The world economy will witness a $2,000bn shift in wealth and power from oil-consuming countries to members of the Organisation of the Petroleum Exporting Countries as oil prices rise to $200 a barrel by 2030.

That stark assessment will be made next week by the International Energy Agency, the western countries' energy watchdog, which will also warn that oil prices could rise even further because national oil companies in oil-rich countries are likely to delay investment decisions.

The IEA's flagship World Energy Outlook annual report does not map the impact of the surge in Opec's revenues.

But the jump is likely to have profound implications for equity, foreign exchange, fixed income and commodities markets as the cartel recycles its petrodollars.

The IEA says that Opec oil reserves are big and cheap enough to increase production and cap oil prices, but it warns: "Investment by these countries is assumed to be constrained by several factors, including conservative depletion policies and geopolitics.

"There remains a real risk that underinvestment [bet-ween now and 2015] will cause an oil supply crunch" the report states.

The projected near-tripling of Opec's revenue to $2,000bn by 2030 from last year's $700bn comes on the back of significantly increased oil price assumptions.

In its report, the IEA sees oil prices reaching $200 by 2030, almost doubling last year's forecast of $108 by the same year.

The report suggests that current oil prices - below $70 a barrel and less than half their peak summer level - are a temporary effect of the economic crisis.

It says that in the future the world will face "persistently high levels of consumer spending on oil".

"While market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over," the IEA says in the executive summary of the report, to be published next week.

In the short term, however, prices are likely to remain highly volatile.

"A worsening of the current financial crisis would most likely depress economic activity and, therefore, oil demand, exerting downward pressure on prices," the report states.

But it adds: "Beyond 2015, we assume that rising marginal costs of supply exert upward pressure on prices through to the end of the projection period [2030]."

The Financial Times obtained a copy of the report's 13-page long executive summary, which was drafted only a few days ago, and was not under embargo.

The IEA declined to comment.

Oil prices hit an all-time high of $147.27 a barrel in July, but since then have fallen back to $60-$70 a barrel as consumption has weakened.

West Texas Intermediate crude oil, the US benchmark, yesterday fell $4.30 to $66.22.

In its report, the IEA assumes a rebound from today's levels, expecting oil to trade, in real terms adjusted by inflation, at an average of more than $100 a barrel from 2008 to 2015.

By 2030, prices will be more than $200 a barrel, or more than $120 when adjusted for inflation.

"These [price] assumptions point to persistently high levels of consumer spending on oil in both OECD [Organisation for Economic Cooperation and Development] and non-OECD countries," the IEA report says.

Over the next 22 years, consuming countries will devote 5 per cent to 7 per cent of their gross domestic products to pay for their oil, up from 4 per cent in 2007.

This will have "serious adverse implications for the economies of consuming countries".

"The only time the world has ever spent so much of its income on oil was in the early 1980s, when it exceeded 6 per cent," the report says. In 1998, when oil traded just above $10 a barrel, the world spent just 1 per cent of its GDP on oil.

The much higher oil price assumptions, on top of concerns about climate change and the daunting challenge of investing enough in new production, prompt the IEA to warn that the "current global trends in energy supply and consumption are patently unsustainable - environmentally, economically, socially".

"The surge in prices in recent years culminating in the price spike of 2008, coupled with much greater short-term price volatility, have highlighted just how sensitive prices are to short-term market imbalances," the report adds.

"They have also alerted people to the ultimately finite nature of oil and natural gas resources."

The steep rise in oil prices over the next 20 years, on top of rising production, will trigger a large windfall to Opec countries, which are forecast to earn the equivalent of about 2 per cent of the world's gross domestic product, up from last year's 1.2 per cent. The cartel will control 51 per cent of the world's oil supply by 2030, up from last year's 44 per cent.

Saudi Arabia will remain the largest producer with its output rising to 15.6m barrels a day in 2030 from the current 9.5m b/d.

The shift will be keenly felt among international oil companies such as ExxonMobil, of the US, and BP, of the UK.

Their access to oil reserves will become increasingly curtailed because the world's remaining large reserves are in the hands of countries unwilling to open their doors to them.

Referring to Opec and other non-Opec countries that restrict foreign companies, such as Mexico or Russia, the report warns: "It cannot be taken for granted that these countries will be willing to make this investment themselves or to attract sufficient foreign capital to keep up the necessary pace of investment."

In the past month, the world has witnessed one of the largest financial and economic upheavals in a generation. The fallout may have been most immediately felt on Wall Street, but the effect on energy, and perhaps even the environment, will also be profound.

Christophe de Margerie, chief executive of Total, the French oil company, who usually argues for governments to get out of the way of those trying to bring enough energy to the market to satisfy demand, this week said recent events meant lawmakers needed to consider extending a helping hand to environmentally friendly energy sources and technologies made uneconomical by falling oil prices.

Executives say environmental initiatives such as carbon capture and storage must not be abandoned and oilfields need to be developed in an as environmentally friendly way as possible. But Chevron has already warned that Australia's cap and trade initiative could make the development of the Gorgon gas field uneconomical.

Royal Dutch Shell has dropped its proposed investment in plans to build the world's biggest offshore wind farm, the London Array, to concentrate on less risky US onshore wind power.

On the government side, the trend could be similar, as environmentalists worry that the billions being spent on bailing out banks may not leave much for the environment. Indeed, amid the fiercely contested US presidential election, the credit crunch has firmly overtaken energy security as issue number one, at least in terms of rhetoric.

But Mr De Margerie's main message centred on security of supply, rather than the environment. He and other executives contend that the drop in oil prices will make it more difficult to develop enough energy to meet the future demand of countries, such as China and India, and could prolong the downturn.

The Opec oil cartel made that same point in its communiqué last week, in the hope of justifying its decision to cut production by as much as 1.8m barrels a day. "Oil prices have witnessed a dramatic collapse - unprecedented in speed and magnitude - with these falling to levels which may put at jeopardy many existing oil projects and lead to the cancellation or delay of others, possibly resulting in a medium-term supply shortage."

Projects in high-cost areas, such as Canada's oil sands and in the deep waters of west Africa, are already being delayed, while the development of giant fields such as Russia's Shtokman gasfield have become more tenuous, as Gazprom, the monopoly, struggles under the credit squeeze.

In fact, the International Energy Agency, the developed countries' watchdog, does not see Russia, the world's second largest oil exporter, being able to increase its production at all in a draft of the Paris-based agency's latest forecast to 2030.

Many of Russia's biggest oil fields are ageing and declining, and tax cuts meant to give companies incentives to develop new fields and help boost the production of old onesare too little, too late, executives and analysts say.

But the problem is far from limited to Russia.

In fact, the IEA believes the single most important factor in deciding how hard the energy industry will have to work to meet demand is the rate at which ageing oil fields are declining.

Preliminary results of a study of the world's largest oilfields, due to be published by the IEA next month, indicate that the scale of the challenge is great.

The world will need to invest $360bn a year in boosting oil production to meet demand, initial data in an early draft of the report obtained by the FT, states. Much of that money will need to be spent in countries where oil reserves are controlled by national oil companies that are either too badly managed or technically incapable of making the necesary investments.

Worldwide, oilfields are declining at an annual natural rate of 9.1 per cent and, even with investment to boost production, are still declining at 6.4 per cent, the IEA's draft report states.

Making the kinds of investments to arrest decline is more difficult when prices are low. Oil companies often choose to shut down a field, rather than pour more money in for little gain. It is a reality that could be felt in the North Sea, where years of high oil prices have prompted a flotilla of niche companies to sail in to save small oilfields.

In fact, many of those small oil companies are now struggling as their share prices have dropped and, in some cases, the credit crunch has eaten into their ability to fund production programmes.

This new reality is one of the other leading forces that have emerged to change the industry, as credit has become tight and oil prices have fallen.

Ian Taylor, head of Vitol, the energy trader, says he believes the industry stands at the edge of a wave of consolidation. "This is the best opportunity for 15-20 years. Many companies are trading at below the value of their assets," he says.

Indeed, on the day he was speaking, BG announced a deal to acquire Queensland Gas for A$5.6bn ($3.8bn). The bid was at an 80 per cent premium to the previous QGC share price, but still valued the Australian company's gas reserves at less than half the implied value paid by ConocoPhillips of the US for similar assets over the summer.

The pickings are richest for the biggest companies by market capitalisation. Their shares have for years traded at relatively low earning multiples despite record revenues, as their inability to grow by finding new fields or taking over large companies has let them down.

These companies are now sitting on unspent cash ($40bn in the case of ExxonMobil, the largest of the group) and very low debt.

As Tony Hayward, chief executive of BP, put it: "We think the current turmoil may create opportunities for us and we will look at those very closely."

Total is said to be eyeing Nexen, a Canadian oil company, whose shares have fallen more than 50 per cent in the past six months, meaning it is no longer too expensive to buy.

Executives from other big oil companies, meanwhile, say they are looking at US players, such as Anadarko.

BG, whose liquefied natural gas portfolio had for years made it attractive to the majors, but which was too big and expensive to be bought, is now again on radar screens, executives say.

Maurice Berns of the Boston Consulting Group, says: "In previous downturns, what have we seen the successful companies do? They consolidate and build competitive strength to come out in a better position when the dust has settled."

But the future will not lie in the hands of those companies. Instead, it will be the investment decisions of national oil companies, many of which are in Opec countries, that will decide whether there is enough oil to see the world out of economic turmoil. And it will be up to governments to ensure the environment is considered in times of economic sickness, as well as in times of economic health.

So far, the signs that either will be able to act in the world's best interest are growing weaker - with the fall in the oil price and the onset of recession - rather than stronger.

Crude oil, gold and copper fell on signs demand for fuel and commodities will be eroded as the global economy slumps.

Gasoline supplies in the U.S., the world's largest energy user, unexpectedly rose 1.12 million barrels to 196.1 million barrels last week, an Energy Department report showed. The worst financial crisis since the Great Depression has curbed demand from builders and carmakers, damped prices and led to a 13 percent decline in the Reuters/Jefferies CRB Index of 19 raw materials in the past month.

``Even a weaker oil price has not restored demand,'' said Tetsu Emori, a fund manager with Astmax Ltd. in Tokyo, Japan's biggest commodities asset manager. ``That's why the inventories have accumulated.''

Crude oil for December delivery declined as much as $1.57 cents, or 2.4 percent, to $63.73 a barrel on the New York Mercantile Exchange. It was at $63.99 a barrel at 4:49 p.m. Singapore time. Prices, which have tumbled 56 percent since reaching a record $147.27 on July 11, are down 34 percent from a year ago. Yesterday, futures plunged 7.4 percent, the biggest drop since Oct. 10.

Bullion for immediate delivery was down 0.4 percent at $737.65 an ounce at 1:55 p.m. in Singapore. Silver for immediate delivery fell 0.4 percent to $10.28 an ounce.

London Metal Exchange copper for three-month delivery declined 2.2 percent to $3,980 a ton after losing 5.4 percent yesterday.

Oil Supplies

Companies in the U.S. cut an estimated 157,000 jobs in October, the most in almost six years, a private report based on payroll data showed yesterday. The drop was larger than forecast and followed a revised 26,000 decline in September that was bigger than previously estimated, ADP Employer Services said.

U.S. distillate inventories rose 1.21 million barrels to 127.8 million barrels last week. Analysts forecast that supplies would increase by 1.55 million barrels.

Crude oil stockpiles climbed 54,000 barrels to 311.9 million barrels in the week ended Oct. 31, the department said. A 1 million-barrel gain was forecast. Imports dropped 365,000 barrels to 9.97 million barrels a day. The department released its weekly report yesterday in Washington.

Lower Margins

Oil has also weakened as refiners' processing profits declined. The profit from making gasoline in the U.S. was at minus $5.04 a barrel and has been negative since Sept. 19.

Merrill Lynch & Co. today cut its estimates for oil- refining profit for Singapore, Southeast Asia's biggest crude trading center, citing a slowdown in demand growth and an increase in processing capacity.

The forecast for the complex margin for refiners in Singapore for 2009 was lowered by 20 percent to $7.20 a barrel, and the margin for 2010 reduced by 9 percent to $7 a barrel. Margins could tumble as low as $4 a barrel should Asia fall into a recession, the bank said.

A slowdown in economic growth in China, India and neighboring countries will reduce travel and cut consumption of diesel, gasoline and jet fuel. Oil demand in Asia including Japan will grow 300,000 barrels a day next year while new refinery capacity is at 1.7 million barrels a day, Merrill said.

Economic Concern

``Refining margins have been slipping and that's a reflection of the demand situation for oil products,'' said Astmax's Emori. ``These margins are causing refiners to shut in some production.''

U.S. refiners operated at 85.3 percent of capacity, down 1 percent from last years. Refiners in Japan and South Korea have also limited their production.

Companies in the U.S. cut an estimated 157,000 jobs in October, the most in almost six years, a private report based on payroll data showed yesterday.

The drop was larger than forecast and followed a revised 26,000 decrease in September that was bigger than previously estimated, ADP Employer Services said. The decline in employment was the biggest since November 2002, when the U.S. was emerging from a recession.

The Institute for Supply Management's non-manufacturing index, which covers almost 90 percent of the economy, dropped to 44.4 from 50.2 in September, the Tempe, Arizona-based group said yesterday. A reading of 50 is the dividing line between growth and contraction.

Tropical Storm Paloma formed in the Caribbean off northeastern Nicaragua and may become a hurricane tomorrow as it turns toward central Cuba, the U.S. National Hurricane Center said in an advisory on its Web site.

Brent crude oil for December settlement fell as much as $1.87, or 3 percent, to $60 a barrel on London's ICE Futures Europe exchange and traded at $60.48 at 4:49 p.m. Singapore time.

Dollar Factor

Bullion, together with other commodities, is also under pressure from the rallying dollar, Darren Heathcote, head of trading at Investec Bank Ltd. in Sydney, said in a report today.

The higher dollar, while ``offering some relief to producers,'' has been ``noticeably'' affecting consumers, said Hussein Allidina, an analyst at New York-based Morgan Stanley, in a report today. Indian gold imports fell by 27 percent in October from a year earlier, he said.

The dollar rose for the second day to $1.2865 against the euro at 1:55 p.m. in Singapore, from $1.2954 yesterday in New York. Crude oil fell by 1 percent after declining by more than $5 a barrel yesterday on a U.S. Energy Department report showing an unexpected increase in gasoline inventories.

BG Group became the latest big oil and gas company to announce a delay to a key project, citing falling crude prices and rising industry costs. The former international arm of the old British Gas group, said that it was postponing a decision on whether to proceed with the next phase of its Karachaganak project in Kazakhstan. The gas and condensate field accounts for almost a fifth of BG’s oil and gas production.

The announcement came as BG unveiled a 140 per cent surge in third-quarter profits, to £857 million, on the back of high global crude prices between July and September. Frank Chapman, the chief executive, said that BG remained committed to the Karachaganak project and that he hoped development costs would fall in the months ahead as the global economy weakens.

Last week Royal Dutch Shell announced the delay of expansion of an oil sands project in Canada because of rising costs. Last night it also emerged that Saudi Aramco, the world’s biggest oil company by production, is reviewing some long-term projects. Khaled al-Buraik, an executive director at Saudi Aramco, said the group would go back to its partners to discuss the new economic circumstances. He said that two developments - the Manifa field and the Karan field offshore free-gas project - are being reevaluated.

The recent collapse in crude oil prices from $147 a barrel in July to less than $70 a barrel is forcing oil companies to reconsider expensive development projects. BG said in July that it would decide by its third-quarter results whether it planned to proceed with Phase III of the Karachaganak project, which represents 18 per cent of the company’s total output of 604,000 barrels per day last year. The Phase III expansion aims to lift oil production to 16 million tonnes a year from 11 million. BG is in talks with KazMunaiGas, Kazakhstan’s state oil company, about the new timetable and offered no target for start-up of Phase III production.

BG said that its profits from July to September were given a boost by an 11 per cent rise in hydrocarbon production as well as healthy profits from transporting liquefied natural gas around the world. BG also confirmed it was on track to sustain a 6 per cent to 8 per cent compound annual growth rate in oil and gas production from 2005 to 2020. A big part of this increase will arise from BG’s share in the Santos basin off Brazil, where several important discoveries has been made recently.

Royal Dutch Shell has delayed a planned investment in Canada’s oil sands, in the latest sign of companies adjusting their plans to reflect the global economic downturn and the fall in the price of oil.

Shell had planned to make a decision next year on the second phase of the expansion of its Athabasca oil sands project, but Jeroen van der Veer, the chief executive, said the company would “wait for costs to cool down . . . before any new investment decision is made”.

Mr van der Veer was speaking as Shell reported a 31 per cent rise in under­lying net income to $8.04bn. The result was ahead of expectations but less buoyant than those of its rivals BP and ExxonMobil.

Shell is one of the western oil companies most strongly committed to “unconventional” resources such as the oil sands, and has set a target of deriving 15 per cent of its production from those sources by 2015.

Projects in the oil sands of Alberta, which have been fiercely criticised by environmentalists, are among the world’s highest-cost oil developments.

In recent weeks, several companies operating there, including Suncor, Petro-Canada, Nexen and Opti Canada, have delayed investment plans.

Construction of the first phase of Shell’s Athabasca expansion is already under way, and will go ahead as planned, adding 100,000 barrels per day of additional capacity, of which Shell has 60 per cent.

Phase two is intended to add a further 100,000 barrels per day.

Shell announced on Wednesday that Peter Voser, chief financial officer,would take over from Mr van der Veer on July 1 next year.

The results gave a sense of the challenge he will face in delivering growth at a turbulent time for the world economy, financial markets and the oil price.

Shell’s oil and gas production fell by 6.6 per cent in the quarter, mostly caused by hurricanes in the US and planned maintenance in the North Sea.

Mr Voser said Shell stuck by its “long-term aspiration” that in the next decade production would grow by 2-3 per cent a year as a result of Shell’s investment in long-lived projects such as the oil sands.

Mr van der Veer called the results, which benefited from the sharp rise in the oil price, “satisfactory”.

The group was “watching the world economic situation closely” but was “robust across a wide range of energy prices”, he added.

Shell promised “competitive and progressive dividends”, echoing BP’s recognition on Tuesday that investors are concerned about the income from their shares.

Shell declared a third-quarter dividend of 40 cents a share, a rise of 11 per cent over the same quarter last year.

RIO DE JANEIRO - Plummeting crude prices and the evaporation of global credit seem certain to delay development of huge oil reserves off Brazil's coast, which the government had hoped would solve many of the country's ills.

Just two months ago, with the price of oil at around $120 a barrel, Brazil was brimming with confidence over the potential 50-80 billion barrels of oil, with newspapers running cover stories and editorials on the issue daily.

President Luiz Inacio Lula da Silva, who called the oil a "gift from God," advocated taking greater a cut for the government to drive Brazil to developed-country status. Analysts said this would also boost support for his chosen successor in 2010.

But the financial crisis has delayed plans by the government and state-controlled oil company Petrobras, which needs to spend hundreds of billions of dollars to extract the 7-km (4.5-mile) deep oil from beneath a thick layer of salt below the ocean floor.

Petrobras (PETR4.SA: Quote, Profile, Research)(PBR.N: Quote, Profile, Research) postponed the eagerly awaited announcement of its new investment plan from this month until the end of the year. Chief executive Jose Sergio Gabrielli said the delay was due to market "uncertainty."

Petrobras has said its exploration plans were based on an oil price of around $35, but officials have said that level may be as high as $50 for the more challenging "subsalt" fields. On Thursday, oil was hovering around $68 a barrel, down from a record high of $147.27 on July 11.

Aside from the oil price slide, analysts say Petrobras faces problems getting the large number of deep-water rigs it needs as suppliers struggle with the credit crunch.

Petrobras plans to tender for 28 rigs this year and for 63 by the end of 2018, a large share of those available in the world, but some contractors have hit financing problems.

"The pre-salt is going to have to suffer significant delays, a matter of years," said Brian Uhlmer of Pritchard Capital in Houston, who follows the world rig market.

Uhlmer said about 20 deep-water rig constructions have been delayed or canceled, about a fifth of the total number of new rigs planned by 2012.

Gabrielli said this month that Petrobras had concerns about its supply chain and would try to help providers find financing for the rigs, which can cost up to $800 million each.

FUNDING STRAINS

Petrobras, whose share price has plummeted about 65 percent since May, also could face its own funding strains if the oil price fails to recover.

Credit Suisse, which sees Petrobras raising its five-year spending from 2009 to about $170 billion from $112 billion, said in a report last month that Brazil's biggest company would have a cash-flow shortage with oil at $65 per barrel.

In that scenario, it said Petrobras would need to raise $15 billion in new debt in 2009 and increase its overall debt to $82 billion by 2013 from $14.2 billion this year.

"You don't have to be an economist to imagine how this can impact Petrobras' plans. They're going to need massive capital and in an environment where you have little," said Erasto Almeida, an analyst at Eurasia Group in New York.

With the reserves seen as strategically vital and a way to build up local industry, Petrobras can rely on government help.

The government, which wants Petrobras to use more locally built ships and platforms, this month threw its nascent ship-building industry a 10 billion real ($4.7 billion) credit line and also raised the amount that state bank BNDES can lend to the oil company.

Petrobras also is partially cushioned from world oil prices as it gets about half its revenues from domestic fuel sales.

The uncertainty for Petrobras and other oil companies involved in the subsalt development such as the BG Group (BG.L: Quote, Profile, Research) and Repsol (REP.MC: Quote, Profile, Research) has been aggravated by a two-month delay of a government plan on changing the country's oil rules.

The government was thought to be favoring a model in which a new state firm would take over the rights to the reserves but would leave production to companies. Currently, it auctions the concessionary rights to oil blocks to the highest bidder and charges royalties and taxes in return.

After the massive Tupi field was estimated to have 5-8 billion barrels of recoverable light oil off the Rio de Janeirocoast late in 2007, the government removed nearby blocks from the auction schedule pending new rules.

"You have very difficult economic conditions, funding conditions, so clearly the government will have to step back a bit," said Francois Moreau, head of the Estrategia and Valor consultancy in Rio. "I think they got very excited and they wanted to deliver politically."

A senior advisor to Lula told Reuters that the government was waiting to see how the crisis panned out before making its final decision. "It's better to have a clearer scenario regarding the crisis," the official said. "We don't have to make an immediate decision."

While the government likely wants to wait for markets to stabilize before announcing the plan, it also faces pressure to implement the changes before Lula's term ends in 2010.

The country's fragmented Congress, in which Lula's ruling Workers' Party does not have majorities, would need to approve any new law.

"I think this (crisis) will moderate a bit what the government will propose and also maybe make it a bit more difficult for Congress to approve," said Almeida.

"Before the crisis I thought there was a likelihood it would be approved; now I think that the probability is decreasing."

$=2.12 reais

Additional reporting by Natuza Nery in Brasilia; Editing by David Gregorio

For the gas industry, peak gas output could come sooner than expected, "maybe not too different from peak oil," Shell executive vice president John Mills told delegates at the ADIPEC conference in Abu Dhabi on Wednesday.

"Globally, what people have woken up to is that there is a prospect for the gas industry that its supply-demand crunch could come earlier than anticipated," he said. 

"The Middle East will still be increasing its gas exports right through that [peak in global gas supply], but the picture in North America and Europe will be quite different," he said.

Chris Ball of Occidental said "we are very optimistic that there are large reserves of gas out there, which if customers will accept the price, [can be developed]. Industry can be creative and innovative [to find solutions] but it will take money." 

ADNOC's gas processing manager Ismail Al Ramahi said that 40% of global gas reserves were in the Middle East, but he said the distribution of the available gas to the market was concentrated in a few countries.

Abu Dhabi will use gas mostly domestically except for its commitment for exports to Japan until 2019. 

There are only two countries in the Middle East, Iran and Qatar, that are exporting. Increased exports are "not even on the radar" until the long-term future, he said.

It is boom time in Baku, the capital of Azerbaijan: The skyline is dense with cranes and high-rise buildings, and the streets of the port city on the Caspian Sea are clogged with luxury shops and traffic.

Oil revenue has fueled the country's growth, and even as prices have plummeted, Azerbaijan's energy resources remain a valuable prize. Evidence of this is the tug-of-war between Russia and Europe over natural gas from the next phase of a project that's expected to at least double current production when it moves from the planning stage to completion.

The competition is testing the former Soviet republic's ability to maintain its political balance in the months since Russia's invasion of Georgia heightened tensions between East and West.

``As always, Azerbaijan is trying to find common ground with all sides,'' says Fariz Ismailzade, director of the Advanced Foreign Service Program at the Azerbaijan Diplomatic Acadamy in Baku.

Over the past two months, Russia and the U.S., acting with the Europeans, have stepped up their attentions to this mostly Muslim nation of 8.5 million people. In addition to selling its gas, Azerbaijan wants to parlay the international interest into the resolution of its conflict over the separatist region of Nagorno-Karabakh, occupied by Armenia since a bloody ethnic war ended in 1994.

Easing Tensions

It inched toward that goal in a Nov. 2 meeting, where the two countries agreed to resolve the dispute under Russian, U.S. and French mediation, easing tensions in the South Caucasus after two Azerbaijani oil-export routes were disrupted by the Georgian war.

``This is our neighborhood and everything that happens here worries us,'' says Novruz Mammadov, head of President Ilham Aliyeb's foreign-policy department.

Given its strategic location between the Caspian and Black seas, Azerbaijan is used to being in the middle. Since becoming independent in 1991, it has sought to minimize reliance on Soviet-era pipelines that go through Russia, a major trading partner and home to 2 million Azeris. At the same time, it has maintained neighborly relations.

``We have a strategic partnership with Russia and with the U.S., and we don't see any contradiction,'' says Khazar Ibrahim, spokesman for Azerbaijan's Foreign Ministry.

One-Day Visit

U.S. Vice President Dick Cheney visited Baku in September, followed a month later by Deputy Secretary of State John Negroponte. In between, Aliyev, 46, was invited to Moscow for a one-day visit with Russian President Dmitry Medvedev. The European Union's energy commissioner, Andris Piebalgs, is due in Baku this month.

One topic of discussion is Shah Deniz II, with natural-gas reserves estimated to at least equal the 9 billion cubic meters produced by the project's first phase. That gas is now sold at home and to Turkey and Georgia.

Once the second phase is developed, Moscow-based Gazprom OAO, which holds a monopoly on Russian exports, wants to buy the gas to boost reserves for future contractual commitments. The U.S. and EU want the new supplies sent directly to Europe through the proposed Nabucco pipeline, an $8 billion venture at the center of the region's efforts to reduce dependence on Russia.

Diversification of sources and routes has been a European priority since January 2006, when Russia, which accounts for 25 percent of EU gas imports, briefly halted shipments over a price dispute with Ukraine, a transit country.

Waiting for Europe

Azerbaijan has yet to decide when it will develop Shah Deniz II and says it's waiting for the Europeans to make an offer. Azerbaijan can bide its time, Mammadov says.

``We have said no to the Russians, for now,'' he says. ``To the Europeans, we have said we are ready to be good partners: for oil, for gas, for transit; but they need this, not us.''

In trying to strike a balance between East and West, Aliyev is following in the footsteps of his father, whom he succeeded as president in 2003. Heydar Aliyev, a former KGB general, played a key role in securing one link with Europe that bypasses Russia: a $4 billion pipeline that, by 2005, was carrying Azeri oil from the Caspian region through Georgia to Turkey's Mediterranean coast.

Operated by London-based BP Plc, Europe's second-largest oil company, the pipeline now exports a million barrels of oil a day on average -- roughly one percent of the world's supply.

Shrinking Revenue

The International Monetary Fund predicts Azerbaijan's gross domestic product will total $53.2 billion this year, compared with $8.6 billion in 2004. Revenue will likely shrink in 2009 as declining economic growth worldwide slows demand for crude oil. Prices have fallen 57 percent to about $64 a barrel Nov. 3 from a record $147.27 on July 11.

For now, though, the signs of oil wealth are everywhere in Baku. In its old city, tycoons have rebuilt modern villas on narrow, winding streets in the style of the mansions of their 19th-century predecessors. Oil has always been key to the fortunes of Baku: Marco Polo spotted a gusher here in the 14th century. In the 1800s, it drew European families, including the Rothschilds and the Nobels, who rushed to profit from the region's hydrocarbons.

Still, the dangers to Azerbaijan's thriving energy business from festering conflicts are all too evident. On Aug. 5, the BP pipeline was temporarily closed after an explosion on its Turkish portion, allegedly the work of Kurdish terrorists. That was followed by the closing of two oil-transit routes that cross Georgia because of its five-day war with Russia over the separatist region of South Ossetia.

Azerbaijan has been able to leverage some of the interest in its energy resources to try to end its own ``frozen conflict'' over Nagorno-Karabakh, which has cost it 20 percent of its territory. Medvedev arranged the Nov. 2 meeting in Moscow at which Aliyev and Armenian President Serzh Sargsyan agreed to seek a resolution -- signaling Russia's willingness to play mediator in this dispute.

``We have to find a way to have a peaceful, stable region,'' Ibrahim says

Millions of British families will heat their homes with gas from the deserts of Qatar this winter, after the arrival this month of the UK's largest ever cargo of liquefied natural gas.

- The tanker, which is set to arrive at a new gas terminal on the Isle of Grain, Kent, will deliver up to 50 million therms of gas, enough to supply about 4.5 million homes for a week.

- With the rapid depletion of the North Sea, Qatar, which has the world's third biggest gas reserves, is set to be a leading source of supply for the UK in the years ahead.

- This year the UK will need to import 40 per cent of its gas demand, rising to 75 per cent by 2015.

- LNG is expected to grow to 28 per cent of UK total supply by 2017, according to National Grid.

- LNG is natural gas that has been supercooled in its source country to minus 160C, creating a liquid whose volume is one 600th of its gaseous form. It is then transported to its destination by tanker and regasified.

- Sam Laidlaw, the chief executive of Centrica, who visited Qatar at the weekend with Gordon Brown and a UK trade delegation, said: “Qatar will play an increasingly important role in maintaining supplies for British Gas customers as North Sea production declines. “Our relationship with Qatar is of particular importance and we look forward to building much closer ties over the coming years.”

Hopes for further expansion of gas storage facilities needed to help the UK weather the vagaries of global energy markets received a blow yesterday when two projects suffered serious setbacks.

While construction began on an E.ON facility in Holford, Cheshire that will be able to hold 165 million cubic metres of gas – about half the country's daily demand – two other companies planning storage projects acknowledged significant delays in developing the schemes.

Portland Gas's Dorset scheme, which had been expected to open in the second half of 2011, is being held up by problems securing financing. The facility was now unlikely to open before March 2012, the company said, sending its shares down by nearly 39 per cent.

Andrew Hindle, the Portland Gas chief executive, said: "The global credit crunch has all but closed off the likelihood of achieving [the 2011] target for the time being and this factor, combined with cutbacks in longer-term capex spend by industry participants in the sector, has meant that halting the current joint venture funding process is in the best interests of all shareholders." Encore Oil is also struggling. The AIM-listed company may have to redesign its North Sea project after preliminary tests showed the plan was more complex than expected.

At E.ON's development, meanwhile, the "solution mining" process that has started at all eight caverns in the project will see seven billions gallons of water pumped into underground salt deposits to create massive underground spaces which can then be used to hold gas.

Britain once relied on the North Sea for all its gas requirements and was insulated from the volatility of global prices. But as domestic stocks depleted, reliance on international supplies and exposure to price fluctuations increased. Since January 2007, spot prices have gone from 40p per therm to an all-time high of 100p per therm in the summer.

More stored gas would allow suppliers to smooth out the price fluctuations by buying and storing gas when it was cheap. Dr Paul Golby, the chief executive of E.ON UK, said: "We're aware that our customers have seen large price increases in recent months and it's only by investing hundreds of millions of pounds in projects such as [Holford] that we can hope to keep energy as affordable as possible."

WASHINGTON -(Dow Jones)- Under President-elect Sen. Barack Obama, D-Ill., the fossil fuels industry may face "dark days ahead," while alternative energy sectors are likely to flourish.

Although it will take years to engineer and implement, an Obama administration energy and environment policy marks a tectonic shift for the nation. He would move the U.S. away from petroleum as its primary energy source and towards renewable energy, advanced biofuels, efficiency and low greenhouse-gas-emitting technologies.

Obama won the U.S. presidential race Tuesday evening, sweeping battleground states such as Ohio and Florida.

Sen. Obama's lynchpin policy is a climate change bill that would cap emissions such as carbon dioxide and auction greenhouse gas credits to encourage a fundamental transition away from high emitting industries to low-carbon alternatives. Obama said such a policy would be more aggressive than any other cap-and-trade system proposed.

As part of that policy shift, renewable energy, natural gas, plug-in hybrid vehicles, and advanced electricity transmission are forecast to receive a major boost. Sen. Obama has proposed using $150 billion from the emissions auction to fund such low-carbon alternatives over the next decade.

And to begin cutting emissions, the president-elect is targeting the fossil fuel industry.

Companies such as ExxonMobil (XOM), ConocoPhillips (COP) and Chevron Corp. ( CVX) say they're concerned about returning to policies enacted in the 1970s, including Sen. Obama's proposals for a windfall profits tax and market intervention such as tapping the Strategic Petroleum Reserve.

"It's pretty clear that if we repeat those mistakes again, we're going to see some pretty dark days ahead," said outgoing American Petroleum Institute president Red Cavaney.

Obama shifted his stance on offshore oil and gas drilling in the Outer Continental Shelf under pressure from $145 a barrel oil prices and $4 a gallon gasoline. But he's largely against extensive new domestic petroleum production. Congressional Democrats could reinstate at least parts of a moratorium on such offshore drilling that expired at the end of September.

With oil prices falling to more than half levels seen in July, there will likely be less political opposition to a new ban. Some Capitol Hill watchers say the moratorium is likely to cover 50 miles off the coast and won't include revenue sharing for the states.

The oil industry says for oil companies to tap domestic production quickly it needs access closer to the shore, and sharing the wealth is necessary to get state approval for exploration off their coasts.

It's unlikely Obama will use all of his new presidential political capital to try and force a contentious greenhouse gas bill through Congress. But the president-elect is expected to start working piecemeal towards a climate change bill early in his tenure.

A federal renewable energy mandate is a central piece of his policy to ax man- made contributions to global warming. Obama wants reductions of 25% by 2025, with a 10% standard achieved early in the next decade. A similar mandate has passed in the House, though it narrowly failed in the Senate. Democrats picked up several seats in the Senate, and with that, "the RPS is almost a certainty," said Dave Hamilton, Sierra Club director of its Global Warming and Energy Program.

Southern utility companies, including Duke Energy Corp. (DUK) and Southern Co. (SO), have lobbied against a federal renewable portfolio standard, though some encourage state mandates.

Wind turbine manufacturers such as GE Energy, a unit of the General Electric Co. (GE), India's Suzlon Energy (532667.BY) and Denmark's Vestas Wind Systems ( VWS.OS), as well as solar firms such as Norway's Renewable Energy Corp. ASA ( REC.OS), and U.S.-headquartered First Solar Inc. (FSLR) and Evergreen Solar Inc. (ESLR) would benefit under a renewable portfolio standard.

Sen. Obama - as well as Senate Majority Leader Harry Reid, D-Nev., and House Speaker Nancy Pelosi, D-Calif. - believe spurring the renewable industry would help the country recover from its current economic crisis.

The coal-fired power generation sector, one of the biggest emitters of greenhouse gases, will likely find the investment climate more difficult under stricter environmental regulations.

Longer-term, the president-elect said he plans to funnel federal money to pay for carbon capture and sequestration technology.

The coal industry, however, is concerned that Obama's pursuit of stringent greenhouse gas laws could strangle the industry. Obama has said his cap-and- trade bill would encourage carbon capture and sequestration for coal-fired power plants. Yet he admits that without such technology, new construction of traditional coal-fired power plants could face bankruptcy.

The National Mining Association, whose members include Peabody Energy Corp. ( BTU) and Consol Energy (CNX), said it feared Obama's climate change policy could destroy the U.S. coal industry, "break(ing) America's energy backbone."

One of the real questions is how quickly Obama and congressional Democrats can move the country swiftly away from petroleum and coal use without damaging the economy. Obama contends a transition to a lower carbon economy will create up to 5 million jobs.

But it will also raise manufacturing, transportation, and material costs because of higher energy prices and put U.S. goods and services at a competitive disadvantage to economies that lack similar emission standards, such as China, India, Russia or the South American and Middle Eastern countries.

It's also questionable whether the president-elect could pass climate change policy early in his tenure amid a focus on rescuing the U.S. economy from a deep recession.

As the oil and coal industries may see their market share of energy production fall, the biofuels, natural gas and nuclear industries could grow.

For the biofuels market, next-generation fuels such as cellulosic and algae- based ethanol and biodiesel will benefit under Obama's energy and environment policies.

Democrats have also warmed to the natural gas industry. The fuel emits half the greenhouse gas pollution that coal producers when conventionally burned, and the U.S. has massive domestic sources that wouldn't require a major change in the sector's transportation infrastructure.

Many Democratic leaders, including Obama, are open to proposals to convert a large portion of the nation's vehicle fleet to run on natural gas.

And though Obama would try to change the current waste storage policy, a long- term expansion of the nuclear power industry is seen as essential to meet the climate change goals propounded by the President-elect.

President-elect Barack Obama may pursue legislation early next year to speed a transition to an economy fueled by renewable energy sources and delay a fight on climate change until the economy improves.

With unemployment at a five-year high, an early effort to create jobs by encouraging electricity production from solar and wind will get top priority, energy lobbyists and analysts said. A more far-reaching effort on a climate-change bill may be delayed until late next year or 2010.

``He will put forward an energy bill ahead of a climate bill,'' said Kateri Callahan, president of the Alliance to Save Energy, an energy advocacy group in Washington that represents 3M Co., Areva SA and Dow Chemical Co. ``That bill will stimulate the economy toward development and use of energy efficiency and clean energy sources and technology.''

Obama's advisers won't say which initiative he will push first. He has proposed a $175 billion economic-stimulus package and plans to revamp the energy economy as part of a separate climate bill, campaign adviser Jason Furman said in an interview.

Obama calls the green-jobs and climate plan a ``mid- to long-term solution'' on his campaign Web site. He plans $150 billion in investment over 10 years to create 5 million jobs in the auto and clean-energy industries.

Oil Drilling

Obama may block oil and natural-gas drilling in new offshore areas. He said Aug. 1 he would compromise on offshore drilling if it was necessary to win approval for alternative- energy investments and more fuel-efficient cars.

``That was total lip service,'' said Kevin Book, an analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia. ``If Congress doesn't block drilling in its appropriations work in March, Obama is very likely to re-withdraw the areas that Bush put back in bounds.''

Jack Gerard, president of the American Petroleum Institute in Washington, said Obama's plan to impose a windfall-profits tax on oil companies would harm one of the few industries that are thriving.

``We certainly hope public officials wouldn't look at this and say, `Gee, let's see what damage we can do to the one bright spot,''' Gerard told reporters Oct. 20 at an industry meeting in Scottsdale, Arizona.

Funding for Obama's windfall-profits tax may have dried up. The plan is to impose the tax when crude prices exceed $80 a barrel. Obama campaign adviser Jason Furman said Oct. 22 that he's now assuming zero revenue from that tax because oil tumbled from a record above $147 a barrel in July to less than $70 last month.

Fuel-Efficient Cars

Obama wants the ailing auto sector to make plug-in hybrid cars and more models that run on ethanol. He proposes a tougher fuel-economy mandate. He plans $4 billion in tax help to retool factories to make advanced cars on top of $25 billion in loans that have been enacted for that purpose. Consumers would get a $7,000 tax credit for purchases of advanced cars.

Obama has ``found a formula that he's been pitching to the American people that I think would get a lot of traction in Congress, which is to get unemployed manual labor allocated to installing solar panels,'' said Friedman Billings analyst Book.

The transition to a low-carbon economy will yield many opportunities to create jobs, said Senator Jeff Bingaman, a New Mexico Democrat who chairs the Senate energy committee.

Bingaman said in an interview he didn't know the order in which Obama would pursue his energy priorities. He said he would develop bipartisan energy legislation early next year and has advocated for longer tax credits for renewable energy and mandates for renewable electricity production, as Obama has.

2025 Goal

Renewables, including hydropower, account for 8 percent of U.S. electricity. Obama has said he wants 10 percent of electricity to come from renewable sources by 2012 and 25 percent by 2025.

A measure to expand use of green power and plug-in hybrid cars could ease the transition to a climate bill, Callahan said. A climate bill will be a ``massive piece of legislation with such far-reaching impacts'' and Obama understands the ``need to take some time with it,'' Callahan said.

As proposed, Obama's climate plan would cut emissions of so-called greenhouse gases linked to global warming by 80 percent by 2050. Emissions credits would be sold in an auction under a cap-and-trade program, not doled out to utilities and others for free. Companies that exceed caps must buy credits on top of those obtained at auction, in Obama's cap-and-trade plan.

``Barack Obama could well put off a costly and regressive surcharge until later in 2009 or 2010, leaving Congress to shoulder the burden,'' Book said. ``On the day that he is elected, cap and trade will fall to No. 10 on his list of top 10 priorities and won't come back until the economy does.''

Higher Costs

Power from renewable energy and cleaner coal-fueled plants is more costly than current U.S. generation sources, said Michael Morris, chief executive officer at American Electric Power Corp., the nation's biggest producer of electricity from coal.

``I do think there are a few things there that a president Obama doesn't have right,'' Morris said in a telephone interview. He objected to Obama's plan to auction all credits and said any climate plan must incorporate a stronger commitment to nuclear power than the president-elect elect has made.

Morris gave Obama high marks for pushing the creation of jobs through expansion of the renewable energy industry, pointing to the proposal to string high-voltage lines to population centers like Chicago from areas high in wind-power potential like the Dakotas.

``He's a big believer in green energy and the jobs that might be created by alternate energy forms, wind and solar,'' Morris said. ``We think that's a good thing.''

World trade volumes have fallen in the second half of 2008, according to new estimates being finalised by the World Trade Organisation. They look set to continue their decline at least until the middle of next year.

Last spring the WTO predicted world trade growth this year of 4.5 per cent in real terms, down from 5.5 per cent in 2007. On Wednesday, it revised up, to 6 per cent, the growth figure for 2007, but it has not yet published its latest prediction for 2008.

WTO economists said on Wednesday they expected world trade growth this year to be less than 4.5 per cent but still positive, pulled up by exceptionally strong trade growth in the first quarter of 2008, which was boosted by booming imports into China and oil-exporting countries.

However, China’s imports have since slowed sharply, dashing hopes that it could act as an economic motor helping to drive the world economy towards recovery. US imports have been declining and Japan is likely to see overall negative import growth this year.

“Emerging economies are not as decoupled from the US and other industrialised countries as many hoped earlier this year,” said a WTO economist.

The recent turbulence in the world financial system and the steep fall in commodity prices, especially for oil, has cut the spending power of oil exporters.

US consumer spending is expected to stay weak for some time in response to falling house prices, rising unemployment and the need to cut household debt.

“The financial crisis has not completely unfolded and the impact on the real economy may only just have started,” the economist said.

The price of petrochemicals used in making goods from toys to mobile phones and from T-shirts to pipes has tumbled to multi-year lows, in further evidence of the slump in global manufacturing activity.

The drop in petrochemicals prices goes well beyond the fall in oil prices, suggesting that demand for plastics and synthetic textiles is extremely weak as the Asia-Pacific export-oriented nations, including China, suffer from reduced overseas orders.

The cost of naphtha – the cornerstone of the petrochemical industry – fell last week to a five-year low of $284 a tonne in the far-east Asia market, down 76 per cent from July’s record high of $1,200 a tonne, according to Platts, the pricing agency.

At current levels, naphtha, a by-product of crude oil, is trading well below the cost of crude, a highly unusual phenomenon.

While naphtha prices have tumbled more than 70 per cent in three months, oil prices had fallen 45 per cent – a gap that traders described as “unprecedented”.

“It is a bloodbath,” said Shahrin Ismaiyatim, head of petrochemicals at Platts. “There is a steep decline in demand in the US and Europe and that is also affecting China . . . But this is not yet the bottom of the market.”

Analysts said some of the price movements were unheard of in at least 20 years. They pointed out that the price of benzene, a ­petrochemical derived from naphtha used for plastics and dyes, fell last week below the cost of ­naphtha for the first time since the 1980s, as demand vanished.

In response, the petrochemical industry, from Sumitomo in Japan to Lyondell in the US, has reduced processing rates as producers forecast that demand will remain weak for the rest of the year and probably in the first half of next year.

The cuts during petrochemical plants’ troughs are likely to trigger a further drop in oil consumption on top of current weakness in gasoline, diesel and jet fuel demand, resulting in a further drop in energy prices, analysts said.

The cost of other petrochemicals has also slumped. For example, the price of polyvinyl chloride – a plastic popularly known as PVC – in China dropped last week to a five-year low of $635 a tonne, down from a record $1,320 a tonne in July.

The drop comes on the back of lower export demand for plastic products and reduced consumption from Chinese construction. The price of ethylene – used to manufacture containers such as shampoo and ketchup bottles – fell to $780 a tonne, down from a record of almost $2,000 a tonne in July.

Industry groups, trades unions and green campaigners are today calling on the government to introduce a strong system of support for renewable energy known as a "feed-in tariff".

The government last week introduced an amendment to its energy bill going through parliament that would bring in a feed-in tariff (FIT) — under which small-scale producers of energy from wind turbines or solar panels are paid an above-market rate for every unit of energy they produce. FITs have proved very successful in other countries but Britain remains well behind in its deployment of renewables.

But a number of organisations including the British Retail Consortium, the Home Builders' Federation, the Co-operative Group and Friends of the Earth have written today to every member of the House of Lords expressing disappointment with the government's amendment. They are disappointed that it contains no timetable for the introduction of a FIT, does not even firmly commit the government to introducing one and has too low a cap on the amount of energy the projects could produce.

As a result, they say, the energy bill will do little to boost the development of small-scale renewable energy projects. The House of Lords will later today vote on amendments to the government's amendment in a bid to beef up the bill.

Ed Matthew, spokesman for Friends of the Earth, said: "A strong feed-in tariff is desperately needed to give homes, businesses, communities and local authorities a financial incentive to fit renewable energy systems and play a major role in tackling climate change.

"Unfortunately the government's woolly proposals are fundamentally flawed and will not guarantee that an effective scheme will be introduced. Proposals for a feed-in tariff must be strengthened to ensure that the UK reaps the benefits of its abundant supply of clean, green energy."

The new climate change secretary, David Milliband, unexpectedly announced on October 16 that he intended bringing in a FIT, something that delighted green campaigners — hence their disappointing at the lack of detail or commitment in last week's amendment.

Many other countries, led by Germany, have introduced similar measures which have proved highly successful at boosting the uptake of renewable energy by shortening the payback time on such investments. FITs have also been shown to be the most cost effective support method.

The fight against climate change will get an unexpected boost today from oil-rich Gulf states which will pledge to invest some of their petrodollar profits in British green energy projects.

The surging oil price over the past year has left parts of the Middle East awash with cash as the rest of the world is squeezed by the credit crunch, making Arab royals some of the few active investors worldwide. The Gulf states have enjoyed a $1.4 trillion windfall from higher oil prices since 2003.

Ed Miliband, the Climate Change Secretary, arrived in Saudi Arabia yesterday with Gordon Brown at the start of a tour of the region. He said some of that cash would now 'help our firms reap the rewards from going low carbon and providing green energy to thousands of families' under a so-called 'green Gulf deal' to be announced today.

Brown, who is accompanied by a high-level trade delegation seeking Gulf investment, including the CEOs of BP and Shell, was due to hold talks yesterday with the Saudi government on plans to boost the International Monetary Fund's capacity to help distressed economies during the current crisis. Britain wants the Gulf states to release more funds to the IMF, with Saudi Arabia likely to play a key role in talks later this month in Washington.

As the government attempted to deal with the financial crisis in the UK, it emerged yesterday that Jim Murphy, the Scottish Secretary, has discussed a rival bid for the troubled HBOS bank, which could provide an alternative to the planned merger with Lloyds TSB. Ministers have been challenged over whether the new 'superbank' is still the right option following the bail-out of British banks.

Murphy, who has met Jim Spowart, founder of Intelligent Finance, which is part of HBOS, said yesterday that if there was 'a second serious bid then [the Treasury] would be happy to talk to them.' Spowart, who has previously accused ministers of trying to railroad the merger through, said he had been told by merchant bankers that an unnamed financial services organisation was interested and thought he should 'alert the government' to the possibility.

The potential bid risks causing confusion hours after Peter Mandelson announced on Friday that he would rubber-stamp the merger with Lloyds despite a report from the Office of Fair Trading warning that bank customers could get a worse deal as a result. The OFT concluded the merger would remove an aggressive competitor from the market and increased risks that banks across the sector would offer less competitive deals on personal bank accounts: 'The value for money of personal current account propositions is expected to worsen, not only for the merged entity but for the industry as a whole.'

The merger also risked 'substantial lessening of competition' for mortgages, with the new merged bank controlling 20-30 per cent of the market. In Scotland, it also predicted a lessening of competition and therefore potentially worse deals for small and medium-sized businesses seeking loans and services such as overdrafts.

However, Mandelson, the new Business Secretary, ruled the merger was in the public interest because it would protect the stability of the financial system.

Britain's biomass industry will miss targets necessary to meet renewable energy goals by 50% unless "blockages in the system" are removed by the government. In a letter to the new energy and climate change secretary, Ed Miliband, representatives from the wood industry say urgent action is required to put biomass back on track.

"For the government to meet its targets for generating 20% of its energy from renewable sources by 2020, the UK needs to fully harness the potential for generating energy, heat and power through biomass," writes Craig White, chairman of Wood for Gold, a pressure group for the timber sector.

"The government is assuming that 50% of that 20% target will be provided by biomass, including clean and sustainable waste wood. But blockages in the system mean that only 4.1% is currently provided by biomass and that the current rate of growth is insufficient to enable the government to meet its 2020 target. Indeed it is likely to miss it by around 50%."

Wood for Gold, which includes the Timber Trade Federation, Confederation of Forest Industries and the British Woodworking Federation, argues that large amounts of potential fuel are being buried, creating methane, one of the most potent greenhouse gases.

"Of an estimated 7.5m tonnes of domestic wood waste, much from construction and demolition, some 80% goes to landfill. Only some 4% becomes sustainable energy from biomass," adds White, who says the UK needs only about 2.7m tonnes a year of wood to meet the biomass 2020 target.

Wood for Gold is keen to see the 2012 Olympics used to showcase biomass with a large plant providing heat and power to the site in east London. There are only very small biomass plants burning wood or plant-based matter, as well as the large coal-fired station at Drax, which is experimenting with burning some non-carbon fuel.

Last week Drax, the owner of Britain's most carbon-intensive power station, said it was turning greener with a £2bn plan to build the country's first large-scale biomass plants. But it is clear the bulk of the fuel for these plants will be imported, at least in the short term.

The three facilities - in Hull, Immingham and probably Drax itself - will have the capacity to produce 900MW of electricity - enough to supply 3% of the country's total.

Food waste weighing thousands of tons will be converted into methane gas and used to generate electricity providing heat and light for J Sainsbury supermarkets from next year.

Lawrence Christensen, the supply chain director, said that from 2009 Sainsbury's intends to become the first leading British retailer not to send any waste to landfill sites.

At present, the group sends 60,000 tons of food waste to landfill every year from its 800 stores. Under the new scheme, this will all be taken to anaerobic digester plants and converted into methane gas, which will be used to generate power.

Some will be composted for use as fertiliser and, in a few cases, turned into pet food, Mr Christensen said. Sainsbury's also plans to recycle all of its 20,000 tons of non-food waste, including metal, plastic and paper packaging.

Most of the waste produced by the group's supermarkets is compacted on site and put in skips, which are collected and driven to landfill sites. But Mr Christensen says all this will change when the new waste processing system is introduced across the country.

It will be based on a pilot project under way in Northamptonshire involving 38 Sainsbury's stores, where food waste that has passed its best before date is sent to a plant near Bedford for anaerobic digestion.

Biodegradable material is placed into a giant sealed unit and broken down by micro-organisms to produce a nutrient-rich solid that can be used as fertiliser, as well as methane that can be used to generate electricity.

“This is the process we are now rolling out across the UK,” Mr Christensen said, adding that by 2010, Sainsbury's planned to send all of its organic waste to a network of five regional anaerobic digestor plants.

He said that the group was in talks with various partners about helping to develop new anaerobic digestor plants, each of which costs up to £8million to build. Only a handful of sites in Britain have the capacity to deal with the volume of food waste produced by Sainsbury's.

Once operational, the nationwide scheme will generate up to 30 megawatts of electricity - enough to power a town of 20,000 people. This will supply a significant proportion of the retailer's total power needs.

Food waste from Sainsbury's supermarkets will be first in line for the new programme, with waste from its network of smaller convenience stores due to follow later.

Mr Christensen said that at present Sainsbury's spends £9 million a year on waste disposal, but this was set to rise sharply with the arrival of increasingly steep taxes on waste sent to landfill. The landfill tax, which stands at £30 a ton, is set to rise to £38 next year and to £46 in 2010.

The tax for landfilling 60,000 tons of food waste would increase from £1.8million to nearly £2.8 million by 2010. Sainsbury's declined to comment on how much it plans to spend on the new programme, but Mr Christensen insisted that it would be cost-effective.He said that as well as creating environmental benefits, the scheme would drive efficiency savings.

For example, it would do away with the need for in-store compactors, skips and waste-carrying lorries. Instead, all of the food waste will be sent back to Sainsbury's depots using delivery trucks before being sent to the anaerobic digestor plant.

A Dutch retailer, Albert Heijn, is conducting a similar programme in the Netherlands.

Mr Christensen added that some food that has passed its sell-by date but not its best-before date is given by Sainsbury's to charity

Motorists with gas-guzzling vehicles face higher road pricing charges, it became clear yesterday.

Paul Clark, the Transport Minister, told a conference of road-pricing experts about plans to introduce tolls on specific lanes of motorways or hard shoulders.

On top of the predicted £1.30-a-mile charge he did not rule out an additional toll for cars that emit the highest levels of carbon dioxide.

Mr Clark said trials into road-pricing would start in the new year, with hundreds of drivers taking part in test runs.

"We need a recession. We have had 10 years of growth. A recession gets rid of crappy loss-making airlines and it means we can buy aircraft more cheaply," he said, urging the Bank of England to "leave interest rates exactly where they are".

He was speaking as he unveiled a sharp fall in first-half profits, down from €460m (£369m) to €105m pre-tax, after a €93.6m write-down on Ryanair's 29.8pc stake in Aer Lingus and a €25.7m charge against aircraft to be sold. Revenues rose 16pc rise to €1.81bn as Ryanair flew 31.6m passengers, up 19pc. Profits were hit by a doubling in fuel costs to €789m.

Mr O'Leary said he had no fears about the downturn. "I think the recession will be at least 18 months long and be very deep and dark," he said, relishing the prospect of turning the screw on weaker competitors by driving down fares. The shares rose 4 cents to €2.82.

He now reckons Ryanair's average fares – down 4pc over the half to €47 – will fall 15pc-20pc this winter, far worse than previous guidance of a 5pc-10pc drop.

Having seen carriers including XL Leisure, Sterling and Futura collapse recently, Mr O'Leary said: "We predict there will be another five or six airline bankruptcies this winter. Even Air Berlin could be at risk."

To this, Air Berlin spokesman Alexandra Müller said pointedly: "We do not comment on nonsense."

Mr O'Leary expects break-even for Ryanair this year, with probable losses in the autumn and winter quarters, not least because the airline hedged 80pc of its third-quarter fuel bill at $124 a barrel – twice the current spot price. "It doesn't look like too bright an idea now," he admitted.

He expects a strong recovery in 2009, however, partly because Ryanair is locking in lower fuel prices. It has hedged 25pc of its fuel needs for next year's first and second quarters at $76 and $79m respectively.

"We were originally planning to hedge 50pc," he said. "But the market is so illiquid at the moment."

He predicted that, eventually, there would only be four European airline groups – Air France, Lufthansa, British Airways and Ryanair.

"I think it's a fair bet over the next two or three years that easyJet will be acquired by BA or Air France," he said.

European carmakers received a dose of support from the European Union on Wednesday when Industry Commissioner Günter Verheugen backed a request for €40 billion in low-interest loans for the struggling auto sector.

The public money would be reserved for manufacturers to meet tough new EU emissions standards, but it comes against a backdrop of a similar American package for its own car industry.

The European Automobile Manufacturers Association (ACEA) has been calling for the cheap line of credit since early October, just after the US government announced a $25 billion package of low-interest loans for American auto giants General Motors, Ford and Chrysler.

Commissioner Verheugen came out in favor of the EU plan after a meeting with car industry executives on Wednesday. "Loan subsidies could be provided via the European Investment Bank," he said.

EU member states would have to decide on the final amount of loan money, Verheugen told reporters, but "we are talking about a credit volume of €40 billion available for research and development in the area of energy efficiency and lower fuel consumption of new vehicles."

Dwindling profits and demand have led some European car companies—including Daimler in Germany and Skoda in the Czech Republic—to suspend production. Daimler announced Monday it would shut down its main German factory for five weeks over this year's Christmas holiday.

The ACEA argued to European commissioners that the slowdown would make it hard for manufacturers to meet an EU target to cut carbon dioxide emissions from cars by 18 percent by 2012.

The auto sector is a major source of jobs in Europe, which is one reason the EU has an interest in granting it public support. But environmental groups are skeptical about the green tinge to the loan plan.

"While Günter Verheugen attempts to greenwash massive state aid and credit to the car industry," said Rebecca Harms, deputy vice president of the Green faction in the European Parliament, in reaction to Wednesday's meeting, "he is also lobbying together with automakers to water down CO2 reduction targets for new cars. Helping the car industry out of a crisis is unacceptable if it comes in the form of disguised subsidies to companies that are hell-bent on continuing with business as usual."

But Verheugen said on Wednesday, "We are in a situation where it is getting harder for big European businesses to get credit. It is not a question of hand-outs, it's a question of the European Investment Bank making available a low-interest credit program."

A Tax Break from Berlin

Also on Wednesday, German Chancellor Angela Merkel announced a €20 to €25 billion stimulus package for the German economy that would include tax breaks for owners of especially clean cars. For two years starting in 2009, according to German Environment Minister Sigmar Gabriel, new cars adhering to the nation's cleanest exhaust standards will be free of an annual automotive tax.

Environmentalists have been in favor of the German measure because it would be an incentive for car owners to scrap older polluting cars.

The German stimulus package will also include soft loans for contractors who improve building insulation and tax deductions for home-improvement work. Peter Struck, parliamentary head of the SPD faction, told the Berliner Zeitung that more details of the package would be released next week. "All together we are talking about a volume of perhaps €20 billion to €25 billion" to cushion the German economy ahead of the expected downturn.

German Unemployment Sinks

Not all the economic news was bad though. The Federal Labor Agency in Berlin announced Thursday that the number of Germans out of work fell below 3 million in October—for the first time since November 1992. The jobless rate sank to 7.2 percent, down considerably from a historic peak in February 2005 of 12.6 percent.

Agency chief Frank-Jürgen Weise said the numbers showed that employment in Germany had suffered "no serious effects of the economic slowdown and the situation on the financial markets," so far.

But an economist at UniCredit in Munich, Alexander Koch, told the Associated Press that job cuts could be on the horizon. "Especially in the important manufacturing sector," he said, huge cutbacks in demand might herald "a noticeable cutback in industrial activity and subsequently in the labor force."