by Centrica, it is widely understood that the third party in question is EDF, which is smarting after its 765p-per-share offer for British Energy was vetoed by two major shareholders –Invesco and M&G – last week. But Centrica's statement also includes possible actions in the event that there is no third party British Energy deal. "Alternatives may include ... long-term power off-take arrangements [to buy electricity generated by BE plants], Centrica participating in British Energy's potential new nuclear partnerships, or a possible merger of Centrica with British Energy," the company said.

The Government's response was lukewarm at best, emphasising that the EDF takeover is still considered the best outcome. A spokeswoman said: "The Secretary of State said on Friday that the EDF deal would have been a good fit – that remains our view and the parties are still in discussion. Our clear preference is for a business with experience of new nuclear build."

Centrica first raised the possibility of a merger earlier this year, with the spin that it would offer a "British solution". But the proposal floundered in the face of the possibility of hard cash from European rivals including RWE, Iberdrola and Vattenfall. EDF became the front runner in May with a rejected 680p-per-share offer.

British Energy runs eight nuclear power stations, which produce around a sixth of the country's electricity, and is central to the Government's strategy for expansion of the nuclear sector to meet rising energy demands. Delays to the sale could be a major drag on the plans. The target is for eight new nuclear power stations, the first of which could come on stream in 2018. But there is also major decommissioning work.

A number of Centrica's major shareholders also have positions in British Energy, and Centrica's chief executive, Sam Laidlaw, is expected to sound out views on a merger this week. But for any merger scheme to go ahead, it will need support from the Government, which owns some 35 per cent of British Energy.

The consortium with a £20bn contract to clean up Britain's Sellafield nuclear plant has been handed a blank cheque by the Government to pay for future accidents there.

Taxpayers would pick up a tab for hundreds of millions of pounds in the event of a serious security breach at the Cumbria facility. One estimate puts the cost of Britain's previous nuclear clean-ups at around £83bn.

The winner of the contract, which will last for up to 17 years, is a consortium led by the troubled French firm Areva. It will be responsible for clearing 60 years' worth of highly toxic nuclear waste. The consortium expects to earn around £50m a year from the deal.

Areva has been under siege in France after two uranium leaks were discovered this summer. A leak last month at its nuclear site at Tricastin, southern France, led to an official inquiry. Uranium was subsequently found escaping from a ruptured pipe at a second plant.

A parliamentary answer by the Energy minister Malcolm Wicks, given just before Parliament broke for the summer recess, reveals that the Government has no limit on the risk to the taxpayer. His answer has not appeared on the online version of Hansard, the parliamentary record, as is usually the custom.

Mr Wicks said: "Whilst the impact of any call on the proposed nuclear indemnity could be very high, there is only an extremely small possibility of the indemnity ever being used ... There is no commercially available insurance."

The government agency that runs Sellafield, the Nuclear Decommissioning Authority (NDA), offered all four bidders for the contract an indemnity as part of the deal, protecting the private firms from footing the full cost of an incident at the facility.

The NDA, awarding the contract, claimed that, in line with a long-established convention, all companies involved in the bidding process had to insure themselves against the first £140m of the costs of an accident.

For MPs and environmentalists opposed to the use of nuclear power, the government guarantees to the private bidders was further evidence that it was "obsessed" with nuclear power.

Paul Flynn, the MP for Newport West, who asked the parliamentary question of Mr Wicks, said: "It is just the latest sign that the Government has been totally seduced by the Pied Piper of the nuclear industry. The Government is putting its faith in nuclear power, literally at any price."

The UK should take active steps to prepare for dangerous climate change of perhaps 4C according to one of the government's chief scientific advisers.

In policy areas such as flood protection, agriculture and coastal erosion Professor Bob Watson said the country should plan for the effects of a 4C global average rise on pre-industrial levels. The EU is committed to limiting emissions globally so that temperatures do not rise more than 2C.

"There is no doubt that we should aim to limit changes in the global mean surface temperature to 2C above pre-industrial," Watson, the chief scientific adviser to the Department for the Environment, Food and Rural Affairs, told the Guardian. "But given this is an ambitious target, and we don't know in detail how to limit greenhouse gas emissions to realise a 2 degree target, we should be prepared to adapt to 4C."

Audio link: http://www.guardian.co.uk/environment/audio/2008/aug/07/james.randerson.climate.change.bob.watson  

Globally, a 4C temperature rise would have a catastrophic impact.

According to the government's 2006 Stern review on the economics of climate change, between 7 million and 300 million more people would be affected by coastal flooding each year, there would be a 30-50% reduction in water availability in Southern Africa and the Mediterranean, agricultural yields would decline 15 to 35% in Africa and 20 to 50% of animal and plant species would face extinction.

In the UK, the most significant impact would be rising sea levels and inland flooding. Climate modellers also predict there would be an increase in heavy rainfall events in winter and drier summers.

Watson's plea to prepare for the worst was backed up by the government's former chief scientific adviser, Sir David King. He said that even with a comprehensive global deal to keep carbon dioxide levels in the atmosphere at below 450 parts per million there is a 50% probability that temperatures would exceed 2C and a 20% probability they would exceed 3.5C.

"So even if we get the best possible global agreement to reduce greenhouse gasses on any rational basis you should be preparing for a 20% risk so I think Bob Watson is quite right to put up the figure of 4 degrees," he said.

One big unknown is the stage at which dangerous tipping points would be reached that lead to further warming - for example the release of methane hydrate deposits in the Arctic. "My own feeling is that if we get to a 4 degree rise it is quite possible that we would begin to see a runaway increase," said King.

He said a two-and-half-year analysis by the government's Foresight programme on the implications for coastal defences had more impact in the corridors of power than any other research on the effects of climate change that he presented.

"No other single factor focussed the minds of the cabinet more than the analysis that I produced through that ... We begin to have to talk about ordered retreat from some areas of Britain because it becomes impossible to defend," he said. "There's no choice here between adaptation and mitigation, we have to do both."

Other experts were concerned that Watson's comments might be seen as defeatist and an admission that emissions reductions were impossible to achieve.

"At 4 degrees we are basically into a different climate regime," said Prof Neil Adger, an expert on adaptation to climate change at the Tyndall Centre for Climate Change Research in Norwich.

"I think that is a dangerous mindset to be in. Thinking through the implications of 4 degrees of warming shows that the impacts are so significant that the only real adaptation strategy is to avoid that at all cost because of the pain and suffering that is going to cost.

"There is no science on how we are going to adapt to 4 degrees warming. It is actually pretty alarming," he added.

Speaking to the Guardian, Watson, who is a former science adviser to President Clinton and ex-chief scientist at the World Bank, said the UK should take a lead in research on carbon capture and storage (CCS).

Alluding to the US effort in the 1960s to put a man on the moon he advocated an "Apollo-type programme" to introduce 10 to 20 CCS pilot projects - which work by burying carbon dioxide from burning fossil fuels underground - among OECD countries to develop the technology.

"This would allow coal-fired power plants that are currently being built to be modular and capable of having carbon capture retrofitted, and would show the world that we take the issue of climate change seriously, thus demonstrating real leadership. Without this technology we have a real problem."

He also said as coal burning is cleaned up to remove harmful sulphur pollution climate change would actually get worse. The sulphur aerosols are actually preventing some warming from taking place currently.

"This offsetting effect, which is equivalent to about 100 parts per million of carbon dioxide, will largely disappear if China and India follow the lead of the US and Europe in limiting sulphur emissions, the cause of acid deposition," he said.

European Union and United Nations systems for tracking the use of carbon credits will be connected before December, a move that should significantly facilitate emissions trading.

Brussels announced on Wednesday that the link-up would be in place “before December 2008 at the latest” following the successful completion of tests. The European Commission added that it was still negotiating with officials at the UN Framework Convention on Climate Change on a precise date but said this would be announced ”shortly”.

The connection will allow companies to transfer certified emission reductions (CERs) issued under the so-called Clean Development Mechanism, an UN-based Kyoto Protocol scheme, into their accounts in member state registries. These, in turn, can be used to offset emissions under the EU’s emissions trading system.

Under the EU’s ETS, heavy industry is given a fixed quota of permits to emit carbon dioxide. Companies must either keep to this limit, buy permits from others who are operating below their EU cap, or fund emission cuts in developing countries, in turn earning offsets or CERs.

Stavros Dimas, EU environment commissioner, said that he welcomed the outcome of the testing phase: “This now paves the way for the transfer of credits from the CDM in the EU registry system. Linking up with the UN’s carbon credit registry will further strengthen Europe’s leading role in the global carbon market.”

A bid battle has broken out between Indian and Chinese companies over London-listed energy group Imperial Energy.

China Petroleum & Chemical Corporation, one of China's leading oil refiners, is poised to table a higher offer than a slated £1.3bn deal, thought to be from India's Oil and Natural Gas Corporation.

The Chinese move is likely to flush out other bidders. It is understood that the Korea National Oil Corporation, which last year tried to take over Burren Oil, has also made "positive noises" to Imperial's management about its Russian oil assets.

The Korean company was prepared to pay £1.55bn for Imperial's rival Burren Oil but was ultimately outbid by Italy's Eni.

It is understood that the Chinese company, known as Sinopec and one of China's leading oil refiners, has been given access to Imperial's books.

It is thought to be happy to offer more than the £12.90-a-share that is already on the table for Imperial, which is currently valued below the possible bid price at £1.1bn.

Imperial's board, chaired by founder Peter Levine, has so far declined to name any of the company's suitors.

The oil exploration and production company, which is largely active in Siberia and Kazakhstan, responded to the first bid approach in July by warning shareholders that there was "no certainty" an offer would be forthcoming.

China and India are both actively acquiring energy assets around the world to meet the growing demands of their domestic economies. China has already outmanoeuvred India by getting access to resources in neighbouring Burma by providing the ruling military junta with infrastructure investment, aid and arms.

This should be paradise. A land of plenty. The finest schools and hospitals, gleaming infrastructure that shames the West, a place where wealth literally oozes out of the marshy undergrowth.

This was the dream, anyhow. To say it has turned into a nightmare doesn't do justice to the horror that the Niger Delta has become; it doesn't even begin to describe just how disastrous the discovery of oil more than 50 years ago has been for the people who live here.

A sweaty, heaving melting pot of 30 million people from 40-odd ethnic groups speaking more than 200 different languages, the Niger Delta lies on the southern banks of Nigeria, Africa's most populous country.

But while we have been using their oil to drive our cars, fuel our aeroplanes, and keep the wheels of our economy turning, those in the Delta have had their land, their lives, their dreams destroyed.

Oil spills have polluted their rivers and land, making fishing and farming impossible. Flares, burning constantly, have filled their air with soot. Billions of dollars have been pumped out of their land with nothing in return. Even the jobs the oil industry promised have gone elsewhere, to well-paid foreigners and Nigerians from less marginalised parts of the country. For those who live closest to the oil fields, the best they can hope for is casual labour: when there is a spill or a pipeline bursts, locals are employed for pennies to clear it up.

Oil has polluted the Delta beyond recognition. But it has also polluted the country's politics. When the first discovery was made in the late 1950s, Nigeria was on the cusp of gaining independence from Britain. The potential oil revenues were seen by many as the perfect launchpad for an independent Nigeria. It hasn't worked out that way. Instead, it has become the perfect launchpad for corrupt politicians and businessmen to enrich themselves at the expense of their people.

It is a dirty business. Oil in the Gulf of Guinea, which snakes its way along the coast of West Africa from Ivory Coast down to Angola, is cheap and plentiful – and until April, Nigeria was Africa's largest oil producer, producing more than 2.5m barrels per day. That

number is falling though, as the Delta has become chaotic, a place of armed gangs, of kidnappings, of daily violence. Oil companies, and the people who work for them, have become the target. In the past few years, shadowy militant groups like the Movement for the Emancipation of the Niger Delta (Mend) have taken advantage of rising anger towards the oil industry. They kidnap foreign oil workers and attack oil installations. Almost all of those kidnapped are returned unharmed once a hefty ransom has been paid. The oil companies and the Nigerian government always insist that no money has changed hands – but no one believes them.

For the oil firms, a seven-figure ransom is a small price to pay to keep on producing. At five cents a barrel, getting oil out of the ground is 10 times cheaper in Nigeria than in Saudi Arabia. But the cost of doing business in Nigeria is getting higher. Mend's attacks on oil installations, including one on a Shell offshore field in June, have cut the country's oil production by at least 20 per cent. As a result, Angola has now overtaken Nigeria as Africa's largest oil producer.

Mend claim they are fighting for a fair share of oil revenues to be spent on the Delta. But nothing is straightforward. The militant groups may like to portray themselves as rebels fighting on behalf of the people, but many of them are little more than guns-for-hire, taking advantage of the chaos. Sometimes they work for gang bosses, sometimes politicians, but the result is always the same. The ransom ends up in some overseas bank account and those living in the Delta get poorer.

Those same accounts are also regularly feathered with money made from "bunkering" – stealing oil direct from the pipeline and selling it on the black market.

The stability or otherwise of the Delta matters a great deal, even to those who have never heard of it. Within a decade, the United States expects to extract around a quarter of its oil from the Gulf of Guinea. They see it as a safer option than the Middle East, and it has played a large part in the thinking behind the establishment of the US's Africa Command – a plan for a series of permanent military bases on the continent.

Britain, one of the largest investors in Nigeria, is also worried. Gordon Brown has offered to help President Umaru Yar'Adua deal with the "lawlessness", as he puts it. British military aid is on the table.

Yar'Adua became president in April 2007. He would say he was elected, but few who witnessed the poll would describe it as democracy. Once in office, Yar'Adua declared the Delta his biggest priority but little, if anything, has really changed. War has been declared on the militants, but when many of those militants have such close links to senior government officials and wealthy pro-government businessmen, it makes any form of military solution almost impossible.

The Delta is crying out for a comprehensive political solution, one that would bring real investment to a region starved for so long. But oil doesn't seem to work like that. Look across the Gulf of Guinea. Nowhere has oil brought peace, security and development. It has brought wealth for a few and misery for the rest. On paper, Equatorial Guinea is one of the richest countries in Africa. In reality, the money is controlled by one man, President Obiang Nguema, a dictator who "won" 97 per cent of the vote last time he bothered asking. The situation is similar in Gabon, where oil revenues have kept a dictator in power for more than 40 years.

The only potential bright spot is Ghana, a relatively stable democracy which has just found oil. Few people celebrated when the discovery was announced though. They looked nervously across at Nigeria and wondered what they were letting themselves in for.

Race to claim gas areas prompts boundary map to head off future disputes between nations including Russia and Canada
The race to carve up the Arctic for its oil, gas and mineral reserves has been charted for the first time in an attempt to alert international policy makers to serious territorial disputes that could result.

A new map (pdf) is designed to illustrate historical, ongoing and potential arguments about ownership in the competition to control areas rich in natural resources.

Its publication by Durham University researchers comes as a growing number of states including the UK cast their eyes towards polar regions and big slices of the ocean floors.

Countries must establish sovereignty over disputed territories if they are to exploit their undiscovered, technologically recoverable energy reserves.

The attempts to assert such rights have already alarmed conservationists who want better international protection for the poles as climate change melts the ice and opens up more land and seabeds for exploration.

Last year, a Russian submarine planted a flag on the seabed below the North Pole to highlight its claim to a big chunk of the Arctic. Other disputes could involve Canada, US , Denmark (through Greenland), Iceland and Norway.

The Arctic map has been prepared by Durham's International Boundaries Research Unit.

Its director, Martin Pratt, said a survey by the US Geological Survey estimated that a fifth of the so-far undiscovered but recoverable resources lay within the Arctic Circle. "We are talking 90 million barrels of oil, nearly 17 hundred trillion cubic feet. I cannot even imagine how much that is, but it is a lot. I suppose for any state, control is significant as other resources dwindle."

Pratt said the map was an attempt "to collate information and predict the way in which the Arctic region may eventually be divided up. The freezing land and seas of the Arctic are likely to be getting hotter in terms of geopolitics." There was likely to be increasing concern over damage to the "unique environment" of the Arctic.

"It is vulnerable and extracting oil and gas is not an environmentally friendly activity."
Russia first made a submission about the areas to the UN over the area in 2001. Claims are made under the UN Convention on the Law of the Sea. Coastal states can extend their rights beyond the 200-mile limit from their shoreline if there is a continental shelf.

Russia claims its continental shelf extends along a mountain chain under the Arctic called the Lomonosov Ridge. Its flag-waving last year was part of its determination to provide more weight to the claim, which have to be verified by geological and sub-sea surveys.
The US has yet to even sign up to the UN convention

Rising international tension between Iran and the West has prompted Opec-member Kuwait to consider long-term plans to increase storage of its oil abroad, oil industry sources and diplomats said.

The United States says it wants a diplomatic solution to its dispute over Iran's nuclear programme but has not ruled out military action if that fails.

Tehran has threatened to impose controls on shipping through the Strait of Hormuz if attacked.

Kuwait, the world's seventh-largest oil exporter, ships all of its crude exports, totalling around 1.7 million barrels per day, through the strait. The Gulf state has no alternative export route.

Kuwait is assessing plans to set up storage facilities in Asian countries such as China and Vietnam where it is building refineries, industry and diplomatic sources said.

Joint venture refinery

"Storing oil there is one of the option beings considered," said a senior Western diplomat. "But it is a very long-term plan as the refineries haven't been built yet."

In April, Vietnam signed a deal with Kuwait and several Japanese companies to set up a $6 billion refinery with a capacity of 200,000 barrels per day which is scheduled to go online in five years.

In China, Kuwait has shortlisted Royal Dutch Shell and Dow Chemical Co as potential partners in a joint venture refinery and petrochemical project with Sinopec in south China that is now undergoing feasibility studies.

Demand for joint stockpiling in Asia is growing as emerging economies such as China look to secure their future energy supplies.

Precautionary steps

The world's second-largest oil consumer China has started to build strategic stocks and plans to have capacity for around 100 million barrels by the end of this year.

Kuwait already has a joint storage deal for two million barrels of its crude in South Korea. The agreement gives South Korea first rights to purchase the oil from state-run Kuwait Petroleum Corp.

The head of top state oil firm Kuwait Petroleum Corp, Saad Al Shuwaib, said in June Kuwait was developing precautionary plans with other Gulf states to continue exports if Iran closes the strait. He gave no further details.

In addition to the crude exports, Kuwait ships around 700,000 bpd of refined oil products, Washington-based consultancy PFC Energy estimates.

In parliament, deputies have been calling on the government to prepare for the possibility of a military conflict.

Airlines are set to make the reduction, the equivalent of one in every 14 seats, in response to high oil prices and the global credit crisis, according to the Official Airline Guide (OAG). Reduced availability is almost certain to force up ticket prices.

In all there will be 59.7m fewer tickets available compared to October-December last year. Routes will be scrapped at 275 airports around the world and 3,500 fewer planes will be needed, according to the OAG.

While Europe will suffer the loss of 5.5m seats, America will be worst hit, with a reduction of about 20m.

Some of Britain's biggest airlines, including British Airways, Ryanair and Easyjet, have already confirmed that they are making major cuts to their capacity, while experts have predicted that further reductions are sure to follow in 2009 as the industry, which has expanded rapidly in recent years, adjusts to the current economic downturn.

British Airways has already dropped six of its short-haul routes to European destinations from Gatwick, while Ryanair has also axed several routes from Stansted.

Willie Walsh, the chief executive of British Airways, last week said that the airline industry was facing its "worst ever" business environment. a Spokesman for British Airways said: "Our capacity has been reduced 3.1 per cent versus last year. I think that Willie Walsh has been quite upfront about that. He has said it is inevitable that fares will rise."

Steve Casley, the chief executive of the OAG, said: "The data speaks for itself. It took a good three years for the industry to recover from the downturn in 2001 when it had a five per cent drop in capacity and a sevenper cent drop in flights.

"From our statistics, it looks quite possible that we may be facing a far more severe global downturn than we have experienced before.

"The industry's resilience will be pushed to its limits in the coming months."

The number of people travelling on international flights grew at the slowest rate in five years in June, according to a report.

World passenger numbers were up 3.8% in June from a year ago, the International Air Travel Association (IATA) said, as the economic slowdown took hold.

Load factors - which measure how full planes are - fell in June, IATA said.

The association warned the situation would get "a lot worse" amid plunging confidence and high oil prices.

The report said that the volume of freight traffic fell in June, down 0.8%, the first decline since May 2005. Falling confidence from manufacturers was to blame, IATA said.

Loss fears

The organisation, which has been downbeat about the short-term future of the airline industry for some time, said the industry could record losses of $6.1bn (£3bn) this year.

Last week, British Airways became the latest carrier to show the impact of tough conditions on its finances - reporting an 88% fall in quarterly profits.

And Ryanair has warned that it may lose 60m euros this financial year.

IATA represents about 230 airlines operating almost 95% of international air traffic. Domestic flights are not included in its data.