Crude oil rose above $100 a barrel as the dollar extended its slump against the euro, enhancing the appeal of commodities as a currency hedge.

Crude has rallied more than $10 a barrel from its seven- month low of $90.51 two days ago. The U.S. Energy Department reported yesterday that crude oil stockpiles dropped the most since May because of disruptions from Hurricane Ike. Gold and crops also advanced today.

"The weaker greenback and new supply risks around the world are reviving the oil price," Eugen Weinberg, a commodity analyst at Commerzbank AG in Frankfurt. "We saw during the first wave of the credit crisis that people consider oil and gold to be safe havens and they may be doing the same now."

Oil for October delivery rose as much as $5.08, or 5.2 percent, to $102.24 a barrel on the New York Mercantile Exchange. It was trading at $101.06at 1:48 p.m. in London.

The U.S. currency slid as much as 2.6 percent to $1.4541 against the euro. Gold for immediate delivery brought its gains over two days to more than 12 percent, trading for $875.88 an ounce at 12:31 p.m. in London. Wheat rose 1.3 percent to $7.35 a bushel.

Oil tumbled more than $10 in the first two days of the week as Lehman Brothers Holdings Inc. filed for bankruptcy, and Merrill Lynch & Co. was sold to Bank of America.

'Over-Correction'

"The key issue of the moment is whether the oil price sell-off should now be considered an over-correction. We don't think it should," Dresdner Kleinwort Group Ltd. analyst Gareth Lewis-Davies said in a report. "Both market fundamentals and financial issues should continue to combine to weaken prices over the rest of this year."

U.S. crude-oil stockpiles fell 6.33 million barrels to 291.7 million barrels last week, according to the Energy Department. It was the fourth straight inventory decline.

Brent crude oil for November settlement advanced as much as $4.85, or 5 percent, to $99.69 a barrel and was trading at $98.75 at 1:33 p.m. London time on London's ICE Futures Europe exchange.

Nigerian militants stepped up attacks on oil companies, raising concern supply may be disrupted. Nigeria lost 280,000 barrels daily of its crude output to attacks launched by armed militants in the Niger Delta oil region in the past five days.

"Current shut-in production stands at about 1 million barrels a day, but it's not necessarily due to militant attacks," Levi Ajuonuma, spokesman for the Nigerian National Petroleum Corp., said by phone from the country's capital, Abuja. "Only 28 percent is because of militant action."

Texas refiners and Gulf of Mexico oil and gas producers may need two weeks to restore normal operations after Hurricane Ike swept through the region.

Exxon Mobil Corp., the world's biggest oil company, said its Beaumont, Texas, refinery took the "most serious hit" of its plants after Ike pushed ashore a wall of water. Chevron Corp. said "several" Gulf platforms were toppled and Royal Dutch Shell Plc restarted "some production" in the region.

"You are looking at 10 to 14 days for most of the refineries" in the Houston and Texas City areas, Andy Lipow, president of Houston-based Lipow Oil Associates LLC, said in a telephone interview. "Power and people are the major stumbling blocks for refineries to return."

Fourteen Texas and Louisiana refineries, with combined crude processing capacity of 3.72 million barrels a day, were closed. The storm came ashore near Galveston Sept. 13, shutting about 20 percent of the U.S.'s oil-refining capacity.

"It's highly unlikely that we will see the bulk of these operations back to normal before a minimum of 10 days to two weeks," Tom Knight, trading director at Truman Arnold Cos., an independent wholesaler in Texarkana, Texas, said in an interview.

Pump Prices

Refinery outages are expected to reduce supply and boost gasoline prices. Regular gasoline at U.S. pumps rose 4.8 percent to $3.842 a gallon on Sept. 14 from a week ago, AAA, the nation's biggest motoring club, said on its Web site.

"Over the next two weeks the national average could get as high as $3.90 to $3.95 and then come back off," said Lipow.

BP Plc is assessing its Texas City refinery, Sheila Williams, a London-based spokeswoman, said by phone today. The company is "working with the local authorities to restore the reliable water and electricity services," she said. The Texas City refinery is BP's largest, according to the company.

Exxon said it plans to "later in the week" restart units at its Baytown refinery, the largest in the U.S. Marathon Oil Corp.'s Texas City refinery is without power and water.

Valero Energy Corp., the largest U.S. refiner, said while power has been restored to most processing units at its Houston refinery, no units are running. "We still need nitrogen, hydrogen, we have to pump water out of some areas," Bill Day, a company spokesman, said by telephone. "There's a lot of issues we have to get through besides just power."

Houston

Ike left Houston without drinking water and severed power to millions after ripping through America's fourth-largest city. It's the first storm to hit a major U.S. metropolitan area since Hurricane Katrina devastated New Orleans in 2005.

About 27 percent of CenterPoint Energy Inc.'s 2.26 million Houston customers had electricity by yesterday, the company said. Houston's electricity distributor has said it may take as long as four weeks for full power restoration.

Oil companies, which shut down most of their Gulf output for the storm, were examining Gulf assets for potential storm damage and beginning to return workers to rigs and platforms.

A total of 99.9 percent of oil production and 93.8 percent of gas output was idled in the Gulf, the U.S. Minerals Management Service said yesterday. Gulf fields produce 1.3 million barrels of oil a day, about a quarter of U.S. output, and 7.4 billion cubic feet of gas, 14 percent of the total, government data showed.

Recon Flights

Chevron, the second-largest U.S. energy company, said reconnaissance flights over its Gulf facilities showed damage from Ike, with "several reported as toppled in the eastern and western shelf areas."

More detailed assessments will be carried out and production will be restored in areas unaffected by the hurricane, Chevron said in a statement on its Web site.

BP "expects to start production facilities over the next week, which is subject to availability of the export infrastructure," BP's Williams said. The company shut down output in the Gulf on Sept. 9. Ike has toppled the drilling derrick aboard BP's Mad Dog oil production platform, which "is the most significant damage," she said.

Shell, Europe's largest oil company, said in a statement yesterday that it had redeployed 300 people to offshore oil and gas facilities. The company will continue to deploy workers until it reaches pre-storm staffing levels of 1,400 people, Darci Sinclair, a company spokeswoman, said.

"Redeployments to some locations in the Gulf of Mexico were hindered by a stalled cold front that was generating less than optimum flying condition," Shell said in a statement.

Mooring Failures

Noble Corp., the third-largest U.S. offshore oil driller, said two of its Gulf of Mexico platforms had "mooring failures" and have now been boarded by crews and power restored. No "significant damage" was found on the company's rigs and start-up operations are under way, Noble said in a statement late yesterday.

Exxon Mobil also said it was sending workers to Gulf oil and gas facilities that weren't in the direct path of the storm.

LyondellBasell Industries' Houston refinery will be down for at "least several days," said company spokesman David Harpole. Shell said "varying levels" of services were available at its Deer Park, Texas, refinery and there was no electricity at its Port Arthur plant, which it operates in a joint venture with Saudi Arabia's state oil company.

Shell's Norco refinery in Louisiana was operating at 60 percent of capacity, while its Convent plant in the state was not yet producing gasoline and "other products."

Reduced Rates

Total SA, Europe's third-largest oil company, said its 240,000 barrel-a-day Port Arthur, Texas refinery is without electricity and wasn't flooded.

ConocoPhillips has begun to restart its Sweeny, Texas, refinery, the company said in a statement on its Web site. The company's Lake Charles refinery is operating at reduced rates and continues the restart process.

Pasadena Refining System Inc. said its Pasadena, Texas, refinery sustained relatively minor damage and is waiting for employees to return before it can restart, Chuck Dunlap, Pasadena's president, said in an e-mailed statement.

WASHINGTON -- The House of Representatives on Tuesday night passed an energy bill clearing the way for more oil drilling off U.S. coasts, but not nearly as much as Republican leaders wanted.

The bill was passed by a vote of 236-189.

Many Republicans opposed the bill because it would allow new oil drilling only between 50 and 100 miles offshore. Republicans generally want to allow new drilling starting 3 miles from shore.

Republicans also objected to provisions repealing tax cuts for the oil industry and what they said was a lack of incentive for states to allow drilling on their land.

House Speaker Nancy Pelosi, a California Democrat, told reporters Tuesday: "The American taxpayers have been ripped off for years on offshore drilling. This bill changes that."

Before the vote, Pelosi said the bill presented a choice between "the status quo, which is preferred by Big Oil," and "change for the future to take our country in a new direction."

Fifteen Republicans voted for the largely Democrat-backed bill. Thirteen Democrats voted against it.

The Senate, meanwhile, could vote on various energy proposals, including more offshore drilling, as early as this week.

The House bill would require states to give their permission for drilling on their land. It also would offer incentives for renewable energy, require the government to release oil from its emergency reserve, and force oil companies to drill on federal lands they already lease from the government.

Democratic leaders had previously opposed Republican-led efforts to repeal a 1981 law barring most offshore drilling. But they changed course over the August recess, saying their new plans would allow some expanded drilling.  See where U.S. offshore drilling is banned »

But Republicans say the House bill wouldn't expand offshore drilling enough. Before the vote, Rep. Mike Pence, an Indiana Republican, called the bill "a charade," denying it would do what its backers claim.

"This is not 'yes' to drilling. This is 'yes, but,' " he said.

"This is 'yes, but no drilling in Alaska, no drilling in the Eastern Gulf, no drilling inside 50 miles,' " Pence said. "This is 'yes, but no litigation reform that will prevent radical environmental attorneys from tying up leases even before a single shovel of dirt is turned.' "

Democrats and Republicans traded harsh words on the House floor Tuesday in the debate over the bill.

Rep. Anthony Weiner, a New York Democrat, said President Bush's "idea of an energy policy is holding hands with the crown prince of Saudi Arabia, embracing him with a big smooch."

When the Republicans "controlled Congress, [they] passed their own energy bill, signed into law by the president. We got into this mess," Weiner said.

But Rep. Jeb Hensarling, a Texas Republican, shot back that the Democrats' bill is a "sham" and a "fraud."

"This is a bill designed to ensure Democrats' re-election, not designed to ensure affordable energy in America," Hensarling said.

Hensarling also complained about how the bill was brought to the floor: "No amendments, no substitutes, no committee hearings. Is this democracy? No."

MOSCOW, Sept 18 (Reuters) - Russia said on Thursday it will slash oil export duty to allow oil firms hit by a weaker crude price to save $5.5 billion and give a boost to their floundering stocks.

Russian markets have gone into a tailspin this week together with other emerging markets, prompting bourses to cease trading and authorities to pump billions of dollars into the banking system.
Russian oil firms have been selling oil at a loss in the past week as export duties, which are set with a two months lag, have been based on record high June global prices, which have slumped nearly 40 percent since then.

Finance Minister Alexei Kudrin said the government will reduce the oil export duty by 23 percent to $372 per tonne from October 1, down from the previously-announced $485.5 per tonne.
"This measure will allow oil companies to redirect funds toward covering liquidity shortages," Kudrin said.

Kudrin, who was speaking at a meeting with President Dmitry Medvedev, said the government had decided to change the usual procedure of setting oil duties because of the markets' turmoil.
"We will slightly diverge from the rules and will set export duty based on the monitoring of oil prices during the last 17 days of September -- from Sept. 1 to Sept. 17 -- and not during the last two months as we usually did," he said.

Russia usually sets oil and oil product export duties every two months based on a monitoring of international prices for the country's mainstay Urals crude blend.

Changes in duties usually lead to significant changes in Russia's oil flows as companies tend to send more crude abroad when they decline and refine more domestically when they rise.
A finance ministry official told Reuters that export duties on refined products would also fall for October-November and would amount to $263.1 per a tonne of light products and $141.7 per tonne on heavy products such as fuel oil.

The previously set duties for the period were $339.7 and $183, respectively.

Russian oil firms have long complained that they cannot invest in new fields and grow production due to extremely heavy taxation.

Oil tax reforms have become a hot topic. Comments by government officials about the need for cuts have often led to sharp stocks fluctuations.

Analysts said on Thursday the cut in duties could help restore confidence in oil stocks when the market reopens on Friday after a two day halt.

"Within the oil and gas sector we have tax payments coming up and anything that can partially offset that will be welcome," said Tom Mundy at Renaissance Capital.

Russia's market watchdog suspended trading on Wednesday morning after Russian indexes fell by over 20 percent since the start of the week.

"It will boost stocks of energy companies, which could help the equity market as a whole when it opens tomorrow," said Vladimir Osakovsky, analyst at UniCredit.

Russia should pass a law marking its territory in the disputed Arctic where it claims a large share of the mineral resources, Russian President Dmitry Medvedev said today.

Geologists believe valuable energy and mineral deposits lie below the Arctic seabed and it is only a matter of time before global warming melts the icecap making them accessible to miners.

"We must finalise and adopt a federal law on the southern border of Russia's Arctic zone," Medvedev told Russia's security council according to Interfax news agency.

"It is our duty to our direct descendents, we have to ensure the long-term national interests of Russia in the Arctic."

Last year a Russian mini-submarine dived to the seabed underneath the North Pole icecap and symbolically planted a Russian flag to claim the Arctic for the Kremlin.

International law states that the five countries which control Arctic coastline - Canada, Russia, the United States, Norway and Denmark - are allowed a 320 km (200 mile) economic zone north of their shores.

But countries have until May 2009 to submit new ownership claims over the Arctic to a United Nations commission.

Russia has claimed jurisdiction over much of the Arctic because an underwater ridge links Siberia to the seabed that runs underneath the North Pole.

Nigeria lost 280,000 barrels daily of its crude output to attacks launched by armed militants in the Niger Delta oil region in the past five days, bringing currently shut output to about one million barrels a day, the state-run oil company said.

"Current shut-in production stands at about one million barrels a day, but it's not necessarily due to militant attacks," Levi Ajuonuma, spokesman for the Nigerian National Petroleum Corp. said by phone from the country's capital, Abuja, today. "Only 28 percent (280,000 barrels) is because of militant action."

The state oil company, also known as NNPC, holds the majority stake in five joint ventures with oil majors that produce more than 90 percent of Nigeria's crude oil. Operators of the joint ventures include Royal Dutch Shell Plc, Exxon Mobil Corp., Chevron Corp., Total and Eni Spa.

The Movement for the Emancipation of the Niger Delta, the main militant group in the oil region, said it declared an "oil war" in the southern delta that accounts for nearly all of the country's oil after the military launched an offensive on Sept. 13 on its positions.

In the last five days the militant group, also known as MEND, has attacked pipelines and oil pumping stations run by the Nigerian units of Shell, Chevron and Eni.

In addition to output shut-ins caused by these attacks, Nigeria had accumulated shut-ins due to maintenance projects, leaking pipelines and previous violent disruptions, Ajuonuma said. Exxon Mobil, which has not experienced the recent attacks, has shut some of its production to carry out maintenance on its pipelines, he said.

'Closed for Maintenance'

"Some of the oil facilities attacked in recent days were already closed for maintenance," Ajuonuma said.

MEND says it's fighting on behalf of the inhabitants of the Niger Delta who have yet to share in the oil wealth of the region.

Nigeria has Africa's biggest hydrocarbon reserves, with more than 30 billion barrels of crude and 187 trillion cubic feet of gas and was the continent's biggest crude exporter in July and August, according to Bloomberg data. The West African country is the fifth-biggest source of U.S. oil imports.

Investors in Royal Dutch Shell and BP are facing increasing risks as a result of the companies’ involvements in Canada’s oil sands, fund managers and campaign groups will tell a meeting in London on Tuesday.

Environmental groups such as Greenpeace and the WWF, as well as some socially responsible investment funds including Co-operative Asset Management, are warning that developing the oil sands is not only environmentally damaging but also financially risky.

They argue it is increasingly likely that there will be a price put on carbon dioxide emissions in North America, threatening the economic viability of oil sands projects, which generally have much higher emissions than conventional oil developments.

James Marriott of Platform, another campaign group, says there is a “gathering storm” of concern over the financial risks of investing in the oil sands.

He said: “In the past we have said to investors, ‘The reason you should do this is because it is right’. Now we are beginning to see the wider investment community such as pension funds, saying ‘this is a problem for us’.”

Tuesday’s private meeting, organised by the UK Social Investment Forum, will be attended by about 60 people representing leading institutional investors.

Paul Monaghan of the Co-op, which urged the UKSIF to call the meeting, says the oil sands and oil shale – similar deposits where oil can be extracted from rock – will be its “number one campaign” and adds: “We are calling for a moratorium on new investment.”

Oil sands projects are already bedevilled by high costs because of shortages of labour and equipment. Last week, Total of France said its oil sands development in Canada required an oil price of almost $90 a barrel to achieve a 12.5 per cent rate of return.

The environmental groups argue that even those high estimates do not reflect the true long-term costs of oil sands production.

Oil is extracted from the sand either by being mined out and then mixed with hot water, or by being heated with steam piped underground so it can be pumped out. Either process uses a lot of water – although less in the steam-assisted method – and gas to provide heat.

After extraction, the oil has to be upgraded to what is known as syncrude, so it can be sent by pipeline to refineries, which in turn need to be configured to take the Canadian feedstock.

The energy used in the process means it has much higher emissions than conventional oil production. A report by Greenpeace and Platform, to be presented at the meeting, cites estimates that conventional oil production generates an average of 28.6kg of carbon dioxide per barrel, whereas oil sands production generates 80kg-135kg per barrel – almost five times as much.

With both John McCain and Barack Obama, the US presidential candidates, talking about setting a price on carbon dioxide emissions, and pressure for tighter emissions control both in Alberta and federally in Canada, environmental groups and some investors believe the high emissions from the oil sands could be a source of competitive disadvantage.

A group of British and American investors, including Calpers and Calstrs, the Californian public employees’ retirement funds, and F&C Management of the UK, has written to the US Securities and Exchange Commission urging it to push companies to disclose the potential liabilities created by their oil sands reserves.

In a letter to the SEC, the investors wrote that oil sands “could be subject to potentially enormous risks associated with their extraction and development, including litigation-related risks and higher carbon taxes”.

Mark Hoskin of Holden & Partners, an environmental investment fund with about £200m under management, says companies that do not recognise the threat of climate change, and the likelihood of action to combat it, are making poor strategic decisions.

He says: “It might not happen this year, or next year, or in the next five years. But at some point it is going to break, and Shell is going to have a share price shock”.

The companies reject the charge that they are ignoring the financial consequences of carbon dioxide emissions from the oil sands.

Shell says the total emissions from oil from Alberta, including its use by the customer, are only 15 per cent higher than conventional oil, and adds that fuel produced from many conventional oil fields could have similar total emissions to fuel from oil sands.

BP says it is using a carbon price assumption in its planning, although it will not say at what level. Its Sunrise joint venture with Husky Energy has not yet been given final investment approval.

The most forceful argument from the oil companies, however, is that the world will need the oil that Alberta will produce.

Total, the French oil company, said on Thursday that oil prices had slipped to within sight of the threshold below which some of its most expensive projects will no longer be commercially viable.

Total’s extra heavy oil sands project in Canada requires an oil price of just below $90 a barrel to achieve a 12.5 per cent internal rate of return, while Total’s developments in the deep waters off Angola need about $70 a barrel, the company revealed in a mid-year presentation. International oil prices on Thursday traded at $102.10 on the New York Mercantile Exchange.

Chistophe de Margerie, Total’s chief executive, warned there was no space for a windfall tax: “It’s true that at $140 a barrel [oil prices] some people might consider there could be room for [windfall] taxes.”

He said that whatever the price, taxes were not a solution, but noted: “At $100 a barrel we need the money to train people and develop new energies, new discoveries, renewable energy and to tackle climate change.”

However, Richard Lines, head of petroleum economics at Wood Mackenzie, the industry consultants, said companies were making the same internal rate of return on big, capital intensive projects at $100 a barrel as they were four to five years ago at $40 because costs had risen so dramatically and fiscal terms deteriorated.

Mr de Margerie said: “It is our [challenge] to go into areas to spend money where there are concerns about climate change.”

He noted many oil fields that are cheaper and less environmentally damaging to tap were becoming off limits to international oil companies because countries wanted to develop them on their own or leave them for future generations.

That lack of access has driven Total, and many of the world’s biggest energy groups, into the Alberta oil sands, a mining operation requiring large amounts of energy and water.

Total and its peers are unlikely to abandon it because of a short-term drop in the oil price but Mr Lines notes that the final investment decisions in Alberta over the next two to three years would be made more difficult at current oil prices.

In fact, the number of developments worldwide given the go-ahead has shrunk as costs have risen, he said. “Few projects have been given final investment decisions over the last two to three years because their economics have been so marginal and the overall risks have gone up,” adding this would impact the amount of oil supply in the market.

NEW YORK (UPI) -- U.S. scientists say they've determined curbing carbon dioxide emissions from coal might avert climate danger.

Researchers at Columbia University's Earth Institute said the continuing rise in the planet's atmospheric CO2 levels resulting from burning fossil fuels might be kept below harmful levels if emissions from coal are phased out within the next few decades.

The researchers, including James Hansen of the U.S. space agency's Goddard Institute for Space Studies and climatologist Pushker Kharecha, said the burning of fossil fuels has accounted for about 80 percent of the rise of atmospheric CO2 since the pre-industrial era, to its current level of 385 parts per million.

"This is the first paper that explicitly melds the two vital issues of global peak oil production and human-induced climate change," Kharecha said. "We found that because coal is much more plentiful than oil or gas, reducing coal emissions is absolutely essential to avoid dangerous climate change."

The scientists report their research in the journal Global Biogeochemical Cycles. Kharecha is also author of a related article, "How Will the End of Cheap Oil Affect Future Global Climate?"

View full report        View summary

Despite the economic downturn and rising prices, global energy demand continues to rise; so do carbon emissions.

In 2008 the world will use 50 per cent more oil, gas and coal than in 1980. Emissions from fossil fuels will be 30 per cent higher than in 1990 – the baseline for the Kyoto targets. The atmospheric concentration of carbon is now 387 parts per million – against 280ppm before the industrial revolution. On current trends the figure will pass 400ppm within a decade and will be more than 450ppm by 2050.

Climate change can seem so complex and global that action by any one country or individual can seem futile. In reality, however, much can be done using known and proven technology. Energy use could be cut by at least 20 per cent by matching Japanese standards of efficiency. Deforestation could be limited or reversed. Proven technologies such as wind, solar and systems to convert waste into power could be deployed. Beyond the proven, we could invest to make those alternatives cheaper and explore ambitious longer-term options: for example, large-scale solar generation in the Sahara, combined with a pan-European direct current (DC) transmission grid.

None of these possibilities, however, will provide sufficient energy in time to forestall the increasing use of hydrocarbons. Today, oil, coal and natural gas provide more than 80 per cent of world demand. On business-as-usual projections that percentage will be un­changed in 2030. That means volumes will increase by about 50 per cent with a comparable growth in emissions. Today, renewables supply just 1 per cent of global demand. Even a tenfold increase would leave carbon emissions growing.

In reality our dependence on fossil fuels is likely to persist until 2050. There seems no way to curtail the serious risk of long-term global warming unless – well before 2050 – we capture much of the carbon emitted when fossil fuels are burnt. The technology is available. Carbon capture and storage (CCS) extracts and buries the carbon from any hydrocarbon source rather than allowing emissions to enter the atmosphere.

Small-scale projects have shown that the technology works but we now need between 10 and 20 full-scale demonstration plants to identify the most effective techniques and the most secure storage options. The Group of Eight leading industrialised nations and the European Union have endorsed this approach but very little is happening – certainly nothing with the urgency that the challenge demands.

Each plant will cost an estimated €1bn ($1.4bn) – not a trivial sum, but a fraction of the €40bn spent each year by the EU on agricultural support and the €200bn spent by European governments on defence.

It is time for Europe’s leading economies to initiate the demonstration process as part of their commitment to serious action on climate change. For the UK the opportunity and the challenge are immediate. The decision to proceed with a new coal-fired power station at Kingsnorth should be accompanied by a decision to begin work immediately on a CCS demonstration plant in Britain. Kingsnorth’s licence to operate should be limited to 10 years and extended only if CCS technology is deployed.

Climate change is no longer a remote long-term possibility but a present reality – all too visibly demonstrated by the melting of Arctic sea ice. If emissions rise unchecked, temperatures may rise by significantly more than the 2°C that is now almost universally viewed as inevitable.

There is substantial uncertainty about the sensitivity of temperature to the level of carbon concentration. Climate models can, however, assess the likely range. We should be most worried by the high-end tail of the probability distribution – the risk of a really drastic climate shift. A 2- or even 3-degree increase might seem manage­able but we should remember that the shift in temperature from the depths of the last ice age to the present day has been just 5 degrees. Any increase that comes will also be far from uniform. The land warms more than the sea; higher latitudes more than the low. In areas such as the Arctic, any change can have untold, self-reinforcing effects. The average numbers tend to gloss over these truths.

The risks are great and probably greater than we realise. Most importantly, they are risks we need not take.

Lord Rees is president of the Royal Soc­iety. Nick Butler chairs the Centre for Energy Studies at the Cambridge Judge Business School

Securing the country's supply of electricity is more important than tackling climate change, a new report from energy analysts has claimed. It warned that the UK's economy could be wrecked if there was no action to plug the energy shortfall predicted for the next decade, with businesses going bust and hundreds of thousands of people losing their jobs.

But the report, led by Ian Fells, emeritus professor at the University of Newcastle and a veteran energy policy analyst, has been dismissed as "naive" by Greenpeace, and "overstated" by the energy secretary John Hutton. Environmentalists argued that the report's recommendation for new coal-fired power stations went against the advice of scientists and that the rest of the world was forging ahead with renewables.

The report said the government had to consider extending the lifespan of the UK's ageing coal and nuclear power stations to meet the impending shortage. Otherwise, Fells warned, the UK would be be hit by repeated power cuts that would shut down public transport, reduce hospital services and cause chaos in supermarkets and offices. "Electricity is the life blood of civilisation. Without it we spiral down into anarchy and chaos."

Fells criticised proposed renewable energy schemes as being too optimistic in their promises and highlighted a long-term need for new nuclear power stations and coal-fired stations that were ready to fit carbon-capture technology to maintain future energy security in the UK.

The impending energy gap will be caused by the closure of the UK's ageing nuclear and coal-fired power stations over the next decade. The report estimates the UK will lose a third of electricity generating capacity in this time. Candida Whitmill, a co-author of the report, said: "Nuclear will not be ready, renewables will not be able to cope. Gas is getting politically and geographically dangerous to rely upon. Security of supply must take priority over everything including climate change."

Fells said the situation was like "watching a slow-motion train crash" because government plans to plug the energy shortfall, such as rolling out huge wind farms, were impractical and filled with wishful thinking. Successive governments, said Fells, had failed to come up with any solutions and criticised the current UK energy policy as "not fit for purpose", warning that there could be severe consequences for the economy. "We had a power cut in 2003 for about 12 hours in the City of London – the consequential loss was about £700m because everything stops. All your IT stops, the stock market doesn't work."

Fells, who has long been a proponent of nuclear power, said that the upcoming crisis required some "unpalatable" short-term fixes. "We will have to keep current nuclear power stations going long past their sell-by date. We will probably have to keep coal-fired stations that are coming to the end of their life. And that's no good for the environment." He also advocated building new gas-fired power stations that could be built quickly to shore up the supply and said that the controversial coal-fired plant at Kingsnorth in Kent would also be needed, though he said this should be made ready to fit technology to capture carbon dioxide and store it underground.

Greenpeace chief Scientist Doug Parr criticised Fells' report for its "long standing love affair with the technologies of the 20th century, but as time goes by [Fells'] fetish for coal and nuclear power looks increasingly naïve. All over the world jobs are being created in the renewable energy sector, but Britain has been left behind for too long by the negative, white flag approach to climate change that this report represents. By proposing projects such as new coal fired power stations and the large scale conversion of coal to liquid fuel for use in aeroplanes, Fells has finally lost the backing of the scientific community."

Responding to the report, energy secretary John Hutton said: "Ensuring we have enough clean and secure energy is a national priority and fundamental to our future existence and prosperity. Ian Fells overstates the risk of the energy gap, but he also understates what the government's already doing to secure our future supplies and increase our energy independence - such as a tenfold increase in renewables, a renaissance of nuclear energy in the UK, and backing clean coal technology."

He added: "That's not to underestimate the task we've got on our hands. Securing future energy supplies for the UK is a matter of national security and so we're not going to rule out any radical options. That's why we keep our energy infrastructure under constant review, and will continue to take the tough decisions needed to ensure that we have reliable energy supplies in the decades ahead."

Fells' report also suggested laying transmission lines to Norway, Germany and Denmark and also an additional line to France. "That would mean we were properly connected up to Europe. That would add a great deal of comfort and security, provided there was someone there to make decisions." Greenpeace have backed a similar North Sea grid proposal.

Over the longer term, Fells wants the UK to build more nuclear power stations and also give the go-ahead for the Severn Barrage, a tidal generation system that could produce up to 5% of the UK's electricity needs. He defended his point that energy security was more important than climate change: "You can't go on doing all the right things environmentally speaking if the whole of your system has crashed - it's more important."

Google and General Electric on Wednesday announced an unusual alliance to promote greater use of renewable energy in the US.

The internet and manufacturing groups said they would combine some of their lobbying muscle in Washington and co-operate on technology projects where GE’s engineering and Google’s software could advance the use of renewables.

The alliance reflects a shared view that sources of renewable energy such as wind and solar power could quickly be used to meet a significant proportion of national energy demand.

“Clean energy is eminently doable, eminently solvable,” said Jeff Immelt, chief executive of GE.

Under Mr Immelt, GE set out three years ago to promote new “clean” technologies, under an initiative dubbed “Ecomagination”.

Mr Immelt acknowledged that the effort had drawn scepticism and suspicion from some quarters, particularly given GE’s involvement in many old, contaminated industrial locations.

But he said that sales of products and services that fell under the initiative had risen to $18bn a year, up from $4bn-$5bn at its launch.

Although less central to its current business, Google has been involved in a number of clean energy initiatives, from helping to launch a tech industry body to promote more energy-efficient data centres to commissioning the largest private US solar power system for its Silicon Valley headquarters and investing in alternative energy start-ups.

The companies said that the first fruits of the alliance would involve joint lobbying in Washington to promote an expansion of the US electricity transmission infrastructure to draw on more renewable energy sources.

They will also lobby jointly for the use of more information technology in the national electricity grid to enhance its efficiency, creating something known as a “smart grid”.

At a technology level, the companies said they would work together on projects to develop geothermal sources of energy and to optimise the use of electricity grids for plug-in electric vehicles.

The joint effort appeared to be timed to catch a new political direction in Washington, with both presidential candidates promoting greater investment in renewable energy technologies.

“There’s no such thing as a free market,” said Mr Immelt. “It needs a little catalyst for the government to say, ‘This is what we would like to see done,’ then the entrepreneurial dollars will flow to that.”

Mr Immelt stopped short of calling for extra financial incentives to foster renewable energy, but said there was a need for existing investment tax credits that expire at the end of this year to be renewed for a longer period.

The persistent uncertainty around the tax incentives, “causes immense volatility around the supply chain that makes the costs go up”, the GE boss said.

On the beautiful Kona Coast of Hawaii's Big Island, Europe's biggest oil company is building six acres of ponds to be filled with green goo.

Royal Dutch Shell is betting that in the next decade it will be selling commercially significant volumes of oil squeezed out of algae.

Of all the exotic processes proposed for creating the transport fuel of the future, producing biodiesel from algae is the most appealing.

Unlike crops such as corn used for conventional biofuels, algae do not need fresh water or agricultural land, and so need not compete with food supplies.

Algae ponds could yield 10 times as much oil per hectare as jatropha plants, which can also be grown on land not suitable for food crops. Algae can also be used to capture carbon dioxide produced by burning fossil fuels, offering even greater savings of greenhouse gas emissions.

In concept, then, the use of algae is exciting. The problem is in the execution.

Graeme Sweeney, Shell's head of future fuels, is under no illusions about the imminent commercial viability of oil from algae.

"The timetable for achieving that is about 2015 or so for significant production," he says. "We are looking at five to 10 years or so."

The potential for using the oil content of algae for fuel was explored by the US government in a research project launched in 1976, but the project was shut down 20 years later with the cost of oil production remaining stubbornly high.

In 1996, conventional crude oil was on its way down to $10 a barrel. With crude at $100, the economics look rather different, but not different enough to make algae-based fuel look imminently viable.

Shell's research programme involves work both in the six-acre ponds and in the laboratory to tackle issues such as maximising the oil yield from the algae.

"It is about learning what the key constraints in project design are," Mr Sweeney says. "The research plant will provide insights into what we need to do to get costs down; it is the scale-up potential that creates the cost reduction."

A full-scale facility would cover 50,000 acres, but Shell will move to that only if the initial pilot plant and then a 2,500-acre demonstration plant perform to expectations. So far, progress has been good, Mr Sweeney says.

Hawaii was the centre of the US government's two-decade research effort, and the university has an algae collection that US government scientists described in the 1990s as an "untapped resource". Several of the scientists at HR Biopetroleum, Shell's partner in its algae venture, have links to the university.

Scientific expertise is no guarantee of commercial success, however. Shell has been working since 2002 on a joint venture with Iogen, a Canadian biotech company, to produce cellulosic ethanol from plant waste, but has still not committed to building a commercial-scale plant.

Mr Sweeney argues that to support the development of advanced biofuels such as biodiesel from algae and cellolosic ethanol, government policies need to favour the more advanced biofuels.

The impact on greenhouse gas emissions and food supplies is generally likely to be better for "second-generation" biofuels.

"It is important that the system rewards carbon dioxide emissions savings," Mr Sweeney says. "We all have to work together to get sustainability criteria agreed in the important markets."

Even with those incentives, however, he accepts that growth in second-generation biofuels will be slow.

"However you look at this, through the five-year period, these kinds of fuels will not be available in large volumes," he says.

For anyone who thought Gulf economies had successfully weaved and bobbed to avoid the impact of the credit crunch this past year, it landed last week like a haymaker punch to destroy that notion.

The oil-fuelled feeling of economic invincibility has been shaken by the events of the last week. In its place is a new mood of caution that has been reinforced by the stream of bad news emerging from the US.

The collapse of Lehman Brothers and the move by the US government to take control of AIG so as to avoid a similar fate for the country's biggest insurer, has led to a seismic shift on Wall Street. Now we're feeling the aftershocks in the Gulf.

Dubai's Financial Market finished down on five consecutive trading sessions losing 12 percent along the way last week.

In Qatar, it was a similar story - five sessions in negative territory and down 12 percent. Oman and Saudi Arabia also declined by the same measure.

Despite the publication of broker notes highlighting the value of many of the region's benchmark stocks early on in the week, the sell-off continued.

The exodus of foreign investors from Gulf markets has left a bitter taste in the mouths of some of their local counterparts, who point to the departure of the foreigners as the main reason for the volatility of many stocks in recent weeks.

Once feted as bringing much-needed liquidity to the region's bourses, the foreigners are no longer flavour of the month in the Middle East.

"They're selling our markets like they always do when something like this happens," said one trader on the DFM on the morning after the news of the Lehman Brothers collapse broke last week.

While the regional equity markets have seen foreign capital hemorrhaging since the start of the year, of greater concern has been the sudden and more recent contraction of the debt markets.

Across the region, the cost of protecting government bonds from defaulting is rising, and what was perceived as a bottomless reservoir of debt options may be drying up.

Analysts interviewed this week expect regional debt markets to contract further this year, which could impact severely on the ongoing building boom.

It's particularly bad news for real estate developers, whose business model often relies on frequent recycling of debt.

Next month the region's real estate majors will gather for the industry's annual Cityscape jamboree.

Every year, the project plans unveiled at the show get bigger and bolder than the year before - as increasingly ambitious developments are revealed.

Some of them make it off the drawing board and some of them don't.

The balsa wood models are likely to be in copious supply this year as they are every year - but perhaps less so will be the funds needed to turn them into real buildings.

Sean Cronin is the editor-in-chief of Arabian Business English.

The global financial chaos as well as the fallout from the Kremlin's war in the Caucasus have combined to plunge Russia's markets into financial turmoil.

Russia's supposed immunity to the global financial downturn was definitively over today as trading was suspended on Russian stock exchanges for a second day running amid record falls.

Analysts attributed the plummet in share prices to the international economic situation but said that the Russian war in Georgia last month had affected confidence in the country among Western investors.

The government today announced an increased lending package to the country's three biggest banks, with the hope of inducing a knock-on effect of stability.

The rouble-denominated Micex stock exchange had its biggest ever single-day fall since Russia's 1998 crisis yesterday, falling 17 per cent in a single day, and the dollar stock exchange hit a two-year low and continued falling. Chaos on Wall Street and falling oil prices have compounded Russia's problems, as investors begin to doubt the solidity of Russia's economy, which is based largely on energy and commodity exports.

Some analysts downplayed the severity of the crisis and said that the crisis was not likely to affect ordinary Russians in the way that the credit crunch is being felt in Western countries. "I still expect overall GDP growth of 6-7 per cent this year, and no full-fledged credit crunch," said Yaroslav Lissovolik, chief economist at Deutsche Bank in Moscow. "This is very different from 1998, because Russia has built up substantial fiscal and monetary reserves over the past eight years."

In 1998, the Russian economy defaulted, plunging the country into economic crisis and sending foreign investors fleeing. But during the reign of Mr Putin, soaring global oil prices meant that Russia was able to amass a vast "stabilisation fund" of reserves to protect the economy from fluctuating commodity prices. Finance Minister Alexei Kudrin yesterday said that the crisis was not yet serious enough to start using funds from the stabilisation fund, but analysts expect the government to do so soon.

"Fundamentally, Russia still represents an attractive destination for foreign investors; its case is still strong," said Mr Lissovolik.

But several deals have already been postponed or cancelled, including the initial public offerings (IPOs) of Russian companies in London and acquisitions of Russian assets by Western companies. Some say that, in a situation where investors are running scared and less likely to accept risk, Russian government actions over the past few months are likely to scare people off.

Back in July, Prime Minister Vladimir Putin criticised mining firm Mechel for selling coal cheaper abroad than on the domestic market. Referring to the company's CEO, who had been taken ill, Mr Putin advised him to get better soon, "or we will have to send him a doctor and clean up all the problems". Mr Putin's remarks were seen as a sign that the state was still prepared to intervene to pressure or destroy companies, and brought back memories of the Yukos saga. The company's value immediately fell by $5 billion.

A protracted dispute between British Petroleum and its Russian partners in the joint venture TNK-BP, its Russian joint venture, as well as the war in Georgia, have led to further doubts about Russia among international investors. The stock market losses may soon be corrected, say analysts, and the government can help improve the liquidity crisis by increasing lending, but investor confidence could take longer to win back.

President Dmitry Medvedev last week said that 75% of Russia's economic woes were due to the international situation, while 25 per cent were due to internal factors, including the crisis in the Caucasus. Mr Putin, however, said last week that the US crisis had led investors to withdraw speculative capital, and that the downturn had little to do with Russia's invasion of Georgia.

"Putin's comments on Mechel made the initial impact, then after Georgia everyone started pulling out of the stock markets," said a British lawyer working in Moscow who has seen deals cancelled and business dry up over the past few weeks. "Add in to the mix that energy and commodity stocks have been falling worldwide on fears of a worldwide recession and you have a fairly bleak picture. If Putin knew how to behave, the crisis would be a lot less serious, as investors had until very recently seen Russia as a good place to weather the global economic storm."

LONDON (Reuters) - The head of the International Energy Agency said on Wednesday there was a risk of global recession if oil prices stayed around the current level and hurt emerging economies.

Nobuo Tanaka, head of the agency which advises 27 industrialized countries, also said the supply and demand balance in the oil market is tight, leaving consumers vulnerable to a fresh surge in prices.

"If it continues, this level of price, there is a risk of recession," Tanaka told Reuters in an interview.

"It very much depends what will happen if high prices affect the emerging economies, China, India and the Middle East. Still their growth is very robust, so we don't see any indication of slowing down."

Oil has fallen to around $93 a barrel from a record high of $147.27 on July 11, partly due to weak demand in the United States, the world's top oil consumer, and other developed economies.

The drop accelerated this week because of financial market turmoil following the collapse of U.S. investment bank Lehman Brothers.

Tanaka said that oil could easily head higher once again.

"The market is tight. Prices are very volatile with hurricanes, accidents, shutdowns. The price could easily spike."

The IEA has yet to decide whether the impact of Hurricane Ike on U.S. oil and gas output warrants a release of oil from its strategic reserves.

"We don't have enough information," Tanaka said. "We are fully assessing the situation."

"We are very much ready to move ahead if necessary."

IEA member-countries hold emergency oil stocks for use in case of supply shocks. They were last tapped in 2005 after Hurricane Katrina caused major disruption in the Gulf of Mexico.

The Organization of the Petroleum Exporting Countries responded to lower prices last week by agreeing to comply with its output targets, a move that would cut supply by about 500,000 barrels per day.

But the IEA urged the producer group, source of 40 percent of the world's oil, not to make any cutbacks.

"We sincerely hope producers will continue the current level of production," Tanaka said.

Goldman Sachs Group Inc. slashed its forecast for crude oil prices in New York, saying the market has ``overshot to the downside'' because of concern the global credit crisis may lead to weaker demand.

The most profitable U.S. securities firm cut its three-month benchmark West Texas Intermediate crude oil estimate to $115 a barrel from $149, and its six-month target to $125 from $142. Current prices present ``compelling buying opportunities,'' Goldman said.

``We will stand by our bullish view on oil but just think it will now take longer to get to our previous price targets,'' Goldman analysts, led by Jeffrey Currie, said in a Sept. 16 report. ``The supply side of the market still remains severely constrained.''

Lehman Brothers Holdings Inc.'s bankruptcy and the U.S. government takeover of American International Group Inc. have roiled financial markets, raising concern global economic growth will slow. Crude oil futures have fallen 36 percent from the record $147.27 a barrel reached on July 11.

Goldman lowered its 2009 average oil price forecast to $123 a barrel from $148. Until now, Goldman had the highest WTI forecasts for 2009 among 35 analysts' estimates compiled by Bloomberg.

Hurricane Disruption

Oil could fall as low as $75 a barrel should a global recession takes place, and could jump a much as $15 above Goldman's targets because of shortages after plants restart from hurricane shutdowns, the securities firm said.

Goldman said oil will rebound in the fourth quarter because of strong demand as U.S. refineries restart operations, speculators return to the market, OPEC cuts output and China purchases more crude after running down stockpiles.

Hurricanes Gustav and Ike disrupted oil field operations and refinery production this month. The Organization of Petroleum Exporting Countries agreed at its Sept. 9 meeting in Vienna to stick to its limit for 11 members of 28.8 million barrels a day, about 500,000 barrels a day lower than the group's July output.

Crude oil in New York rose today, snapping its worst two-day decline in almost four years. Oil for October delivery gained as much as $3.57 a barrel, or 3.9 percent, to $94.72 a barrel. Prices were at $94.12 at 2:31 p.m. Singapore time.

We received a petition asking:

“We the undersigned petition the Prime Minister to undertake a reassessment of UK Energy Supplies, in particular evaluate the risk of an imminent peak or plateau in global oil production.”

Details of Petition:

“The Government considers that the world’s oil and gas resources are sufficient to sustain economic growth for the foreseeable future. One question is how long is the forseeable future, but many experts now agree that global oil production is likely to plateau and peak within the next 5 years. Furthermore, a significant number of senior figures in the oil industry anticipate an imminent ceiling on oil production and the International Energy Agency expects a Supply Crunch before 2012. Despite this and unlike several other countries, the UK has published no study into the availability of future oil and gas supplies. Indeed the Energy White Paper still expects UK oil consumption to rise in the medium term. This petition highlights the need for a major reappraisal by UKG given increasing concerns about the reliability of world reserve data and declining production from 64 of the 98 oil-producing countries.” 

The Government’s assessment is that the world’s oil resources are sufficient to prevent global total oil production peaking in the foreseeable future.  This is consistent with the assessment made by the International Energy Agency (IEA) in its recent 2007 World Energy Outlook (WEO), which concludes that proven reserves are already larger than the cumulative production needed to meet rising demand until at least 2030.

The UK Government is working to secure the country’s future energy supply and is committed to encouraging the dialogue with oil producing countries to discuss international oil markets and to promote free, transparent and open oil markets.  We are working to deliver safe, secure and sustainable energy supplies and ultimately a low-carbon economy. 

The Department for Business Enterprise and Regulatory Reform (BERR) produces several publications annually, such as the Energy Markets Outlook (EMO), which assess the security and current trends of UK energy supply.  HM Treasury published an analytical document to inform the G8 Finance Ministers meeting held in Japan on 13-14 June 2008. It outlines the Government’s analysis behind recent price increases in oil and other commodities and sets out the United Kingdom’s vision for how the international community can work together to ensure efficient and effective global commodity markets.  This document can be accessed from: http://www.hm-treasury.gov.uk/media/C/A/globalcommodities_190608.pdf.

Internationally, at the G8 Energy Ministers’ Meeting in Japan on 8 June 2008, a comprehensive Plan of Action covering energy technologies, energy efficiency and R&D networks, among many other initiatives was agreed.  At the Jeddah Energy Meeting on 22 June 2008, all participants called for the IEA, OPEC and IEF Secretariat to collaborate immediately and produce shared analysis on these issues in order to better understand the market situation and establish a common understanding of the drivers of oil prices and the likely future demand and supply trends.  Through the Prime Minister’s Global Energy Initiative the UK is supporting this work and has committed to hosting a major follow-up conference in London in December aimed at enhancing the dialogue between consumers and producers of oil.

More information on the work undertaken to ensure the UK’s energy supplies can be found at: http://www.berr.gov.uk/energy/index.html.

Negotiations over the sale of British Energy (BE) to EdF remain deadlocked over disagreements about price with the French nuclear power company refusing to make a significant improvement to its £12bn offer.

Despite hopes of a deal being agreed this week, the protracted talks look like going into next week and denying Business and Enterprise Secretary John Hutton an announcement ahead of the forthcoming Labour Party conference.

At a meeting today with senior executives from power companies, Mr Hutton was due to warn that Britain must start building new reactors or risk losing out on investment and skills to nuclear programmes under way in America and China.

For Mr Hutton, a key part of Britain's nuclear future is for EdF, the world's largest nuclear power producer, to buy BE and its ageing reactors, and begin a new-build programme. The Government, which holds 35pc of BE, backs EdF's offer, but other key shareholders are holding out for more.

EdF, whose board met in Paris yesterday, is understood to have agreed a "minimal tweak" to its offer of either 765p a share cash, or 700p plus a slice of future profits under a so-called contingent value rights (CVR) deal.

Both the cash and CVR offers have been improved slightly, but are still nowhere near the 800p-plus wanted by some shareholders. EdF believes the falling oil price makes its offer even more attractive. The French company is also worried about the spiralling construction costs of new reactors.

Some analysts agree that BE shares are worth little more than what EdF has offered. Ingo Becker, at Landsbanki Kepler, said yesterday that BE is worth no more than 777p a share in a takeover. He added that "soaring build costs and potential shortages in both equipment and engineers" make a higher bid risky.

Mr Hutton will try to convince power chiefs today that the Government backs nuclear new-build as a matter of urgency. In comments ahead of the meeting, Mr Hutton said: "I'm determined to press all the buttons to get nuclear built in this country - not only because it's a no-brainer for our energy security, but also because it's good for jobs."

He is considering state aid towards a £120m-£150m investment by Sheffield Forgemasters in a giant steel press to make reactors. The company is one of only about five in the world capable of making the huge structures.

Britain is trying to weaken European proposals to make governments and companies cut their carbon emissions by 2020 to tackle global warming, the Guardian has learned. Leaked documents show Britain wants Brussels to offset more domestic carbon savings through investment in clean projects in the developing world.

The move would let firms and countries import more carbon credits to count against their pollution targets. It would allow Europe to make less effort to cut its pollution, while keeping it on course to meet an ambitious target of reducing carbon emissions by 20% by 2020.

The government's own calculations show the proposed change would allow Europe to emit an extra billion tonnes of CO2 from 2013-2020.

The move was condemned last night by environment campaigners, who accused the UK of trying to undermine efforts to get European industry to reduce emissions.

Caroline Lucas, MEP and leader of the Green party, said: "The British government is trying to buy its way out of climate change targets using unreliable credits from abroad. It shows how much of the political talk on climate is empty rhetoric, when you have the UK talking up the need for action on one hand, and carrying out this kind of irresponsible climate vandalism on the other."

The change is described in a discussion paper prepared by the UK on possible amendments to the EU climate and energy package, a copy of which has been obtained by the Guardian. Dated August 8, the paper says: "There are many good reasons why we should support increased access to project credits," and says the contribution of credits from schemes such as the UN's clean development mechanism (CDM) should be "limited to 50% of absolute effort".

In other words, it wants to allow half of the targeted carbon savings to be achieved through imported credits. The original EC proposal set the limit at about a quarter.

The UK position is confirmed in a separate briefing note sent to MEPs earlier this month.

The credits would be bought using the CDM or similar carbon markets set up under the Kyoto protocol.

Projects in the developing world that save carbon, such as technology to generate electricity from renewable sources, generate carbon credits, can then be bought by companies and used to notionally reduce their own emissions.

Campaigners say the carbon credits are often unreliable and are no substitute for direct reductions. A US report earlier this year claimed between a third and two thirds of CDM credits did not reflect genuine carbon savings.

Keith Allott of WWF said: "Europe has a responsibility to help developing countries move onto a low-carbon pathway, but this cannot come at the expense of high emissions at home. We need to move beyond the idea of offset Europe."

The proposal is the latest UK attempt to weaken the EC environmental package, which faces critical votes in Brussels next month. In July, the Guardian revealed how Britain wanted to block attempts to give renewable electricity sources priority access to electricity grids. The UK has also targeted the pledge to generate 20% of EU energy from renewable sources, with an attempt to make the target voluntary and to count projects abroad.

Dearer energy bills sent Britain's annual inflation rate to a 16-year-high of 4.7% last month but Bank of England Governor Mervyn King said inflation was close to peaking because of tumbling oil prices.

The increase from 4.4% in July leaves inflation at more than double the government's 2% target and forced King to write an explanatory letter to Alistair Darling today.

In that letter King said inflation would soon peak at around 5% and then fall back, although he cautioned it could remain above 2% - the Bank's government-set target - until well into 2009 because of the recent fall in the pound's value which could push up import prices. That meant, he added, that he would be writing further letters at three-monthly intervals to the chancellor.

He said that the recent weakness in the economy, which is likely to continue well into next year, would help dampen wage pressures and prices. "As a result the monetary policy committee still expects inflation to fall back sharply in 2009 and to fall back to target thereafter," King wrote.

Despite the recent fall in crude oil prices, the ONS said that past increases in the cost of energy had pushed up household gas and electricity bills, adding 0.3 points to the inflation rate as measured by the consumer prices index.

Food prices also added to inflationary pressure last month, but these were offset by cheaper petrol as garages cut prices in response to the cost of crude oil coming down on global markets.

And oil prices continued to fall today, with US light crude futures shedding a further $4 a barrel to trade at a seven-month low of $92.50 a barrel, 37% down over the past three months. That is likely to push prices at the pump further down.

The ONS said that last month's inflation rate was the highest since the series officially started in 1997, but using historical data officials calculated it was the highest since April 1992.

CPI inflation has more than doubled since the start of the year, when it stood at 2.2%, and has been above the government's target in every month since May. While the Bank expects price pressure to abate sharply in 2009, its nine-strong monetary policy committee has been reluctant to cut interest rates while the cost of living has been rising.

The ONS reported that the so-called core measure of inflation - which strips out housing, energy and food prices, had continued to rise and now stood at 2%.

James Knightley, economist at ING, said: "The fact that the core rate rose to 2% shows that inflation is no longer just concentrated in food and energy, which will cause some concern at the Bank. Indeed, with household inflation expectations at an all-time high the Bank is likely to remain concerned about the potential for second round price effects. This suggests to us that we will need to see a marked deterioration in financial market conditions to get a near-term rate cut."

The City had been expecting CPI inflation to rise to 4.6% this month, but most analysts believe that falling oil prices will leave the Bank scope to cut rates later this year. Other measures of inflation showed a more encouraging trend last month, the ONS said. The headline retail prices index - the benchmark for most pay deals - slipped from 5% to 4.9%, while the RPI excluding mortgage interest payments - edged down from 5.3% to 5.2%.