Russia is poised to join Opec in a co-ordinated action next week that could lead to global oil production being cut by up to two million barrels a day. The move, designed to put a floor under a slide in crude prices of more than two thirds since July, will be announced to coincide with Opec's meeting in Oran, Algeria, on Wednesday, according to Sergei Shmatko, the Russian Energy Minister.

He said that his country would announce proposals on curbing oil production to accompany Opec's own announcement, which he said would include “very significant” measures to defend prices. Oil traded at $47 a barrel on Wednesday, down from $147 in July.

Russia is not an Opec member but ranks alongside Saudi Arabia, the cartel's most powerful member, as the world's largest oil exporter. Together, Opec and Russia control about half the world's daily production, or more than 40 million barrels. All oil-exporting nations have been concerned at the scale of recent price drops, which have undermined their governments' ability to spend on social and military programmes.

Richard Savage, head of energy research for Mirabaud, the Swiss bank, said that there was a glut of at least one million barrels a day in the global market for crude oil as the spreading global recession undermines demand, particularly in the United States. He said that any effective move by Opec and Russia to force prices back up would require a cut of at least 1.5 million barrels of production. 

However, he added that cutting production to defend prices was an inexact science that often failed to work. “It's a very blunt tool and it will take at least four to six weeks to have any impact,” he said, adding that much would hinge on the severity of the reduction in global oil demand next year — an issue that is controversial and poorly understood. The strength of the Chinese economy next year is likely to be a critical factor.

Another question is whether the cuts will be honoured by Opec members — a perennial problem for the cartel, because some choose to overproduce to boost their own revenues. Saudi Arabia is thought to be among those still producing significantly more than its latest Opec production quota of about 8.5 million barrels a day, set when the cartel cut production in October.

The meeting in Algeria is likely to include discussion of the need for greater compliance by member states.

The prospect of closer ties between Opec and Russia has alarmed consumer countries, which have been urging restraint.

Fatih Birol, the chief economist of the International Energy Agency, said that Opec members needed to “consider the fragile state of the world economy” at their meeting next week.

The US Energy Information Administration said this week that it expected global oil demand to slump by 50,000 barrels a day this year and 450,000 barrels a day next year, representing the first year-to-year drop in world oil demand since 1983.

Top oil exporter Saudi Arabia has pre-empted the outcome of an OPEC meeting next week by telling some of its biggest customers they will get significantly less crude in January, trade sources said on Wednesday.

One source said the cut from Saudi Arabia would be enough to take the kingdom's output below its implied OPEC target of 8.47 million barrels per day (bpd). Saudi Arabia pumped 8.92 million bpd in November, according to a survey by newswire Reuters.

"There are quite severe cuts - they are going to be seriously cutting back," a trader with one major customer said.

"The Saudis are definitely reducing further in January," another big buyer said.

Saudi officials have yet to comment publicly.

The reductions imply Saudi Arabia expects the meeting of the Organization of the Petroleum Exporting Countries on Dec. 17 in Algeria to agree a further cut in supplies.

Another output reduction would follow deals so far since September to remove around 2 million bpd from the market to prop up prices, which plunged from a record above $147 hit in July to just above $40 a barrel last week.

US crude strengthened on Wednesday following news of the Saudi cuts to trade at above $45 a barrel.

Prices had already firmed earlier this week after industry sources said Saudi Arabia would also deepen oil supply cuts to some of its Asian and smaller European customers next month.

OPEC supply policy agreements pertain to production, whereas allocations to customers relate to exports.

As the largest OPEC producer, Saudi Arabia holds the greatest stake in any output decision and was responsible for unilaterally increasing supplies to try to calm the market when oil prices were racing higher.

The kingdom's output climbed to around 9.65 million bpd in August.

The International Energy Agency, an adviser to 28 nations, said global oil demand will contract this year for the first time since 1983 and cut its outlook for 2009.

Consumption worldwide will shrink in 2008 by 200,000 barrels a day, or 0.2 percent, the IEA said in a monthly report today. The reduction in demand is concentrated in developed economies in the Organization for Economic Cooperation and Development, where oil use will tumble 3.3 percent. Next year’s growth may be wiped out if the economic slump deepens, the agency said.

Oil prices have plunged more than $100 a barrel from a record in July as the U.S., Europe and Japan face their first simultaneous recession since World War II. Ministers in OPEC, responsible for more than 40 percent of world oil production, have said the group is likely to cut output when it meets Dec. 17 in Algeria to shore up prices.

“It’s been evident for many months now that demand in the OECD on the back of the economic slowdown has been getting clobbered,” David Fyfe, head of the IEA’s oil industry and markets division, said in a telephone interview from Paris. “In response, OPEC looks likely to cut supply significantly at its next meeting.”

Weaker Economy

The IEA reduced its 2008 estimate by 350,000 barrels a day, or 0.4 percent, to 85.8 million barrels a day following weaker economic forecasts from the International Monetary Fund. In the fourth quarter of this year demand will shrink by 1.6 million barrels a day, or 1.8 percent.

Next year consumption worldwide will increase by 400,000 barrels a day, or 0.5 percent, to 86.3 million barrels a day, according to the report.

While the agency trimmed its estimate for oil use in developing nations by 300,000 barrels a day in 2009, that still leaves growth of 2.9 percent, taking non-OECD demand to 39.4 million barrels a day. Chinese consumption will climb 3.7 percent to 8.23 million barrels a day.

“There are some signs that non-OECD demand is bearing up,” Fyfe said. The persistence of fuel subsidies in some Asian countries despite the fall in oil prices indicates “some stickiness with non-OECD demand,” and reinforced the agency’s perception that growth will increase next year.

Forecast demand in the countries of the OECD was cut by 300,000 barrels a day to 47.5 million barrels a day in 2008, and by 200,000 barrels a day to 46.9 million a day in 2009.

‘Prolonged Recession’

“Clearly, if we are now heading for a prolonged and global outright recession, then the 0.5 percent global oil demand growth we now envisage for next year may not materialize,” the report said.

The Organization of Petroleum Exporting Countries will have to provide about 30.8 million barrels a day next year to balance supply and demand, the IEA said, 200,000 barrels a day more than estimated in the previous report. The adjusted “call” on OPEC was cut by 500,000 barrels a day in the fourth quarter of this year.

Supply estimates from outside OPEC were cut for this year and next because of prolonged disruptions in Azerbaijan and the Gulf of Mexico. That means non-OPEC supply in 2008 will shrink for the first year since 2005, when hurricanes battered platforms off the U.S. coast, by 90,000 barrels a day to 49.6 million barrels a day.

Next year non-OPEC production will increase by 480,000 barrels a day to 50.08 million a day.

Global oil demand will collapse next year and commodities will not return to the highs they reached this summer in the foreseeable future, two authoritative reports said on Tuesday as they forecast a long and painful worldwide recession.

The stark conclusions came as the World Bank’s chief economist predicted that the world faced “the worst recession since the Great Depression”.

The US energy department said global oil demand will fall this year and next, marking the first two consecutive years’ decline in 30 years.

“The increasing likelihood of a prolonged global economic downturn continues to dominate market perceptions, putting downward pressure on oil prices,” it said, forecasting that demand would drop 50,000 barrels a day this year and a hefty 450,000 b/d in 2009. US oil demand will drop next year to the lowest level in 11 years.

Meanwhile, the World Bank’s Global Economic Prospects report said the commodities boom of the past five years – which drove up prices 130 per cent – had “come to an end”.

The World Bank’s analysis of the commodities boom contrasts with the prevalent view among natural resources companies – and most Wall Street analysts – that the ongoing price drop is a correction within an upward trend.

Although it ruled out a return to the torrid high prices of this summer, it said commodities prices would not fall back to the depressed levels of the 1990s.

Oil would return to about $75 a barrel within the next three years, it said, while food would trade 60 per cent higher than in 2003, but about half below this year’s record.

“Over the longer run, the price of extracted commodities should fall,” the bank said, adding that because of slower population and income growth, world demand for raw materials will ease.

Andrew Burns, the leading author of the report, dismissed the idea – widely supported among the industry and international bodies such as the International Energy Agency – that the credit crunch could result in higher prices when the economy recovers as companies cancel supply expansion projects.

The bank forecast that world trade – an engine of growth for many developing countries – would contract for the first time since 1982.

Justin Lin, the World Bank’s chief economist, said the current downturn was likely to see simultaneous recessions in most of the industrialised world, and that these recessions were likely to last longer than in the early 1980s, and the decline in growth would be more universal than in past episodes in recent decades.

The International Energy Agency cut its global oil demand forecast for 2009 because of the world economic slowdown.

The Paris-based agency reduced its demand forecast by 170,000 barrels a day from its November estimate to 86.37 million barrels a day, analyst David Martin said in a phone interview today as the agency issued an update to its July’s Medium-Term Oil Market report.

The forecast for 2013 demand has been lowered by 2.9 million barrels a day to 91.25 million barrels a day from a July estimate of 94.14 million barrels a day, Martin said.

Consumers have cut spending amid a global economic downturn, reducing demand for fuels such as gasoline, and naphtha, used in plastics, clothing, and toys.

The IEA has removed Kuwait Petroleum Corp’s fourth refinery at Al-Zour and Saudi Arabia’s Jubail facility from its forecast of world refinery capacity in 2013 as lower demand delays projects.

That cuts 825,000 barrels a day from refinery capacity in 2013, now forecast to rise 7.98 million barrels a day in the next five years. These large-scale projects “can no longer realistically be completed within the time frame,” the IEA said.

The IEA’s forecast for 2008 demand has been reduced by 40,000 barrels a day from last month’s report, Martin said. Gasoline and naphtha demand will remain weak while growth is biased toward diesel, the IEA said today in the report.

Oil prices could slump to just $25 a barrel next year, as much of the world sinks into recession and demand falls, according to the latest predictions from Merrill Lynch.

The US investment bank thinks prices will decline until well into next year before recovering in the second half of 2009.

The news came as the International Energy Agency cut its forecast for world oil demand in the next five years. Oil demand is expected to grow by just 220,000 barrels a day next year, the agency, which advises 28 industrialised countries, said today. The Paris-based agency had previously predicted 350,000 barrels a day.

The IEA also expects new investment in oil refineries to boost crude distillation capacity in the next five years at a faster pace than growth in demand.

Any further falls in the price of crude oil would spell good news for motorists. After soaring earlier in the year along with crude oil, petrol prices are now coming down. The supermarket chain Morrisons recently started a new forecourt price war when it cut the price of unleaded petrol to 89.9p a litre and diesel to 105.9p.

"With demand vanishing across all key oil consuming regions, benchmark crude oil prices continue to plummet," said Merrill Lynch. "In the short-run, market participants will focus on both Opec and perhaps even non-Opec producer responses to balance the market."

The bank added: "A temporary drop below $25 is possible if the global recession extends to China."

Oil prices hit a peak above $147 a barrel in July but have fallen more than $100 since then.

Merrill Lynch cut its forecast for the average price of US crude oil futures and North Sea Brent crude oil to $50 a barrel next year, from a previous estimate for both of $90. The new estimate is based on a global GDP growth forecast of 1.3% for next year, compared with 3% expected by Merrill Lynch economists in October - a scenario consistent with a global recession, they said.

The bank believes oil prices could trough in March or April with the seasonal slowdown in demand. "Then, as economic activity starts to strengthen, we see oil prices posting a modest recovery in the second half of 2009."

It said the main downside risk to its estimates is the Chinese economy. Its economists currently forecast 8.6% growth for the world's second-largest economy next year.

"In the short run, global oil demand growth will likely take a further beating as banks continue to cut credit to consumers and corporations," Merrill Lynch said. "We now expect an outright contraction in global oil demand in 2009."

Petro-Canada, the country’s third- largest oil company, plans to slash spending on oil and natural gas projects in Canada and overseas by 25 percent to C$4 billion ($3.2 billion) next year after crude prices plunged.

Petro-Canada will reduce and defer investment further if commodity prices “remain weak for an extended period of time,” the Calgary-based company said today in a statement. Production is forecast to fall next year.

The cut in spending comes after a 70 percent decline in oil prices from a record $147.27 a barrel on July 11. Crude oil for January delivery rose as much as $1.85, or 4.3 percent, to $45.37 a barrel on the New York Mercantile Exchange today.

It traded at $45.30 a barrel at 10:30 a.m. in London. Chief Executive Officer Ron Brenneman has been delaying some projects and cutting back on others because of the slump in oil prices. Petro-Canada also lowered its production forecast for 2009. Production in 2009 is expected to be between 360,000 to 395,000 barrels a day, down from 400,000 to 420,000 for 2008.

“We believe we’ve set a prudent level of capital spending for next year, given current market conditions,” Brenneman said in the statement. “But we’ll evaluate the business environment and financial markets as the year progresses and adjust our plans accordingly.”

Delayed Decision

Petro-Canada last month delayed a decision on its C$25.3 billion ($20.6 billion) Fort Hills oil-sands mining project in Alberta because of rising costs and falling oil prices. The company also put on hold a plan to build an upgrader, which would convert the sands into oil suitable for refining.

Spending on Fort Hills reached C$1.7 billion this year, the company said Nov. 17. Petro-Canada owns 60 percent of the project, which is scheduled to produce 140,000 barrels a day of refinery-ready crude by 2012. The first stage has been pegged to cost C$14.1 billion.

Petro-Canada gained C$2.11, or 7.9 percent. to C$29 yesterday in trading on the Toronto Stock Exchange. The shares have fallen 45 percent year to date.

Iraq's independent electoral commission announced plans on Sunday to collect signatures in support of a referendum to transform the oil-rich province of Basra into an autonomous region.

Signatures would be collected from Dec. 15 to Jan. 14 in 34 centres across the predominantly Shi'ite province, the Independent High Electoral Commission (IHEC) said in a statement.

According to the IHEC, there are 1,409,393 eligible voters in the province of Basra which includes the city of Basra, Iraq's second port along with Umm Al-Qasr and the country's economic nerve centre.

"If after the certification of the signature collection process the signature list reaches the required 10 percent of the 'Final Voters List', a referendum will be held within three months," the statement said.

More than 70 percent of Iraq's oil is produced in Basra and its port is used for 80 percent of crude exports.

The region has been riven with the rivalries among three main Shi'ite factions - the former rebel Supreme Iraqi Islamic Council (SIIC), the Mahdi Army of firebrand cleric Moqtada Al-Sadr and the smaller Fadhila party.

If the referendum is organised and accepted, it will transform Basra into an autonomous region with the same rights as Kurdistan, the autonomous region in northern Iraq which also enjoys considerable oil wealth.

Over the past year, the Kurdish regional government has angered Baghdad by finalising its own energy law and signing contracts with global oil majors despite the absence of national oil legislation.

The national law has been delayed in parliament over bitter differences among the assembly's Shi'ite, Sunni and Kurdish lawmakers over the sharing of the revenues generated from oil sales.

The bitter gas supply dispute between Moscow and Kiev escalated yesterday when Russia's Gazprom revealed the two sides were far from reaching an agreement and warned Ukraine would not be allowed to "steal" gas.

Alexander Medvedev, deputy chief executive of the state-controlled gas company, told the Financial Times that talks with Ukraine about debts and future prices were still "far away from a settlement" but he hoped a deal could be reached this year.

However, he quoted Vladimir Putin, Russia's prime minister, as having "made a very clear statement that if Ukraine tries to steal the gas, we will not tolerate this situation".

Kiev and Moscow have quarrelled over how much Ukraine should pay for gas since the early 1990s in a dispute that led to severe supply disruptions and soaring prices in some European Union countries in the winter of 2005-06. Russian imports supply about 25 per cent of the EU market and about 80 per cent of that gas flows through Ukraine.

In a similar dispute a year ago, Gazprom reduced supplies to Ukraine without a significant effect on the EU.

However, with the global financial crisis putting pressure on both sides, tensions are rising ahead of a new supply agreement due to take effect on January 1. Gazprom believes it is owed about $2.4bn (€1.85bn, £1.6bn) for unpaid bills up to the end of November, and has been paid only a "marginal" amount following an agreement last month for Ukraine to pay off some of its debt.

Gazprom executives will meet European Commission officials in Brussels today in an attempt to explain its determination to make Ukraine pay up.

The Russian company thinks Brussels might be able to exert some influence to help bring about a solution, or can at least be persuaded that if supplies are disrupted, the fault will not entirely lie with Gazprom.

Ukraine's leaders have in recent days pledged that their country would do everything in its power to avoid a repeat of disruptions in Russian exports to the EU.

However, officials at Naftogaz, Ukraine's national gas company, struggled yesterday to predict how debts owed to Gazprom would be settled or when a price agreement for next year would be signed.

Gazprom says it has been making every effort to avoid cutting off Ukraine's gas, including allowing some of the payments to be deferred.

Gazprom is also seeking to finalise an October deal between Mr Putin and Yulia Tymoshenko, Ukraine's prime minister, in which the price paid by Ukraine will rise to EU levels by 2011. The details of the transition are still not agreed.

Ukraine is paying $179.50 per thousand cubic metres of gas compared with an expected EU price of $400 in the first half of next year.

Mr Putin said last week: "How can we keep the same prices if our Ukrainian partners are still getting gas twice as cheaply as Europe? Try to come to any store in Germany and say that you want to get a Mercedes for free or at half price. Who will sell it at half price?"

Naftogaz said yesterday: "The global financial crisis, namely the sliding Ukrainian currency, has complicated our efforts to settle this debt. We are currently in talks with Ukrainian and foreign banks to refinance this debt."

Oil would have to cost between $55 and $65 per barrel for developers to produce transportation fuels derived from coal, according to a Rand Corp. report.

The report, prepared for the U.S. Air Force and the Energy Department, said that coal could supply 3 million barrels per day of transportation fuel for 90 years. The Air Force has promoted domestic coal to liquids, or CTL, as an alternative to foreign oil, against Democratic protests about the effect on the climate.

“CTL production would benefit oil consumers by reducing the world price of oil, and this reduction in world oil prices would yield national security benefits,” the report says.

Crude oil futures for January delivery settled at $42.07 a barrel on the New York Mercantile Exchange yesterday. Uncertainty about production costs, regulation of greenhouse gases and the future price of oil are impeding private investments in CTL, the report says.

The oil price that would make coal-derived fuels profitable accounts for the costs of capturing 90 percent of the carbon from coal liquefaction, the report says. A provision of an energy law passed in December 2007 prevents the U.S. government, including the Air Force, from contracting to buy coal-derived and other fuels with a higher carbon footprint than conventional fuels.

Peering nervously into the dark tunnel of climate change policy, Europe’s political leaders hesitate. Gordon Brown says he can see a chink of light in the distance and he stumbles into the gloom. Silvio Berlusconi says the British are silly and declines to follow. Angela Merkel, the German Chancellor, says she can see the dim glow but wonders whether it might be a train.

She is right; the light at the end of the tunnel is a coal train, a diesel juggernaut pulling 100 wagons laden with dusty, carbon-rich but very cheap fuel. Even as European Union leaders were preparing to meet in Brussels on Thursday for talks on cutting carbon emissions, the world’s energy marketplace was rushing towards them, pistons pumping and whistle blowing.

Can they hear it? Europe’s CO2 emissions are falling. Deutsche Bank is forecasting a 10 per cent fall in emissions in 2009 against last year’s level. The price of coal, gas and oil is cheaper by the day and, even more embarrassing, the price of a permit to emit a tonne of carbon has collapsed on Europe’s emissions trading system.

With fuel prices as they are, the margin from burning coal is unbeatable, even after adding the cost of buying carbon allowances at €14 a tonne. According to Deutsche Bank’s calculations, a fuel switch from dirty coal to cleaner natural gas would require a carbon price of between €25 and €30 a tonne. Estimates of the long-running carbon price needed to justify investment in carbon capture and storage technology vary between €40 and €50 a tonne.

Forget it. This much-lauded technology of stripping out CO2 and pumping it into spent oil wells is at the heart of many cherished plans and projections, but where is the full-scale demonstration plant? Where are the wagons of cheap coal being transformed economically into kilowatt hours with carbon dioxide piped harmlessly into subterranean pits?

For the next two or three decades, the picture is emerging of coal for the poor, more expensive gas and nuclear power for those on middle incomes and wind turbines for the super-wealthy. Wind is a fringe benefit for Britain: it works at the margins but it is too unreliable and expensive to replace the 22 gigawatts of baseload power that this country needs if it is to replace elderly power stations over the next 15 years. Nuclear will fill some of the gap but Europe’s nuclear industry is just recovering after decades of ruinous neglect. For an electricity generator, the market signal is absolutely clear: burn coal, make cheap power and speed the economic recovery.

The market wants to go with coal and there is the rub. Having erected this fantastic mechanism – the emissions trading system – and puffed its merit on political platforms worldwide, Europe’s leaders are now embarrassed, frantically brushing the coal dust off their cuffs. The original idea behind the scheme was that it puts a price on carbon by enabling companies to trade permits, known as EU allowances to emit CO2. These allowances were issued free by governments in the early stages of the ETS. Too many were issued and falling industrial output now means that companies need fewer of them. Unless governments drastically curtail the number of permits in the future by forcing companies to pay for them, the cost of carbon pollution will continue to fall. Deutsche Bank reckons a decline to less than €12 a tonne is possible. but the auctioning of permits will push up power prices as the recession deepens. A politically dangerous strategy.

The air is now fetid with antimarket sentiment. Poland wants the carbon price to be collared with a cap and a floor. Ed Miliband, Britain’s new Energy and Climate Change Secretary, was last month asking energy bosses about their plans for price reductions and yesterday he spoke of a “strategic role for government” in energy policy. The Government would take responsibility in “setting the carbon price”, he said. Why bother?

Carbon is now central to the pricing of energy, if we are to believe the EU target of reducing emissions by 20 per cent by 2020. So, when the minister talks of setting a carbon price he is talking about setting energy prices. Why not go all the way and regulate energy prices? Why not bring back the Central Electricity Generating Board?

It is easy to see where Mr Miliband’s thoughts are drifting. The carbon price is becoming an irritation rather than a useful tool by which the cost of pollution is calculated and priced into the cost of fuels. However, carbon is not a real market. No one wants carbon; it is not a commodity, like wheat or gold, to be hoarded or consumed. If its price is falling precipitously, it is because companies denied credit from banks and desperate for funds are selling their carbon permits for a bit of free cash.

Politicians invented the carbon market, but it is only a tax like any other. Instead of fiddling with carbon permits, Europe’s leaders should take a deep breath and make up their minds. Do they want cheap energy and a rapid recovery from this grim recession? If so, take the coal train and use the profits of recovery to build civil defences against climate change.

Or, are we sincere about carbon reduction? That road is harsh: it means taxing all hydrocarbons, doubling road fuel duty and raising domestic electricity bills as recession deepens. It’s a policy of more pain now in return for less pain tomorrow. It requires enormous political courage, a commodity that has been taxed almost to extinction.

As environment ministers from all over the world prepare for negotiations on climate change at Poznan in Poland this week, all eyes are on the future president of the United States.

Barack Obama has pledged to overturn George Bush's policies by pushing for deep cuts in greenhouse gas emissions.

But he inherits an energy system dependent on a heavily polluting fuel - coal.

The first sight of the impact of US hunger for coal takes the breath away, here at Kayford in West Virginia, there's a yawning chasm where a mountain used to stand.

And stretching a dozen barren miles to the horizon there's a series of hills with unnaturally flat tops - their peaks have been blasted off in a type of mining known as "mountaintop removal"

On a flight organised by the conservation charity SouthWings, pilot Susan Lapis tells me she's "horrified" to see how the quest for coal has devastated great tracts of landscape, some estimates suggest that more than 400 tops have been demolished so far.

The Appalachians are rich in black gold - they fuelled the US industrial revolution - and even now coal from mines like these helps generate no less than half the country's electricity.

And therein lies one of the toughest dilemmas facing Barack Obama: he promises action to save "a planet in peril" by introducing massive cuts in greenhouse gases, but the the US lights are kept on by burning one of the dirtiest of the fossil fuels.

Environmental campaigners like Matt Wasson of the group Appalachian Voices are cautiously optimistic that the "gut reaction" of the incoming president will be to turn against the most damaging forms of mining.

Climate scientists have long argued that at the very least no new coal-fired power stations should be built - and they're heartened by the Obama plans for tough new controls on emissions.

For the mining companies these are potentially unsettling times - billboards along the highway carry the assertive message, "Yes, Coal". But in reality they're quietly confident that the new administration will come to see the essential role of coal.

They point out that Barack Obama is himself from a coal mining state, Illinois, and that his campaign brought him to regions where thousands of people depend on coal for their livelihoods.

And, as Bill Raney of the West Virginia Mining Association puts it, why would anyone "overlook the geological blessing of coal?" It's American, indigenous, and plentiful at a time when energy independence is at a premium.

The Obama team's hope is that new technology will help find an answer to squaring the circle of how to harness such a polluting fuel without adding to global warming.

Clean coal

In a remote wood, on West Virginia's border with Pennsylvania, I'm shown an example of the kind of research that many are banking on - an experiment being set up by the mining giant Consol Energy to pump carbon dioxide underground.

The company's vice-president for R&D, Steve Winberg, explains how over the next two years, the gas will be forced into a deep well and a network of monitors will measure where it goes and, crucially, whether it stays put and does not seep out again.

Barack Obama himself has talked up the importance of systems to trap and store carbon dioxide - to be able to burn coal without the climate drawbacks. And, as he put it in one rally, if America can put a man on the Moon in the space of ten years, surely the country can quickly find a way to use coal cleanly.

According to Paul Bledsoe of the National Commission on Energy Policy, new coal technologies are likely to receive more funding than any other type of low-carbon research "It'll be a top priority", he says.

Back at Kayford, I watch the demolition teams fill lines of holes with liquid explosive. Another layer of mountain is set to be destroyed and the coal extracted.

In another part of the state, a vast power station, fed by coal, belches dense smoke into the evening sky while on a hilltop nearby a line of wind turbines spins steadily.

America is at a crossroads in its choices about future energy, and the rest of the world is watching.

Britain's coal industry is on track to break a new production record as it expands at a time when many environmentalists are calling for it to be cut back or closed down.

The West Midlands colliery of Daw Mill near Nuneaton is expected to produce more coal this year than any other in the history of an indigenous industry that began with the Romans.

And this week a rig will move into position to drill three exploratory boreholes that could lead to reopening of a mothballed mine at Harworth in north Nottinghamshire.

Daw Mill has already mined 3m tonnes this year and staff are confident of hitting 3.25m tonnes by the end of this month, beating a 13-year-old record for annual output set at Selby, North Yorkshire.

"This is a remarkable achievement and shows our mining skills are world class," said Jon Lloyd, chief executive of UK Coal, which runs Daw Mill and four other deep mines. The production rise comes at a time when at least 14 companies have applied to develop 58 new opencast mines in Britain, giving coal its biggest boost in 30 years. Much of the industry was closed down after the disastrous strike in 1984 and 1985.

There are now 680 miners working at Daw Mill and the company is looking at whether it can extend working there to exploit a further 40m tonnes of coal. A further 40m tonnes could be accessed at Harworth if UK Coal obtains positive results from the boreholes and a separate seismic survey. If Harworth re-starts, at an estimated cost of £200m, it would provide work for 400 skilled miners at the Welbeck colliery near Mansfield which is due to close at the end of next year.

UK Coal is spending £100m on extending output at Thoresby in Nottinghamshire and Kellingley in West Yorkshire.

The bulk of the Daw Mill output goes by rail to the Ratcliffe power station near Nottingham which is run by the German-owned utility E.ON, with some of the rest used by the Cottam facility operated by EDF of France. E.ON is among the energy producers that want to build new coal-fired power stations, including the controversial Kingsnorth scheme in Kent.

The government is trying to decide whether it will allow new stations with or without pilot schemes for carbon capture and storage (CCS), a technique which buries carbon dioxide to reduce emissions from coal plants. The European Union has been gradually introducing tougher environmental restrictions on the burning of coal at power stations, and environmentalists consider CCS vital.

The expansion of coal mining in Britain follows a reassessment of its economics triggered by a tripling of commodity prices over the past two years. When Harworth closed in August 2006, the price of world coal was £34 a tonne. That rose to £100 although it has since fallen back to half of this level. About 60% of coal burned at UK power stations is imported from countries such as Russia, South Africa and Colombia.

Greenpeace opposes the development of mining and is sceptical about "clean coal" projects using CCS. "Coal is the most carbon-intensive of all fossil fuels," it argues. "Being nearly pure carbon, it releases nearly pure carbon dioxide. In the sector that changes our climate the most, coal is the worst offender."

The European Union’s 27 governments were on Wednesday edging towards a deal marrying long-term measures to combat climate change with the short-term battle against economic recession.

Yet on the eve of a two-day summit of heads of state and government in Brussels, EU officials and diplomats said the talks could still fail even though the areas of disagreement were getting smaller.

This week’s summit will test the EU’s credibility on climate change, because its influence at international talks on the subject next year will depend on whether it can agree on a set of ambitious and politically painful steps to achieve a 20 per cent cut in greenhouse gas emissions by 2020 from 1990 levels.

On the economy, a draft summit communiqué illustrates how Germany and its allies have taken a tough stance, insisting that the EU’s economic recovery plan, including a proposed €200bn ($258bn, £174bn) fiscal stimulus, should include strong language on the need to maintain fiscal discipline.

The statement says the EU’s stability and growth pact, conceived by Germany in the 1990s as a fiscal rulebook for Europe’s monetary union, “remains the cornerstone of the EU’s budgetary framework”.

It adds that the goal of long-term budgetary sustainability “implies a swift return to the reduction of deficits which have been temporarily increased”.

These two passages did not form part of early versions of the summit communiqué.

If it proved impossible to reach a deal by Friday evening, Nicolas Sarkozy, France’s president, would probably break off the talks rather than let them continue into the early hours of Saturday, one senior EU diplomat said.

This raises the possibility that Mr Sarkozy may summon EU leaders for one last summit before December 31, when France hands over the EU’s six-month rotating presidency to the Czech Republic.

With Italy signalling that most of its climate change objections have been met, the main outstanding problem concerns Poland and other former communist states that want a more generous financial offer from richer EU countries to help them cope with the transition to a low-carbon economy.

A positive summit outcome on climate change would be a triumph for France, which since July has led the bloc through some of the biggest emergencies in its 50-year history.

EU diplomats say the energetic Mr Sarkozy has done much to wipe out memories of the final years of the presidency of Jacques Chirac, his predecessor, who let France drift from its natural position at the heart of EU affairs.

But Mr Sarkozy’s occasionally impulsive and erratic style has not gone down well with Angela Merkel, the German chancellor who, according to EU diplomats, takes a dim view of the French leader’s failure at times to forewarn her of his initiatives.

Some cash-conscious governments oppose a European Commission proposal in its stimulus plans to use €5bn of unspent EU budget funds on trans-European energy connections and broadband internet access.

The third main summit issue is the EU’s Lisbon treaty, on which Ireland will request concessions from its partners so that it can make a second attempt at ratifying it next year after Irish voters rejected it in June.

A global campaign in the style of Make Poverty History is needed to pressure political leaders into sealing a treaty on tackling climate change, Ed Miliband, the environment secretary, has said.

Miliband told the Guardian a "popular mobilisation" was needed to help politicians push through an agreement to limit carbon emissions in the face of concerns about the economy. "There will be some people saying 'we can't go ahead with an agreement on climate change, it's not the biggest priority'. And, therefore, what you need is countervailing forces. Some of those countervailing forces come from popular mobilisation."

He added: "I think back to Make Poverty History ... and that was a mass movement that was necessary to get the agreement. In terms of climate change, it's even more difficult. There are people who have legitimate concerns, whether it's businesses in Europe who are concerned about competitiveness, or people who [ask] is it really necessary to do this now."

His view comes as environment ministers prepare to attend UN talks in Poznan, Poland, on the likely shape of a global deal to succeed the Kyoto protocol. The talks aim to secure an agreement at a meeting in Copenhagen this time next year.

"When you think about all the big historic movements, from the suffragettes, to anti-apartheid, to sexual equality in the 1960s, all the big political movements had popular mobilisation," said Miliband. "Maybe it's an odd thing for someone in government to say, but I just think there's a real opportunity and a need here."

He denied trying to pass the responsibility for tackling global warming from politicians to the public. "Political change comes from leadership and popular mobilisation. And you need both of them."

Make Poverty History made history itself when a coalition of British charities and celebrities such as Bono and Richard Curtis rallied hundreds of organisations from around the world, and millions of individuals wearing white wristbands, to press the G8 group of leading industrial countries to commit in 2005 to spend $50bn (£34bn) to tackle global poverty.

Environment and development groups said campaigns will grow in the run-up to Copenhagen, but warned they would include protests against UK plans to expand aviation and new coal plants. "He [Miliband] is going to get his wish, but he must be quite clear what he wishes for because it's going to be very hardnosed," said Benedict Southworth, director of the World Development Movement.

Ashok Sinha, director of Stop Climate Chaos, a UK-based umbrella group of organisations with 4 million members, said cutting domestic emissions was the best way the UK could get global action. There is also concern about the government's motivation, given there are several organisations trying to get mass support. And there were warnings that the climate would be hard to win public support for: first, because it has had less time to build up - Make Poverty History was a decade in the making; second, unlike action on poverty, individuals would have to make personal sacrifices, such as flying less.

"It would be helpful if there was a Make Poverty History mobilisation around climate change, but that shouldn't preclude political leadership now ... we need urgent action," said Mike Childs, head of campaigns for Friends of the Earth in the UK.

Elsewhere talks are continuing in Brussels on measures to cut EU carbon emissions by 20-30% by 2020. Last night it emerged that the French president, Nicholas Sarkozy, and Germany's chancellor, Angela Merkel, had agreed to push for the cuts.

Ed Miliband, the Energy and Climate Change Secretary, appeared to be on a collision course with Britain's big power companies last night as he called for sweeping reforms to the industry, including greater state control and a retreat from the free market orthodoxy of the past two decades.

In one of his first big speeches since his appointment as head of a new Department of Energy and Climate Change, Mr Miliband signalled a departure in UK energy policy by suggesting that a more muscular approach would be needed from government to tackle the challenges of fighting climate change, curbing fuel poverty and securing long-term energy supplies.

“Sustainability, security and affordability are all challenges which the market alone cannot be guaranteed to solve,” he told an audience at Imperial College in London, before flying to Poland today to join negotiators from 190 countries at a UN Climate Change conference in Poznan.

He said that the Government needed to take a more interventionist approach in the setting of higher carbon prices to “overcome market failures” that were inhibiting the adoption of renewable energy technologies.

He also indicated that the Government was shifting away from the liberalised approach to the energy industry of the 1980s towards a hybrid model that would combine dynamic markets with strategic government.

“These markets will work to the best effect in the public interest if there is a strategic role for government alongside the market.” He added that he would unveil a road map next summer identifying how Britain can cut carbon emissions by 80 per cent by 2050.

His remarks reflect growing concerns within government that Britain's energy industry is failing to deliver, either for consumers or for the Government's increasingly ambitious environmental and fuel poverty agendas.

Accusations of profiteering by the Big Six power companies and of failing to pass on steep falls in wholesale prices have been accompanied by criticism that Ofgem, the regulator, has been too feeble in its policing of the industry.

The Government has also come under fire for making little headway either in cutting UK carbon emissions, boosting investment in the power sector or meeting its targets to abolish fuel poverty.

Nevertheless, the speech is unlikely to help to mend the fragile relationship between Mr Miliband, who was appointed to the post in October, and Britain's big power supply companies.

The Times revealed this week that some chief executives of the Big Six that dominate the industry: E.ON, EDF Energy, Centrica, NPower, Scottish Power and Scottish & Southern Energy (SSE) had felt snubbed by Mr Miliband's refusal to hold individual meetings with them.

They also criticised him for “shooting from the hip” on calls for them to cut prices, while at the same time expecting them to pour £100 billion into Britain's ageing power grid over the next 12 years.

Britain is committed to raising its share of renewable power generation from 4 per cent to 40 per cent by 2020, a target that many experts believe is unachievable.

“This looks like sabre-rattling,” said John Hall, an independent analyst, who added that Mr Miliband would find it difficult to create a new industry structure that met the Government's disparate objectives.

Another industry source said: “If they want lower emissions then they can't expect lower bills as well. Renewable energy projects are very expensive to build.

Dieter Helm, Professor of Energy Policy at the University of Oxford, said the UK will face shortages and high prices for electricity from 2020 when the current generation of coal-fired power stations and nuclear stations have to close down.

He said the only way to avoid the problem it to invest in a new generation of power stations, including clean coal and nuclear, as well as renewables like wind and solar.

In a report for think tank the Policy Exchange, Prof Helm looked at UK energy policy over the last few decades. He said that the current policy to subsidise renewables through the Renewables Obligation is failing because wind, solar and hydroelectric power cannot fill the impending energy gap.

Instead he called for a "Low Carbon Obligation" that paid energy companies to invest in nuclear or carbon capture and storage (CCS) that will allow coal stations to operate without releasing as much carbon into the atmostphere.

He said: "The Renewables Obligation is one of the most expensive ways of subsidising renewables in the developed world. It also fails to support other low carbon technologies, such as nuclear and carbon, capture and storage (CCS)."

Prof Helm is the latest expert to warn of an energy gap as the UK is forced to close down old coal-fired stations because they are too polluting and nuclear stations because they are not safe. However he is one of the first to suggest the Government should subsidise nuclear and other low carbon technologies.

Ben Caldecott, head of the environment and energy unit at Policy Exchange, said the UK needed to invest in a mix of technologies in order to protect against blackouts.

He warned: "If we don't change the course of our energy policy, the lights might go out, we will see a second dash for gas based on insecure Russian supplies and we'll be locked into a high carbon future. This scenario is the worst possible, but is becoming increasingly likely."

The report also called for households that generate their own electricity through microgeneration such as wind turbines to be paid more and the roll out of "smart metres" that will improve energy efficiency in the home by telling consumers how much electricity they are using.

Environmental groups claim the UK's energy gap can be filled by boosting renewables alone while the Government is advocating a mix of technologies, including nuclear.

A Government scheme to combat fuel poverty has been called a failure after it emerged that more than 10,000 eligible low-income households will be unable to benefit this winter - because they are too poor.

Government statistics seen by The Times show that 11,020 qualifying households that applied for its Warm Front scheme this year have pulled out because they cannot afford their share of the costs involved in home heating and insulation upgrades.

Warm Front was established in 2001 as part of the Government's drive to eradicate fuel poverty in England by 2010. The scheme offers households that are receiving benefits home energy improvements worth up to £2,700, or £4,000 for those with oil-fired central heating.

While the costs of labour and materials have all increased sharply, the grants have remained capped for four years. Applicants are expected to pay any extra to complete the work. So many people are withdrawing to avoid paying these top-ups that more than 10 per cent of the nearly 110,000 eligible households that have applied this year will receive nothing.

The figures also point to a 13-fold escalation in the number of poor families and pensioners pulling out of the scheme. In 2005-06, fewer than 1 per cent of applicants withdrew on the same grounds - 818 households out of a total of 112,976.

Age Concern called the scheme a failure yesterday, pointing out that it was the poorest applicants who were most likely to struggle to pay the extra, while their homes often required most work.

Gordon Lishman, the director-general of Age Concern, said it was “outrageous” that a scheme established to help those most at risk expected the poorest pensioners and families to pay hundreds or thousands of pounds extra. “This is leaving thousands of the most vulnerable households with no option other than to live in cold and energy-inefficient homes,” he said.

“If the Government is serious about helping the poorest households out of fuel poverty, it must urgently raise the Warm Front grant and review the problems with the scheme.”

Rising fuel prices this year mean that about 5.4 million households are facing fuel poverty, which is defined as spending more than 10per cent of their income on energy. With wholesale energy prices now tumbling, power companies are under mounting pressure to trim bills.

Joan Ruddock, Energy Minister, said she was “very concerned” that so many people were having to pay a contribution. Total funding for Warm Front will be £959million for the three years to March 2011.

Rolls-Royce and Balfour Beatty have signed up with Areva, the French nuclear reactor maker, to create an industry bloc ready to exploit the opportunities of the UK's nuclear renaissance.

The partnership will create up to 15,000 long-term manufacturing and construction jobs as the three companies work together to develop the skills and supply chain needed to build Areva's next-generation EPR nuclear reactors, the first of which could start construction in 2013.

Mike O'Brien, the Energy minister, said yesterday: "This is the welcome face of low carbon energy, which we'll see more and more over the coming decades, opening up enormous potential for UK plc at home and globally."

The French group's technology is being evaluated by the Health and Safety Executive – as is its main rival technology, the Westinghouse AP1000 – and is not expected to receive accreditation for the UK market until 2011.

But the EPR design already has the support of EDF, which is in the process of buying British Energy, the UK's main nuclear group, and has said that it will build one new nuclear station by 2017 and four by 2025. Earlier this year, E.ON also announced plans for at least two EPRs.

Civil nuclear power is a major growth industry, in both the UK and across the world. The global industry, currently worth around £30bn annually, is expected to shoot up to £50bn in 15 years.

In the UK, the scale of the Government's plans for nuclear will breathe new life into an almost-extinct industry sector. Although the next-generation reactor design has not yet been signed off, and no sites for new power stations have been agreed, it is vital to get ready now, the companies involved in the Areva deal said yesterday.

Andrew McNaughton, the chief operating officer of Balfour Beatty, said: "What we are doing is investing the skills and experience of these organisations to develop an industrial landscape – establishing where the supply chain is going to come from, and where the resources are going to come from – so we are ready for nuclear new build when it starts."

Luc Oursel, chief executive of Areva NP, said: "There is a lot of work to prepare operations on the supply side – to help make the investment, train the people and clarify the processes – and it is better to do this now than when the project is launched."

The global air industry is set to lose $5bn (£3.32bn) in 2008 and $2.5bn next year because of the global economic downturn, an industry body has said.

The International Air Transport Association (IATA) had forecasted bigger losses, but revised the figures down because of lower oil prices.

"We face the worst revenue environment in 50 years," said IATA director general Giovanni Bisignani.

IATA expects North America to be the only profitable region in 2009.

Mr Bisignani said that US airlines would benefit from cheaper fuel and cutbacks they had made this year.

The organisation thinks that passenger traffic will fall for the first time since 2001, dropping by 3% in 2009 compared with 2% growth in 2008.

Air cargo traffic is expected to continue its decline.

"The outlook is bleak. The chronic industry crisis will continue into 2009," said Mr Bisignani.

The decision on whether to go ahead with building a third runway at Heathrow was delayed by the government yesterday amid cabinet splits over the controversial project.

The announcement was due to be made this month but has been put back to the end of January. Explaining the postponement Geoff Hoon, the transport secretary, said he needed more time to reach "the right conclusion". There have been 70,000 submissions.

"I know that there are strong views across a range of interests," Mr Hoon said.

"It is important that people see that I am going the extra mile to demonstrate that I have understood all of the relevant issues," he said.

While business has fought hard for the new runway amid concerns over lack of capacity at the west London site, there have been fierce protests by green campaigners. Environmental groups believe that splits within the cabinet could still scupper the project or, at least, force further delays. Ministers including Hilary Benn, David Miliband, Ed Miliband, Harriet Harman and John Denham have concerns about the scheme.

John Sauven, executive director of Greenpeace, said the move was a sign that the "pro-runway faction" in the government was in retreat.

Airport groups were however, sanguine about the delay. BAA, the Spanish-owned company that controls the airport, said it understood the need for Mr Hoon to take more time given the "complexity of the issues involved".

Ed Anderson, chairman of the Airport Operators Association, said it was "entirely reasonable", given that the transport secretary had been in post for only two months.

Heathrow is the third busiest air hub in the world, last year handling 67m passengers. A third runway would increase its flights by almost a half, from 480,000 to 700,000 a year. Expansion is bitterly opposed by thousands of west London residents, who resent the congestion, noise and disturbance caused by the sprawling airport.

Despite his insistence he is keeping an open mind, Mr Hoon has argued strongly that the extra infrastructure is sorely needed. Yesterday he repeated that the government wanted the project in principle: "The government set out its position in the 2003 white paper, that we are in favour of the extension."

An electric transport company is to install thousands of recharging points for electric cars across Israel ready for commercial use by 2011 in the first such nationwide network.

The firm, Better Place, showed off its first charging spot yesterday at a car park above a shopping centre in Ramat Hasharon, near Tel Aviv. In a pilot project, it will install 500 of the charging points by the end of this year in cities, including Tel Aviv, Haifa and Jerusalem. It expects to have 500,000 charging points by the time the first cars are marketed.

Moshe Kaplinsky, head of Better Place Israel, said the firm believed it presented a fundamental challenge to petrol-driven cars. "This vision is to stop this addiction to oil," he said.

"The profits of oil, we know where they go," he told a news conference. "Unfortunately a great part of the resources of oil are held by countries that don't share the same values we cherish in the western civilisation where we live. The gap is very clear between the price of producing a barrel of oil and the price that it sells for on the world market. And in some places these profits finance terror."

Better Place, which is based in Palo Alto, California, has signed deals for similar electric car networks in San Francisco, Hawaii, Denmark and Australia, but the project in Israel is seen as its pioneer system. The firm has signed agreements with the Israeli government and Renault-Nissan, who will supply the electric cars.

It expects a lithium-ion car battery to last for 106 miles. Given Israel's small size, the company expects relatively little need for changing batteries. A return trip from Jerusalem to Tel Aviv, for example, covers 75 miles. For longer journeys, battery changing stations will be set up across the country and would replace a car battery within minutes.

Payment for the service would be through a monthly account, similar to a mobile phone bill. No prices have been announced, but Kaplinsky said the cost of buying the car and paying for recharging would be less than the costs incurred with petrol-driven cars. "We intend that by 2020 almost all the cars in Israel will be electric vehicles," he said.

The firm was founded last year by a former software executive, Shai Agassi.

The recession in the industrialised world will be longer and deeper than forecast so far and could spread to emerging economies such as China and India, both the OECD and the European commission warned yesterday.

Klaus Schmidt-Hebbel, OECD chief economist, and Marco Buti, EC director general of economic affairs, both indicated that the projected recovery may be postponed until later in 2010.

Buti said the next EC forecasts for the EU and eurozone economies, to be published in January, a month earlier than planned, would be significantly worse than those drawn up a few weeks ago.

Schmidt-Hebbel told a European Policy Centre conference that the OECD would change its forecast of just two weeks ago and extend its estimate of the duration of the recession by at least a quarter, with unemployment peaking in 2010-11. The OECD has been forecasting a rise of 8 million in the number of unemployed to 42 million among its members.

The two gloomy readings of the global economic outlook came as a leading German forecaster, the RWI, said Europe's biggest economy would contract by 2% in 2009 - its worst recession since 1949. France's industrial output collapsed by a record 7.2% last month.

Buti in effect cast serious doubt on claims by the EC president, José Manuel Barroso, that the proposed €200bn (£173bn) stimulus package would make the recession "shorter and shallower".

Questioning OECD estimates of a slow recovery beginning from the third quarter of 2009, he said: "In spite of the unprecedented macroeconomic boost, the risks for 2010 are firmly to the downside and the risk that the economy will not restart in earnest then are strong. I would hope to be proved wrong."

The EC forecast in late October that the eurozone would come to a standstill in 2009, with the EU economy growing by just 0.1%, but Buti tore this up: "My reading is that the risks of a longer-lasting recession are clear and present."

Schmidt-Hebbel, who has forecast a gradual recovery in the 30-strong OECD from the third quarter of next year and a return to potential growth in the final quarter of 2010, said one bright spot was the decline in food and energy prices.

Another was the likelihood that central banks, led by the US Federal Reserve which is expected to cut rates to 0.5% next week, would further ease monetary policy. But the impact of rate cuts to near-zero could take longer than usual to feed through.

As China reported the first drop in its exports for seven years, Schmidt-Hebbel suggested a "small" likelihood that it and India could experience negative growth as global trade slows. But he added: "This will not be the Great Depression."

Senate Majority Leader Harry Reid said he was "terribly disappointed" about the demise of an emerging bipartisan deal to rescue Detroit's Big Three automakers.

He spoke shortly after Republicans left a closed-door meeting where they balked at giving the automakers federal aid unless their powerful union agreed to slash wages next year to bring them into line with those of Japanese carmakers.

Republican Sen. George V. Voinovich of Ohio, a strong bailout supporter, said the union was willing to make the cuts - but not until 2011.

Mr Reid was working to set a swift test vote on the measure, but it was just a formality. The bill was later rejected.

Mr Reid called the bill's collapse "a loss for the country," adding "I dread looking at Wall Street tomorrow. It's not going to be a pleasant sight."

The implosion followed an unprecedented marathon set of talks in Washington among labor, the auto industry and lawmakers who bargained into the night in efforts to salvage the auto bailout at a time of soaring job losses and widespread economic turmoil.

"In the midst of already deep and troubling economic times, we are about to add to that by walking away," said Democratic Sen. Chris Dodd, the Banking Committee chairman who led negotiations on the package.

Sen. Bob Corker of Tennessee, the Republican point man in the talks, said the two sides had been tantalizingly close to a deal, but the union's refusal to agree wage concessions by a specific date in 2009 kept them apart.

The autoworkers' contract doesn't expire until 2011.

"We were about three words away from a deal," said Mr Corker. "We solved everything substantively and about three words keep us from reaching a conclusion."

The stunning breakdown was eerily reminiscent of the defeat of the $700 billion Wall Street bailout in the House, which sent the Dow tumbling and lawmakers back to the drawing board to draft a new agreement to rescue financial institutions and halt a broader economic meltdown. That measure ultimately passed and was signed by President George W. Bush.

It wasn't immediately clear, however, how the auto aid measure might be resurrected.

Congressional Republicans revolted against a version that the Bush White House negotiated with congressional Democrats and the House passed on Wednesday.

As the price of oil continues to decline, the Institute of International Finance (IIF) 2009 commodity forecast says oil will average $56 per barrel in the first quarter of next year, rising to about $65 towards the end of the year.

This is some good news for the Nigerian government which had predicated its earnings next year on $45 per barrel of crude oil – and with the commodity now selling below the budget benchmark, Governor Godswill Akpabio of Akwa Ibom has warned that Nigeria’s economy could collapse in six months if the downward trend continued.

Akpabio said the country’s economy might collapse in six months “if the price of crude in the international markets continues to tumble”.

The governor expressed worries over the instability of the nation’s economy while speaking with newsmen yesterday at the Murtala Muhammed International Airport (MMIA), Lagos, expressing regrets that Nigeria is dependent on the market forces that are not in its control.

He said: “The falling crude oil price is a worrisome development. I think the falling oil price will affect everybody, every state and will even affect the Federal Government. So, we are watching this and praying it will not go far below $40 per barrel as it is going now but that shows the volatility of Nigeria economy. We are dependent on forces that are not within our control.

“If the oil price can fall from $147 to less than $50 per barrel under three months, that shows that Nigeria can actually collapse economically under six months. So, it’s a source of worry that we must make the best prudent use of the available resources on a daily basis, that we must try to create additional revenue generating means and resources if Nigeria must survive.”

The governor said that it is important that the state governments device ways to effectively manage their revenue and re-evaluate their developmental programmes, adding that in Akwa Ibom, his administration had decided to finish all ongoing projects before initiating new ones.

But Washington, DC-based IIF released its forecast at a press briefing in Washington, DC, United States, yesterday with some promising news for Nigeria.
 
First Deputy Managing Director and Chief Economist of IIF, Mr Yusuke Horiguchi, said the forecast was based on events in the market which indicate a dramatic fall in oil demand due to a slow-down in world economy and a possible recovery next year.

The planned reduction of oil supply by the Organisation of Petroleum Exporting Countries (OPEC) will also affect the market, he added.

Horiguchi stated that the collapse in the global economy is here to stay for sometime. A slow recovery is expected by the middle of next year, which will spur growth, commodity demand and lead to a spike in prices, said Horiguchi.

There is "tremendous weakening in oil demand relating to collapse of world economy... This will continue for sometime and we are not seeing any recovery in world growth until the middle of next year... Once economic activity starts growing faster than now, in the second quarter of next year, demand will increase," said the economist.

Asked to assess the risks of the volatile price of oil to the Nigerian economy, IIF Special Advisor and Director of the Africa-Middle East Department, Mr George Abed, told THISDAY the deficit in the 2009 budget might be more than three per cent, given huge spending.

"Budget that has been put before the legislature assumes $45 per barrel. At that price, given the spending, deficit will widen beyond three per cent, perhaps three per cent plus," he stated.

He added that there might be a strong demand to fund deficit projects with money from the foreign reserves.

The IIF in a report also stated that the recovery process for the world could be more painful than expected. The baseline scenario projects a rapid deceleration in global growth from 3.4 per cent in 2007 to 2.2 per cent in 2008 and 1.4 per cent in 2009.

Economic activity is expected to stagnate through mid-2009 in most advanced economies, as asset price and consumption boom deflate and financial institutions curtail credit to reduce leverage, said IIF.

Emerging and developing economies will be adversely affected by the crisis through reduced investment, trade and external funding, adds the institute. As a result, growth in emerging markets and developing countries is projected to moderate from the rapid pace of growth over the past several years, as spillovers from the global financial crisis intensify, the IIF stated.

The global financial crisis has led to a decline in oil prices from record highs mid this year to record lows this month. The commodity peaked in July costing well over $147 per barrel, falling to a four-year low $40 yesterday.