Shares soared and the dollar fell to its lowest level against the pound this year as the US currency bore the brunt of greater optimism about economic recovery.

The FTSE 100 closed 2 per cent higher as more positive data about the global economy lifted shares in oil, mining and financial companies. The index closed up 88.25 points at 4,506.19, its highest since early January.

In New York, the Dow Jones industrial average rose 221.11 points to close 2.6 per cent higher at 8,721.44, while the S&P 500 was up 2.5 per cent at 942.85. European shares closed at their highest level since January 6.

Sterling surged, buoyed by optimism about early economic recovery and a flight of capital from safe havens – such as the dollar – to more risky cyclical assets, including crude oil, which rose almost $2 per barrel to $68.29 on the New York Mercantile Exchange. Copper, zinc and tin also joined the rally, gaining ground on the London Metal Exchange after the publication of bullish manufacturing data from China.

Hopes of recovery is sending investors in search of higher-risk assets that will respond quickly to signals of economic growth. Sterling rose 1.5 per cent against the US currency to $1.6449, its highest level since October. The upbeat mood took its toll on safe-haven assets, such as gilts and US treasuries.

Currency analysts questioned whether the pound would continue its rise, cautioning that the apparent reversal in fortune might merely be a correction after an excessive fall. Paul Mackel, at HSBC, said: “It’s less to do with green shoots than that it [sterling] was significantly undervalued at $1.35. Investors were looking to buy an undervalued currency.”

Timothy Geithner, the US Treasury Secretary, sought to reassure Chinese government officials that the dollar reserves held by the People’s Republic were safe. China is the biggest foreign owner of US Treasury bonds, with holdings worth $760 billion in March. Mr Geithner said: “Chinese assets are very safe.”

Dollar weakness is helping to boost the price of crude oil, which is traded in the American currency. The up-surge in the oil price, which gained almost a third in value in May, is confounding oil market analysts, who see little underlying reason for the bullish price. After five consecutive quarters of falling demand for crude, stocks are high, with 130 million barrels held in floating storage by oil companies.

Meanwhile, General Motors and Citigroup were ejected from the Dow Jones industrial average after their falls from grace. Cisco Systems, the technology group, will replace GM, with Travelers, the insurance group, taking Citigroup’s place. GM will also be removed from the S&P 500 this week.

THE price of a barrel oil went past $68 during the day on Monday June 1st, the highest level in seven months. Although this remains less than half the peak of last July, prices are likely to remain above the norm of the past few decades, lifted with every bit of cheery economic news and as the dollar weakens. Some economists are now again talking of the approach of “three-digit oil prices”, in part as large emerging economies, such as China, India and Brazil, which are energy-intensive, appear to emerge from the worst of the downturn. In the longer term, prices could be pushed upwards thanks to demand from the emerging world and because of difficulties increasing global supply.

Consumers have not forgotten the pain of high oil prices in 2008, when a barrel of the black stuff peaked at $147. In rich countries commuters squealed especially, not only because of the expense—rich-world consumers found that they were forced to spend a larger, if still low, share of their income on transport—but also because of the volatility of the price and the sheer speed of the increases. As higher oil prices nudged up transport costs and energy bills, inflation began to rise. Carmakers were affected too, as demand for new vehicles slumped. The suddenness of the price rise left little room for consumers, companies or governments to adapt smoothly.

In many poorer countries higher oil prices caused greater hardship. For oil-importers, at least, higher prices played havoc with government finances, cutting into budgets for other kinds of spending. For poorer consumers, the associated rise in food prices affected a larger slice of their spending, provoking social unrest in many countries. Along with the rise in the oil price, food prices have again been creeping upwards recently.

Many poorer countries would also be affected if rising oil prices hamper global trade. For economies that depend upon being within global supply chains, making or assembling goods that are then shipped to rich-world consumers, rising transport costs are particularly unwelcome. Given the vast numbers of people employed by export-oriented firms, from Cambodia to Bangladesh, any repatriation of production closer to final markets could prove painful. For some poorer countries, most obviously oil-exporters, rising commodity prices would be beneficial.

Worries about the broader macroeconomic impact of higher oil prices centre on the possibility of the return of stagflation, the combination of high inflation and declining output that marred the periods of the 1970s after the two oil shocks of 1973 and 1979. For now that seems most unlikely, given the wider concerns about deflation in the rich world. Olivier Blanchard, now the chief economist of the International Monetary Fund, and economist Jordi Gali, in 2008 looked at the response of industrialised economies, particularly America, to oil price shocks since the 1970s. They doubted that higher oil prices would mean the return of stagflation, concluding that inflation, unemployment and output were markedly less responsive to oil prices during the two big oil price hikes since the 1980s, which began in 1999 and 2002.

Part of the explanation may be that the original 1970s stagflation episodes were the result not just of oil price shocks, but of other simultaneous shocks and mistakes by policymakers. In Europe and America, the economists argued, wages have become less rigid than they were in the 1970s (perhaps because unions are weaker). All this makes it easier to adjust to oil price increases.

So the world may have less to fear from an oil price rise in terms of overall macroeconomic stability than it used to. But the world economy has to be guided out of the biggest rut it has been in since the second world war, with eventual recovery likely to be slow and shallow. So it was probably wise of OPEC to decide recently to hold off more production cuts: too rapid a rise in oil prices could at least batter consumer confidence further, hampering recovery.

The Organization of Petroleum Exporting Countries increased oil output by 1.5 percent in May, the biggest gain since 2007, a Bloomberg News survey showed.
Oil output averaged 28.15 million barrels a day last month, up 405,000 from April, according to the survey of oil companies, producers and analysts. The 11 OPEC members with quotas, all except Iraq, pumped 25.76 million barrels a day, 915,000 more than their target.

OPEC agreed at three meetings last year that the 11 members with quotas would cut output by 4.2 million barrels a day to 24.845 million. The group, in a meeting May 28 in Vienna, decided not to reduce their production targets further because of concern higher prices might harm an ailing global economy. Ministers are scheduled to meet again on Sept. 9.

“Some members have been suffering because of recent cutbacks and have decided to take advantage of the higher prices,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “There’s a feeling that the market can tolerate greater production because of the recent rise in prices.”

Crude oil futures for July delivery rose $2.27, or 3.4 percent, to $68.58 a barrel on the New York Mercantile Exchange today, the highest settlement since Nov. 4. Prices have risen 54 percent this year.

Quota Adherence

Saudi Arabia, the United Arab Emirates, Kuwait and Qatar were the only OPEC members to produce less oil than their respective targets during both April and May.

The countries that are adhering to quotas “feel less fiscal pressure than other members such as Iran and Venezuela,” said Rick Mueller, a director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Their oil is cheaper to produce and they have an easier time balancing their books and paying for social services for their population.”

Saudi Arabia, the world’s biggest oil exporter, increased daily production by 75,000 barrels to 8 million, the survey showed. Output was 51,000 barrels less than the kingdom’s target of 8.051 million barrels a day.

The U.A.E. increased production 40,000 barrels a day to 2.2 million barrels a day, leaving output 23,000 barrels a day below its quota.

Kuwaiti output rose 55,000 barrels a day to 2.15 million, the first increase since October, according to the survey. Output was 72,000 barrels a day lower than the country’s quota.

Qatar, the second-smallest producer in the group, pumped 695,000 barrels a day in May, up 10,000 barrels from April and 36,000 barrels below its target.

Iranian Production Gain

Iran, OPEC’s second-biggest producer, raised daily output by 80,000 barrels to 3.78 million, the biggest increase of any member. The country’s production is now averaging 444,000 barrels a day above its target, exceeding the quota by more than any other member, according to the survey.

Nigeria and Angola, OPEC’s West African members, exceeded their quotas by the second-and third-biggest margins last month, the survey showed.

Nigeria’s production rose 40,000 barrels a day to an average 1.88 million in May. The country exceeded its target by an average 207,000 barrels a day.

Angola increased production by 30,000 barrels to 1.715 million barrels a day, leaving output 198,000 barrels above the nation’s target.

Venezuela reduced output by 25,000 barrels to 2.1 million barrels a day, the only production decline. The country pumped 114,000 barrels a day in excess of its target of 1.986 million last month, the survey showed.

The Latin American country is producing 3 million barrels a day and exporting 2.6 million, Oil and Energy Minister Rafael Ramirez said on May 27 in Vienna.

“It’s hard to believe that the Venezuelans are producing as much as they say,” Muller said. “They have really mature fields that have not seen much-needed investment as funds have been diverted to social programs.”

Current oil prices are not justified in the face of weak global demand and a glut of spare supply, but oil supplies could tighten in the next three to five years, energy analyst Daniel Yergin said on Monday.

U.S. oil futures rose more than 2 percent to a seven-month high of $68.29 a barrel on Monday due to rallying stock markets and sustained expectations for a global economic recovery.

But crude oil's biggest monthly gain in a decade has more to do with rallying equity markets and a weak dollar than actual oil demand, Yergin, chairman of IHS Cambridge Energy Research Associates (CERA), told the Reuters Global Energy Summit in Washington.

"The weakening dollar is part of it," Yergin said. "What's not part of it are the fundamentals of supply and demand which do not support a price like this."

There are few bullish signs to point to in the oil market, Yergin said. Global oil demand is down nearly 3 million barrels a day, erasing four year's worth of demand growth, and the market is struggling to digest the biggest spare capacity overhangs in 21 years at 6.5 million barrels per day.

But slack demand and low prices could spur big oil industry players to cancel or defer about 7.6 million barrels per day of planned expansions, which could lead to firmer oil demand down the road, Yergin said.

"The way you get to a crisis is five years and that's kind of how these cycles roughly go," Yergin said. "You could get back to a tight market in three to five years."

Another big question mark in the direction of global energy markets is new U.S. regulations to limit heat-trapping greenhouse gases, as well as a global push for efficiency measures, Yergin said.

Yergin, who won the Pulitzer Prize for his oil industry history "The Prize," said the industry has come full-circle on a cycle set in motion after the oil price shocks of the late 1970s.

Soaring prices set in motion a push to build smaller automobiles and develop alternate energy sources such as wind and solar, but the oil price crash of the 1980s stopped many of those initiatives in their tracks, Yergin said.

When oil prices hit their peak near $150 a barrel in July, many such initiatives came back into the spotlight.

"It's like a chasm has been closed," Yergin said. "It's like picking up the story from where we left off in 1980s."

Editing by Lisa Shumaker

U.S. Energy Secretary Steven Chu said on Monday he believes technology can solve environmental problems associated with Canada's oil sands and that the huge nearby resource contributes to U.S. energy security.

Chu told the Reuters Global Energy Summit that the balance between the environmental impact from the huge energy resource in northern Alberta and its importance to U.S. energy supply is a complicated one that will require solutions from the industry.

Environmental groups have mounted major campaigns to get the message out to Americans that the expansion of Canada's oil sands industry threatens to intensify global warming, deforestation and damage to water resources.

"It's a complicated issue, because certainly Canada is a close and trusted neighbor and the oil from Canada has all sorts of good things. But there is this environmental concern, so I think we're going to have to work our way through that," he said. "But I'm a big believer in technology."

Canada is the largest foreign supplier of oil to the United States and its oil sands represent the biggest deposits of crude outside the Middle East.

The Canadian and Alberta governments as well as the oil industry are going to great lengths to ensure that U.S. energy and environmental policies do not put oil sands-derived crude at a disadvantage in its most important market.

The resource is mined in open pits as well as produced in wells with the aide of steam pumped into the ground. Then it must be processed by upgrading plants into light oil that can be fed into refineries.

There is concern about the large amount of energy required to produce oil sands, Chu said. He said Canadian producers point out they are making strides in extracting the crude "more cleanly."

Cutting the energy used to extract a barrel of oil sands crude would be "economically good and it will be environmentally much better," he said.

Reporting by Ayesha Rascoe, Writing by Jeffrey Jones; Editing by Phil Berlowitz

In a ceremony that would not have been out of place for the Oscars, Iraq's Kurdish region on Monday celebrated the launch of oil exports from what it says are Iraq's first newly developed oilfields in over 20 years.

Exports from the Taq Taq and Tawke oilfields, developed by foreign companies, started at 100,000 barrels per day (bpd).

Iraqi President Jalal Talabani, a Kurd, and Kurdish regional President Masoud Barzani, symbolically began the flow by turning a flower-festooned valve on a stage, to a backdrop of strobe lights, a satellite link to the fields and an operatic score.

Exports from the region could hit 1 million bpd by end-2012, said Kurdish officials, who missed no opportunity to contrast their success with the failure of the Shi'ite Arab-led central government so far to boost flagging oil output elsewhere.

The largely autonomous Kurdish Regional Government (KRG) and Baghdad have had a long and bitter feud over territory and resources, and while allowing the exports, Baghdad rejects the contracts the KRG has signed with private oil firms.

"Today we are the successful example for the rest of Iraq. Today we show that the market driven policies and competition can lay a foundation for Iraq," KRG natural resources minister Ashti Hawrami told an audience of several hundred people.

Any central government representatives present kept a very low profile.

Baghdad's decision this month to allow exports from Taq Taq and Tawke was seen as a breakthrough after years of deadlock, but uncertainties remain over how the developers are to be paid.

Norway's DNO International developed the Tawke field, and Toronto-listed Addax Petroleum developed Taq Taq. Turkey's Genel Enerji is a partner in both deals.
There was no danger that the firms would not be paid, Hawrami said, but the money would not come from the 17 percent portion of total state oil revenues allocated to the KRG each year.

PEAK OUTPUT
Oil Minister Hussain al-Shahristani said all the oil pumped would be sold by the central government and the revenues would go into its coffers.

Exports from Tawke started at 60,000 bpd, officials said, though engineers at the field said 50,000 bpd was the current maximum. Another 40,000 bpd will be pumped out of Taq Taq.

The exports from new fields in Kurdistan are a poke in the eye for Shahristani, who says the KRG's deals are illegal.

Shahristani faces growing criticism in parliament, having presided over a drop in overall Iraqi oil output to 2.3-2.4 million bpd, lower than before the 2003 U.S. invasion.

"From the central government's point of view, these contracts are not correct, are not constitutional," Shahristani told U.S.-funded al-Hurra television, defending his record.

"They were completed secretly, not competitively, and the interest of the Iraqi people, who own this wealth, was not taken into account."

A sharp fall in oil prices since last year has hit Iraq's finances hard and Baghdad's acceptance of the Kurdish crude exports is thought to be a sign of its need for money.

TROUBLE AHEAD
Shunning production sharing deals, Shahristani is instead offering tenders for long-term, fixed fee service contracts in two rounds, the first to be decided at the end of June. Fields around the northern city of Kirkuk, disputed by Kurds, Arabs and ethnic Turkmen, are among those on offer.

Hawrami warned that the KRG expected to be consulted over the Kirkuk tender and could reject any deal.

U.S. officials fear Kurd-Arab tensions could reignite violence just as the sectarian war and insurgency are fading.

While it sits on the world's third largest oil reserves, Iraq's oil industry is in dire need of investment.

* Exports a breakthrough in Kurd-Baghdad dispute
* Hopes to hit 1 million bpd by end 2012
* Kirkuk fields oil tender in doubt

Additional reporting by Sherko Raouf and Shamal Aqrawi, Writing by Tim Cocks and Mohammed Abbas; Editing by Christian Wiessner

The Australian oil and gas industry is struggling to meet its self-imposed oil and condensate production target, according to a report released this week by the local upstream industry body.

In 2007, the Australian Petroleum Production and Exploration Association outlined a number of targets for the following decade, including maintaining oil and condensate production at the 2006 proportion of 57% of liquid fuels consumption.

Instead, the ratio of production to liquid fuels consumption declined to 56% in 2007 and 54% in 2008, according to APPEA's 2009 report on the industry.

Australia has posted a 35% decline in oil and condensate production over the period from 2000 to 2008, from 715,000 b/d to 461,000 b/d. A forecast short-term spike in output to 653,000 b/d in 2007 and 608,000 b/d in 2008 did not materialize due to facilities issues and greater-than-expected decline in some producing fields.

"Oil and condensate production may temporarily increase in 2009 but without major new discoveries, will return to the long-term downwards trend," APPEA said. "The decline in production in 2008 is disappointing given the significant number of new project startups over recent years," the association added.

The 80,000 b/d Stybarrow oil project off Western Australia began producing in November 2007, just after the 5,000 b/d Puffin development in the Timor Sea. Western Australia's 100,000 b/d Vincent oil field started up in August 2008 and the North West Shelf joint venture's Angel project, with a capacity of 310 petajoules/year of gas and 50,000 b/d of condensate, was commissioned in October 2008. In addition, several small oil fields have been discovered and brought into production in the onshore Cooper Basin.

Australia's upcoming oil projects include the Apache-operated Van Gogh development, expected to start up during 2009 with a capacity of 63,000 b/d; BHP Billiton's 96,000 b/d Pyrenees field, due to start producing during the first half of 2010; and PTT Exploration and Production's 39.9 million barrel Montara project in the Timor Sea, expected to pump first oil in the third quarter of 2009.

"Looking further ahead though, there have been very few significant oil discoveries in recent years to support the next generation of oil field developments," APPEA said. "Exploration for oil is still largely directed towards mature oil provinces with discoveries becoming smaller and smaller. Not enough exploration is occurring to test unproven oil plays in frontier areas that hold the greatest potential for a major discovery. In addition, production from most of the new or about to be commissioned projects ... is expected to drop away quickly."

APPEA forecast a rapid decline in Australia's liquids production after 2009. "It generally takes at least five years to appraise and develop a major oil discovery, so unless several major new fields (or ideally a new oil province like the Exmouth Sub-basin) are discovered within the next few years, the strategy target of maintaining the liquids production to consumption ratio at the 2006 level, will be difficult to meet," the association said.

Beyond 2014, the commissioning of one or more greenfields LNG projects with condensate-rich gas, could help partly reverse the decline in liquids production. Japan-based Inpex Holdings' Ichthys field, which is expected to be developed to supply an 8 million mt/year LNG plant in the northern Australian city of Darwin, also contains 527 million barrels of condensate and could produce around 100,000 b/d of liquids from 2015.

Meanwhile, Australia's petroleum balance of trade has continued to deteriorate, with imports exceeding exports by a record A$13.1 billion ($10.8 billion) in 2008, despite markedly lower oil prices in the second half of the year. The deficit last year was A$4.7 billion higher than the A$8.4 billion recorded in 2007, and the data suggests the shortfall, excluding LNG, could double from A$13.7 billion in 2006 to A$28 billion or more by 2017, APPEA said.

Gulf of Mexico energy companies are taking a big risk this hurricane season as they are squeezed by rocketing premium rates and the stress of last year's collapse in oil and gas prices.

Insurance rates in the Gulf have risen 20 per cent to 100 per cent on average, according to brokers at Marsh, with some insurers claiming to have charged clients up to three times last year's rates for the same cover.

Last year's hurricane Ike caused $15bn in total insured losses, destroying 54 platforms in the Gulf and damaging 95 others, says Howard Mills, director and chief adviser of consultant Deloitte's Insurance Industry Group.

"Ike was even more of a watershed event," Mr Mills says. "It has really crystallised the difficulties of predicting risk in the Gulf."

Allied with the ravages of the financial market turmoil, the capital available from both traditional operators and hedge funds has dropped dramatically. Primary insurance capacity for the Gulf has dropped by 30-40 per cent, according to Bertil Olsson, energy leader for Marsh's US energy, mining and power practice.

Meanwhile, falling oil and gas prices last year put pressure on the balance sheets of all energy producers, meaning they have less cash available to spend either on insurance now, or on clean-up and repairs later if hurricanes do hit.

One mid-sized oil and gas company said while it had robust insurance coverage for all other potential risks, it could not get any cover for damage to assets in the Gulf. Even after lowering its limit to $100m with a $50m deductible, insurance companies subscribed for just 22 per cent of the cover. Pre-Katrina, the company had more than $500m in hurricane coverage with a $15m deductible.

This company believes the string of recent storms showed the risk models used to price insurance were flawed. "It turns out their models were completely wrong, and it wiped out more money than they ever thought they could lose."

It is not just the amount, but also the type of insurance cover that has changed, which will have important knock-on effects for companies' ability to restart production in the wake of a bad storm.

Richard Tolliday, chief executive of Omega Insurance, a small London-listed insurer, says even those with insurance may not have cover for the costs of controlling wells, salvaging wreckage or redrilling.

"It is available, but separately and at additional cost, whereas previously it was included automatically," he says.

Some think energy companies and insurance brokers are playing a game of chicken with the insurers as the clock winds down towards the busiest part of the storm season, which began on June 1.

"There is capacity, but a lot of insurers are deliberately keeping their powder dry to do business at the prices they want," says Mr Tolliver.

Richard Brindle of Lancashire, a London-listed Bermudan insurer, believes some clients are being advised by brokers to hang back and wait for insurers to drop their prices. "We think it's bad advice," he says. "They're waiting for some last-minute meltdown in the insurance market - which there won't be."

The oil majors, which have stockpiled profits from the high oil and gas prices of recent years, should be better equipped to weather another massive hurricane than their less diversified, smaller rivals. However, observers say while a near normal season has been forecast, big storms would be particularly painful for the energy industry.

"An active hurricane season would pose significant challenges for the industry," Mr Mills says. "They're really in a cash crunch."

Mr Olsson of Marsh adds: "If there is a low-wind season all will be fine, but these companies have less cash due to lower energy prices, which means big storms will put big pressure on the industry and its ability to cope with repairs."

Brazilian and Chinese state oil firms are boosting investment even as their western independent competitors cut expenditure in light of lower demand, according to an Ernst and Young study.

Just one of the big international oil "majors", Chevron, has increased capital expenditure this year over last year, the study found. Repsol, Total and Exxonmobil had held spending steady but others including ConocoPhillips, BP and Royal Dutch Shell had all made significant cuts.

But thanks to nationalised oil companies around the world overall expenditure has remained stable at $375bn (£228bn) this year, the report said.

There has been widespread concern that the sudden drop in oil prices over the last ten months would lead to big falls in investment in new fields, leading to shortfalls in supply and new price surges if and when economic recovery takes hold.

Key were the state firms of Brazil and China, the report said, speeding a trend in favour of emerging economy producers that was already under way.

"If you look at what China is now spending that's a continuation of what's been happening for years," said the report's author, Andy Brogan, Ernst and Young's global oil and gas transaction advisory services leader.

"In terms of the biggest spenders China is right up there. Petrochina is the oil company in the world based on market capitalisation right now."

Petrochina is just one of three big state-owned Chinese oil groups. They are continuing to exploit China's own oil fields but much of their energy is spent trying to secure supplies from abroad, signing takeover, finance, development and servicing deals with countries from Kazakhstan to Venezuela.

Petrobras, by contrast, is mainly focused on developing Brazil's own growing production base.

Mr Brogan said there was still a risk that investment would fall off, leading to future shortages. Much would depend on announcements later this year, but most firms were being "responsible" and looking to the long term.

The oil price has in any case recovered to around $67 from lows of $33 a barrel at the end of last year.

The report said that with the fall in oil prices countries might be seeking new partnerships once again, if only to raise capital.

Russian gas supplies to Europe through Ukraine could come to a grinding halt soon due to crisis-ridden Kiev's payment arrears, Russian Prime Minister Vladimir Putin warned on Wednesday.

"This could happen in late June or early July -- a full stop to our transit" across Ukraine, Putin told a press conference in Helsinki.

"No one in Russia is taking pleasure or gloating at Ukraine's difficulties in paying for the product it receives from us. But it must pay," the powerful Russian prime minister told reporters.

Speaking during a visit to EU member Finland, Putin complained that Europe had rebuffed Russian requests to help Ukraine pay for its gas needs.

"We are proposing to solve the problem with the European Commission. But our efforts to approach the commission about this have not been successful. There is only one answer (from them) -- we have no money for Ukraine," Putin said.

Under the contract that governs Russian gas deliveries to Ukraine, Russian state energy giant Gazprom has the right to start demanding pre-payment from Kiev if any payments do not arrive on time, Putin said.

After that, if Ukraine misses the deadline for one of its advance payments, Russia will cut off the gas to its southern neighbour, he said.

In recent weeks Russia has warned repeatedly that crisis-battered Ukraine would have difficulties paying its gas bills, but Kiev has denied the claims and insisted that it has the funds.

Again on Wednesday, Ukraine said it will pay Russia what it owes for May gas deliveries.

"We have 500 million dollars left to pay. We still have time before June 7 and I think we will find the money," the country's energy minister, Yuri Prodan, was quoted by news agency Interfax as saying.

He shrugged off Putin's threat, saying: "Ukraine has always paid on time and I think this will be the case in the future."

Putin on Wednesday also urged Finland to approve the Nord Stream undersea gas pipeline, which would deliver energy to Europe while bypassing Ukraine.

The multibillion-dollar project is strongly backed by Russia and Germany but still needs approval from Finland, Sweden and Denmark as the proposed pipeline would pass near their Baltic Sea coastlines.

"I do not see a single reason why we would not receive permission to lay this pipeline system in the Finnish economic zone, especially since it in no way harms the interests of Finland," Putin said.

However, Putin stressed that Finland was entitled to make its own decision, speaking in a press conference in Helsinki alongside his Finnish counterpart Matti Vanhanen.

"Undoubtedly, this is a sovereign decision for Finland ... We will respect any decision," he said.

The 1,220-kilometre (760-mile) pipeline would run under the Baltic Sea from the Russian port city of Vyborg to Greifswald, in northern Germany.

Ukraine needs some 500 million dollars (350 million euros) per month through October to store the gas it needs for winter, Putin said, adding that without the stored gas Kiev would be "forced" to siphon off gas bound for Europe.

Russia accused Ukraine of stealing Europe-bound gas during the January gas crisis, which raised doubts within the European Union about Moscow's reliability as an energy supplier.

In that crisis, more than a dozen European countries were left without Russian gas in the middle of winter as a result of a bitter price dispute between Moscow and Kiev.

The EU gets about a quarter of its gas supplies from Russia. Around 80 percent of those supplies pass through Ukraine.

Gazprom, Russia’s state-controlled energy group, has told Turkmenistan to reduce its gas export price after saying it did not need central Asian gas.

The statement marks an escalation in a dispute that has prompted Turkmenistan to intensify its efforts to find other export routes for its gas.

Gazprom offered last year to pay central Asian gas suppliers high prices to outbid rival buyers in China and Europe. But Valery Golubev, deputy chairman of Gazprom, has now said it would be unprofitable to sell highly priced Turkmen gas in Europe and Ukraine where energy demand has fallen as the economic recession has taken hold.

“Today there is nowhere to sell your gas at your price. Either review the price or the volume,” he said.

Relations between Gazprom and Turkmenistan soured in April after an explosion on a pipeline – carrying central Asian gas to Russia.

Turkmenistan accused Gazprom of triggering the blast by reducing its intake of gas without warning and threatened to sue the group for damages.

Gazprom has cut gas production by more than 20 per cent this year as demand slumped in Europe and Ukraine. It is determined that central Asian producers should share the pain of lost revenues.

Tachberdy Tagiev, the deputy prime minister of Turkmenistan, is in Beijing this week to discuss possible Chinese financing for developing the huge South Iolotan gas field that could feed a new pipeline to China.

Gazprom has urged Turkmenistan to dedicate South Iolotan gas to a planned pipeline running across Kazakhstan to Russia.

The European Union, meanwhile, has offered to finance construction of a gas export pipeline from Turkmenistan across the Caspian Sea in exchange for access to South Iolotan.

Turkmenistan invited RWE, the German energy company, last month to develop gas reserves in the Caspian Sea and seek new ways to deliver gas to Europe.

RWE is a member of the Nabucco consortium planning to build a new pipeline to bring Caspian and central Asian gas west across the Caucasus and Turkey, reducing European reliance on Russian gas.

Ukraine said on Monday it would meet a June 7 deadline to pay for Russian gas imports supplied in May. Gazprom earlier warned that Naftogaz, Ukraine’s state gas company, was insolvent.

The earth has been shaking for a few days now all across Pipelineistan - with massive repercussions for all the big players in the New Great Game in Eurasia. United States President Barack Obama's AfPak strategists didn't even see it coming.

A silent, reptilian war had been going on for years between the US-favored Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline and its rival, the Iran-Pakistan-India (IPI) pipeline, also known as the "peace pipeline". This past weekend, a winner emerged. And it's none of the above: instead, it's the 2,100-kilometer, US$7.5 billion IP (the Iran-Pakistan pipeline), with no India attached. (Please see Pakistan, Iran sign gas pipeline deal, May 27, 2009, Asia Times Online.)

This whole saga started way back in 1995 - about the time California-based Unocal started floating the idea of building a pipeline crossing Afghanistan. Now, Iran and Pakistan finally signed a deal this week in Tehran, by which Iran will sell gas from its mega South Pars fields to Pakistan for the next 25 years.

According to Iranian energy officials speaking to the ISNA news agency, the final deal will be signed in less than three weeks, slightly after the first round of the Iranian presidential election. The last 250 km of a 900-km pipeline stretch in Iran between Asalouyeh and Iranshahr, near the border with Pakistan, still needs to be built. The whole IP pipeline should be operational by 2014.

The fact that Islamabad has finally decided to move on is pregnant with meaning. For the George W Bush administration IPI was simply anathema; imagine India and Pakistan buying gas from "axis of evil" Iran. The only way to go was TAPI - an extension of the childish neo-conservative belief that the Afghanistan war was winnable.

Now, IP reveals Islamabad's own interests seemed to have prevailed against Washington's (unlike the virtually US-imposed Pakistan army offensive against the Taliban in the Swat Valley). The Barack Obama administration has been mum about IP so far. But it will be very enlightening to hear what former Bush pet Afghan Zalmay Khalilzad - who's been infiltrating himself as the next CEO of Afghanistan - has to say about it. (Please see Slouching towards Balkanization, May 22, 2009, Asia Times Online.) Khalilzad's Pipelineistan dream, since the mid-1990s, has always been a trans-Afghan pipeline capable of bypassing both Iran and Russia.

IP, IP, hurrah
India, for a number of reasons (the pricing system, transit fees and above all, security) de facto shelved the IPI idea last year. Had it not been the case, IPI would become a powerful vector in terms of South Asian regional integration - doing more to stabilize India-Pakistan relations than any diplomatic coup. Nevertheless, both Iran and Pakistan still have left an open door to India.

India's (momentary?) loss will be China's gain. Since 2008, with New Delhi having second thoughts, Beijing and Islamabad had set up an agreement - China would import most of this Iranian gas if India dropped out of IPI. China anyway is more than welcome business-wise to both Iran and Pakistan. Only in transit fees, Islamabad could collect as much as $500 million a year.

For Beijing, IP could not be more essential. Iranian gas will flow to the Balochistan province port of Gwadar, in the Arabian Sea (which China itself built, and where it is also building a refinery). And Gwadar is supposed to be connected to a proposed pipeline going north, mostly financed by China, along the Karakoram Highway (which by the way was largely built from the 1960s to the 1980s by Chinese engineers ... ).

Pakistan is the absolutely ideal transit corridor for China to import oil and gas from Iran and the Persian Gulf. With IP in place and with multi-billion-dollar, overlapping Tehran-Beijing gas deals, China can finally afford to import less energy via the Strait of Malacca, which Beijing considers exceedingly dangerous, and subject to Washington's sphere of influence.

With IP, not only China wins; Russia's Gazprom also wins. And by extension, the Shanghai Cooperation Organization (SCO) wins. Russian deputy Energy Minister Anatoly Yankovsky told the Kommersant business daily, "We are ready to join the project as soon as we receive an offer."

The reason is so blatant that Gazprom officials have not even bothered to disguise it. For Russia, IP is a gift-from-above tool in rerouting gas from Iran to South Asia, and away from competing with Russian gas. The big prize, in this case, is the Western European market, dependent almost 30% on Gazprom and the source of 80% of Gazprom's export profits.

The European Union is desperately trying to keep the Nabucco pipeline project - which bypasses Russia - afloat, so it may reduce its dependence on Gazprom. But as anyone in Brussels knows, Nabucco can only work if it is provided enough gas by either Iran or Turkmenistan. The Turkmenistan distribution system is controlled by Russia. And a deal with Iran implies no more US sanctions - still a long way away. With IP in place, Gazprom reasons, Nabucco is deprived of a key supply source.

All eyes on Balochistan
With IP firmly in place, the strategic spotlight focuses even more on Balochistan. (Please see Balochistan is the greatest prize, May 9, 2009, Asia Times Online.) First of all, there's an internal Pakistani question to be settled. An editorial in the Pakistani daily Dawn has stressed how Islamabad must be serious about hiring indigenous Balochi labor and making sure "the gains of the economic activity ... are focused on Balochistan for the benefit of its poverty-stricken people".

The port of Gwadar, in southwest Balochistan, near the Iranian border, is indeed bound to become a new Dubai - but not the way the vice president Dick Cheney and gang in Washington once dreamed of. Gas from the South Pars fields in Iran will definitely flow though it. As for gas from the Daulatabad fields in Turkmenistan, assuming TAPI ever gets built though war-torn Afghanistan, that's much more unlikely.

This all raises the crucial question: how will Islamabad deal with ultra-strategic Balochistan - east of Iran, south of Afghanistan, and boasting three Arabian sea ports, including Gwadar, practically at the mouth of the Strait of Hormuz?

The New Great Game in Eurasia rules that Pakistan is a key pivot to both North Atlantic Treaty Organization (NATO) and the SCO, of which Pakistan is an observer. Balochistan de facto incorporates Pakistan as a key transit corridor to Iranian gas from the monster South Pars fields, and not to a great deal of the Caspian wealth of "gas republic" Turkmenistan. For the Pentagon, the birth of IP is mega bad news. The ideal Pentagon scenario is the US controlling Gwadar - in yet one more prime confluence of Pipelineistan and the US Empire of Bases.

With Gwadar directly linked to Iran and developed virtually as a Chinese warehouse, the Pentagon also loses the mouth-watering opportunity of a long land route across Balochistan into Helmand, Nimruz, Kandahar or, better yet, all of these three provinces in southwest Afghanistan, where soon, not by accident, there will be another US mega-base in the "desert of death". From a Pentagon/NATO perspective, after the "loss" of the Khyber Pass, that would be the ideal supply route for Western troops in the perennial, now rebranded, GWOT ("global war on terror").

Balochis surging
Islamabad has promised an all-parties conference "within days" to seriously deal with Balochistan. No one is holding their breath. Over a year ago, Balochistan was promised greater control over its immense natural resources - the undisputed, number-one Baloch grievance - and a massive aid package. Not much has happened.

Punjabis derisively refer to Balochistan's "backwardness". But the heart of the matter is systematic, hardcore pillage by Islamabad - combined with hardcore repression and serial Latin America-in-the-1970s-style "disappearances" of political activists and senior Baloch nationalists. Not to mention virtually no investment in health, education and job creation. This Third World dictatorship catalogue of disasters fuels Baloch nationalism and separatism.

Islamabad's paranoia is "foreign involvement" in the different strands of Balochistan's nationalist movements. That would be, in fact, the CIA, MI5 and the Israeli Mossad, all engaged in overlapping agendas which manipulate Balochistan for balkanization of Pakistan purposes and/or as a base for the destabilization of neighboring Iran's southeast. While the Taliban, Afghan or Pakistani, can roam free across Balochistan, Baloch nationalists are intimidated, harassed and killed.

Sanaullah Baloch, a secretary of the Balochistan National Party-Mengal, told Dawn how "several Baloch political parties tried to file charges against [former president General Pervez] Musharraf, but the country's institutions lack the will or courage to accept our plea against him." Studies show that rural poverty in Balochistan when Musharraf was in power increased 15% between 1999 and 2005.

Sanaullah Baloch roundly denounces the "civil-military elites" of Pakistan as implicated in the systematic repression going on in Balochistan; "Without their consent, no political regime can undo their policy of continued suppression."

And his analysis of why Islamabad has made a deal with the Taliban in Swat but won't do a deal with Balochis could not be more enlightening: "The establishment in Pakistan has always felt comfortable with religious groups as they do not challenge the centralized authority of the civil-military establishment. The demands of these groups are not political. They don't demand economic parity. They demand centralized religious rule which is philosophically closer to the establishment's version of totalitarianism. Islamabad's elite are stubborn against genuine Baloch demands: governing Balochistan, having ownership of resources, and control over provincial security."

So Islamabad still has all it takes to royally mess up what it has accomplished by approving IP. For the moment, Iran, Pakistan, China and Russia win. The SCO wins. Washington and NATO lose, not to mention Afghanistan (no transit fees). But will Balochistan also win? If not, all hell will break loose, from desperate Balochis sabotaging IP to "foreign interference" manipulating them into creating an even greater, regional, ball of fire.

Pepe Escobar is the author of 'Globalistan: How the Globalized World is Dissolving into Liquid War' (Nimble Books, 2007) and 'Red Zone Blues: a snapshot of Baghdad during the surge'. His new book, just out, is 'Obama does Globalistan' (Nimble Books, 2009).

Green energy overtook fossil fuels in attracting investment for power generation for the first time last year, according to figures released today by the United Nations.

Wind, solar and other clean technologies attracted $140bn (£85bn) compared with $110bn for gas and coal for electrical power generation, with more than a third of the green cash destined for Britain and the rest of Europe.

The biggest growth for renewable investment came from China, India and other developing countries, which are fast catching up on the West in switching out of fossil fuels to improve energy security and tackle climate change.

"There have been many milestones reached in recent years, but this report suggests renewable energy has now reached a tipping point where it is as important – if not more important – in the global energy mix than fossil fuels," said Achim Steiner, executive director of the UN's Environment Programme.

It was very encouraging that a variety of new renewable sectors were attracting capital, while different geographical areas such as Kenya and Angola were entering the field, he added.

The UN still believes $750bn needs to be spent worldwide between 2009 and 2011 and the current year has started ominously with a 53% slump in first quarter renewables investment to $13.3bn.

Counting energy efficiency and other measures, more than $155bn of new money was invested in clean energy companies and projects, even though capital raised on public stock markets fell 51% to $11.4bn and green firms saw share prices slump more than 60% over 2008, according to the report, Global Trends in Sustainable Energy, drawn up for the UN by the New Energy Finance (NEF) consultancy in London.

Wind, where the US is now global leader, attracted the highest new worldwide investment, $51.8bn, followed by solar at $33.5bn. The former represented annual growth of only 1%, while the latter was up by nearly 50% year-on-year.

Biofuels were the next most popular investment, winning $16.9bn, but down 9% on 2007, as the sector was hit by overcapacity issues in the US and political opposition, with ethanol being blamed for rising food prices.

Europe is still the main centre for investment in green power with $50bn being pumped into projects across the continent, an increase of 2% on last year, while the figure for America was $30bn, down 8%.

But while overall spending in the West dipped nearly 2%, there was a 27% rise to $36.6bn in developing countries led by China, which pumped in $15.6bn, mostly in wind and biomass plants.

China more than doubled its installed wind turbine capacity to 11GW of capacity, while Indian wind investment was up 17% to $2.6bn, as its overall clean tech spending rose to $4.1bn in 2008, 12% up on 2007 levels.

A number of Green New Deals – government reflationary packages designed to kickstart economies and boost action to counter climate change – have been laid out by ministers around the world.

The slump in global renewable ­investment during the first quarter of 2009 has alarmed the UN and New Energy ­Finance, the London-based consultancy that compiled the figures for the UN.

Michael Liebreich, chief executive of NEF, said the second quarter had revealed "green shoots" of recovery, which indicated this year could end up with investment at the upper end of a $95bn to $115bn range, but still a quarter down on 2008 at the least.

About $3bn of new money had been raised via initial public offerings or secondary issues on the stock markets in the second quarter, compared with none in the first three months of this year.

The New Energy Index of clean tech stocks, which had slumped from a 450 high to 134 by March, had since bounced back to 230, while more project financing had been raised in the last six weeks than in the 13 before that, he said.

But Steiner and Liebreich are still anxious that politicians do more to stimulate growth.

"There is a strong case for further measures, such as requiring state-supported banks to raise lending to the ­sector, providing capital gains tax exemptions on investments in clean technology, creating a framework for Green Bonds and so on, all targeted at getting investment flowing," said Liebreich.

It is important stimulus funds start flowing immediately, not in a year or so, he added: "Many of the policies to achieve growth over the medium-term are already in place, including feed-in tariff regimes, mandatory renewable energy targets and tax incentives. There is too much emphasis amongst some policy-makers on support mechanisms, and not enough on the urgent needs of investors right now."

The cost of petrol is threatening to pass the psychologically important £1-per-litre mark, with motoring groups warning that speculators pushing up oil prices are endangering Britain's economic recovery.

Prices at the pumps have risen consistently since January to reach 99.99p per litre for petrol and 103.74p per llitre for diesel yesterday, mirroring a steadily increasing oil price. London Brent crude for July delivery topped $67 per barrel yesterday, having breached $66 on Friday for the first time since October.

The fear is that cash-strapped drivers will stop spending their money on other items, which could slow recovery or push the country even deeper into recession, according to the Automobile Association. In a survey of 15,000 motorists, published today, 55 per cent told the AA's researchers they were already cutting back on either fuel consumption or household spending in response to the rising petrol prices.

Luke Bosdet, a spokesman for the AA, said: "Drivers just don't understand why, when so much of the world is in recession, fuel prices are going up."

The finger of blame is pointing at investors ploughing money into commodities, particularly oil, in the hope that they avoid beleaguered equity markets and cash in on the burgeoning economic recovery. But if fuel prices are pushed too high, consumers will stop spending, drivers will stop driving and the price will crash.

Last summer's all-time high of $147 per barrel of oil was partly fuelled by speculation. But the impact on demand, particularly among US drivers, combined with the banking crisis applying the brakes to economic growth, sent oil spiralling downwards to as low as $35 in December. Fuel prices followed the same curve. Last July, petrol cost 119.7p per litre and diesel 133.25p. By January, petrol was down to 86.07p and diesel to 98.25p. "The speculators have learned nothing from last summer," Mr Bosdet added. "The markets are playing the same game but consumers do not have the same spending potential."

At least some of the rising oil price is down to fundamentals. Opec, the 12-member cartel of oil producing nations, agreed three tranches of production cuts last autumn to help prop up the collapsing price, taking an estimated 3.2 million barrels per day out of the market. But experts estimate that Opec's cuts are only responsible for taking the price back up to about $50. "Oil has now become a justifiable investment for funds looking for the maximum return," Mr Bosdet said. "The problem is that they are gambling on a recovery that may not happen for months and in the meantime are creating a mini bubble."

The Government's policy on fuel duty is not helping motorists either. Tax increases added 2p per litre from 1 April, with another 2p per litre to come at the start of September. The end of the VAT holiday in December will add another 2.5 per cent, and the re-introduction of the fuel price "escalator" will push up duty by another 1p per litre in real terms from 2010.

Iraq and Britain have struck a deal that will allow British troops to remain in the country, helping Iraqi naval forces protect oil platforms beyond a previously agreed withdrawal date, officials said on Tuesday.

Britain's presence in Iraq began with its support of the 2003 U.S. invasion, but was set to conclude at the end of June under a pact signed at the end of last year.

But the two sides agreed to extend the British deployment so that a small number of British troops and up to five naval vessels could help Iraq protect its floating oil terminals against attack, said government spokesman Ali al-Dabbagh.

"The agreement will allow a limited number of not more than 100 British troops, and their civilian support personnel and five navy ships with their crews, to stay in Iraq for one year, after parliament has given its approval," Dabbagh said.

Lieutenant Colonel Sean Armstrong said the British forces would focus on protecting the oil platforms in Iraq's south, through which most of its oil exports are shipped, and on training Iraqi forces.

Iraq has the world's third largest oil reserves and is desperately trying to ramp up production so it can raise the funds it needs to rebuild after years of sanctions and war.

Armstrong said the total British force would not number more than 400.

"It is inappropriate for us to comment further on the Iraqi process while the Council of Representatives is considering the text," he said in an email, referring to Iraq's parliament.

London sent 46,000 troops to the Gulf for the U.S.-led invasion, a war that became deeply unpopular in Britain, and ended up controlling the southern province of Basra where most of Iraq's crude is pumped out of the ground.

By 2007, Britain's remaining 4,000 soldiers had largely withdrawn to Basra airport, leaving security in the provincial capital Basra -- Iraq's second largest city -- in Iraqi hands. The British troops began to pull out for good earlier this year.

Writing by Michael Christie; Editing by Jon Hemming

Britain's slow but steady march towards renewable energy took a step forward yesterday when plans were revealed for the UK's first power plant to produce electricity from geothermal energy – the Earth's own heat.

The plant is a joint partnership between the Eden Project, the Cornish ecotourism attraction which features the world's largest greenhouse, and a geothermal power company, EGS Energy. It is hoped the plant will be built on the Eden site near St Austell, and will power the whole complex.

It will be based around two wells, driven down 4km into the Cornish granite where the bedrock itself is hot enough to heat water to 150 degrees, which will then produce steam to power an electricity-generating turbine.

The plant should be able to produce about three megawatts of carbon-neutral electricity – about the same as a large wind turbine – which will be more than enough to supply Eden's needs. Power left over could be sold to the national grid.

While there is already a geothermal plant in Southampton which supplies heat to buildings in the city centre, this is believed to be the first such facility in Britain to generate electric power.

Engineers believe that the vast quantity of geothermal energy stored in Cornish granite would eventually enable them to make a significant contribution to UK energy needs – as much as 10 per cent of the total.

World leaders are to meet for an unprecedented second summit on climate change this year to try to get agreement on a tough new treaty by December, and may even get together for a third time before the end of the year.

The UN Secretary-General, Ban Ki-Moon, is to call the world's heads of government to New York in September to "galvanise political will" about what he describes as "the defining issue of our time". And there are plans for another G20 summit to discuss the issue in the autumn.

These will follow a meeting of 17 key world leaders convened at the initiative of President Barack Obama immediately after the annual G8 summit in July. Observers cannot remember any similar progression of top-level meetings to address any issue over such a short period of time.

The moves come as pressure mounts on the leaders to reach agreement at December's vital negotiations in Copenhagen, billed as the world's last chance to get to grips with global warming before it escalates out of control.

On Friday a think tank headed by the former UN secretary-general Kofi Annan reported that climate change was already killing 300,000 people and affecting 300 million. The day before, 20 Nobel Prize winners, meeting in London, warned that it posed as great a threat as nuclear war. And in Copenhagen on Tuesday 500 business chief executives called for "an ambitious and effective treaty" to "help establish a firm foundation for a sustainable economic future".

The summits are part of an extraordinarily intense series of meetings over the next six months that will take negotiators from Bonn to Bangkok and from Barcelona to the Ilulissat in Greenland. The first three are formal discussions on a UN treaty for the Copenhagen talks, while key ministers from 30 countries will go to the small Greenland town next to the Arctic's fastest melting glacier at the end of next month to try to hammer out a "political declaration" to accompany it.

The next round of negotiations opens in Bonn tomorrow, but no one is expecting a breakthrough. Talks in the former West German capital in April made little progress beyond agreeing to draw up negotiating texts.

These will be on the table for the first time tomorrow, but they mainly serve to highlight divisions between countries and show how far there is to go in six short months to meet December's deadline.

One of the main stumbling blocks is how much rich countries will undertake to cut their emissions of greenhouse gases in the short to medium term. There is general agreement that they should be reduced by a drastic 80 per cent on 1990 levels by 2050, the minimum that scientists say will be needed to avoid dangerous climate change. But setting more immediate targets is proving much harder.

Ten days ago, China flung down the gauntlet by calling on rich countries to cut emissions by 40 per cent by 2020. The only advanced economy to come near that is the European Union, which has promised unilaterally to reduce them by 20 per cent by then, rising to 30 per cent if other countries follow suit. But at present there is little sign of other industrialised nations taking up the challenge; despite the new priority President Obama is giving to climate change, his plans would amount to a cut of only a few per cent from 1990 levels.

In return, developing countries, including China and India, would agree to slow the growth of their emissions through "measurable, verifiable and reportable" measures. But India has just signalled that it will not open such plans to global scrutiny unless rich countries deliver on a promise to provide funds to help it tackle and adapt to climate change.

That is the second sticking point. Developing countries want to get at least $200bn a year, which works out at about 0.5 per cent of rich nations' economic output and is about the same size as current development aid. It is a relatively small sum, especially in the context of the amounts spent in recent months on bailing out the banks, but developed country government are baulking at it. Last week Australia described the demands as "unimaginable".

In the end, senior negotiators say, success or failure will depend not so much on the climate talks themselves, but on whether the world adopts a Green New Deal as the best way to revive the world's economy.

The Obama administration said yesterday that it was pursuing a joint US-Chinese deal on action against global warming to help push the rest of the world towards a global agreement on cutting greenhouse gas emissions.

Todd Stern, the US climate change envoy, said a deal between the two countries – the world's largest polluters – would boost efforts to secure a crucial accord to avoid dangerous climate change. Those UN talks are just six months away.

"China may not be the alpha and omega of the international negotiations, but it is close," Stern said in a speech to the Centre for American Progress, a liberal thinktank. "No deal will be possible if we don't find a way forward with China."

Stern's remarks represent the clearest acknowledgement yet that the Obama administration has taken on board a blueprint for US-Chinese action to address global warming. The plan is the product of secret back-channel negotiations between US and Chinese officials that were revealed in the Guardian last month.

Stern, who leaves for China on Saturday, will be accompanied by two experts who were involved in those back-channel efforts, and are now officials in the Obama administration. Obama's science adviser, John Holdren, visited China last year and David Sandalow, now an energy department official, produced a report advocating partnership with China.

Stern said the US was also seeking deals with other major economies such as India, Indonesia and Brazil.

The envoy made no suggestion that the US would seek a commitment from China to put a firm limit on its greenhouse gas emissions. That strategy, which could prove politically unpopular at home,appears modelled on the back channel talks which sought to build goodwill with China by finding potential areas of collaboration.

Instead of negotiations about caps, Stern's comments suggest he sees that the key components of a deal with China involving technical co-operation. He said that would include collaboration in developing new technologies for industrial efficiency, expanding the use of solar power and– perhaps most importantly from the Chinese point of view – developing techniques for carbon capture and storage. That would enable China to clean up its many coal-powered energy plants.

He also said there was scope for joint effort on improving building efficiency and developing electric vehicles, where the Chinese have made a big push.

China's official position still demands from the US a 40% cut in emissions by 2020, far deeper than anything being currently considered.

Stern played down prospects of reaching a deal this week. "I do not expect to have a big agreement to wave around at the end of the trip, but this trip is one piece of what is going to be an extended interaction with the Chinese," Stern said. "The vision we have is of a clean energy and climate partnership bilaterally with the Chinese."

IMPROVEMENTS in energy efficiency will lead to greater use of fossil fuels, according to research published this week.

Terry Barker, director of the Cambridge Centre for Climate Change Mitigation Research, predicts that by 2030, half the carbon emission savings gained from more fuel-effi-cient transport, buildings and industry will be cancelled out by a corresponding rise in consumption of fossil fuels.

He argues that what he calls a “rebound effect” has been seriously underestimated by policymakers, who will have to impose drastic measures such as high petrol taxes to tackle the problem.

“The rebound effect is not very welcome to politicians because they have been thinking that energy-efficiency programmes are the answer to climate change,” said Barker, a co-author of reports by the International Panel on Climate Change. “It’s not nearly as good an answer as they thought. Efficiency programmes will have to be ramped up to achieve the same targets.”

Steven Chu, America’s energy secretary, told the BBC this month of plans to make commercial buildings in America 80% more efficient and the European Union has set a target of a 20% reduction in overall consumption of fossil fuels by 2020.

The rebound effect works in several ways. Industry, for example, will save on fuel costs by taking measures such as insulating buildings or switching to hybrid cars. It can then pass the savings to customers through lower prices, leaving them with more cash to spend. Production will rise to meet the demand created by the extra spending.

Barker said the effect will be much stronger in the developing world, where large populations are about to join the fossil-fuel economy and small improvements in disposable income can lead to big changes in consumption.

He believes that energy-effi-ciency policies must be accompanied by measures to keep the price of fossil fuels high, limiting the rebound effect and encouraging a move to clean fuels that do not produce carbon, such as solar and wind power.

European consumer spending and exports contracted the most in at least 14 years in the first quarter.

Investment also slumped as the worst global recession in more than six decades prompted companies to cut output and jobs.

Gross domestic product shrank 2.5 per cent from the fourth quarter, matching an initial estimate and the most since the data were first compiled in 1995, the European Union's statistics office in Luxembourg said yesterday.

Household consumption contracted 0.5 per cent, while exports dropped 8.1 per cent and imports declined 7.2 per cent, all the most since the series started in 1995.

Investment spending fell 4.2 per cent, after a 4.3 per cent contraction in the previous quarter that was also the sharpest since 1995.

Even with evidence building that the worst of the economic crisis may be over, euro-area unemployment has risen to a 10-year high as payrolls start to reflect the severity of the recession with companies from ThyssenKrupp AG to Air France-KLM Group firing workers.

European Central Bank President Jean-Claude Trichet, who said on May 7 that he saw "tentative signs" of stabilisation in the economy, will unveil the bank's latest economic forecasts today.

"The big danger is that if unemployment continues to rise, that's going to limit recovery prospects," said Howard Archer, chief European economist at IHS Global Insight in London.

"Even the fear of unemployment is going to cause consumers to be worried and hold back on spending."

Yesterday's report showed that from a year earlier, the euro-area economy shrank 4.8 per cent in the first quarter, compared with a 1.7 per cent contraction in the previous three months. The statistics office had initially put the annual contraction at 4.6 per cent.

Amid global concerns about deflation, euro-area producer prices fell 4.6 per cent in April from the year-earlier month, the most since the data were first compiled in 1981, a separate report showed yesterday.

With the euro-area economy expected to shrink four per cent this year and 0.1 per cent in 2010, according to EU forecasts, the ECB will today give details of its strategy to haul the region out of the recession.

The financial crisis, which started with the collapse of the US property market in 2007, has triggered more than $1.48 trillion (Dh5.4 trillion) of writedowns and credit losses at financial companies and sent the global economy into its first recession since the Second World War.

The ECB will probably hold its main interest rate at a record low of one per cent today, according to economists, as it sets out the mechanisms for buying 60 billion euros of covered bonds, low-risk securities backed by mortgages and public sector loans.

Despite talk of economic "green shoots," more people around the world received pink slips last month.

In Hong Kong on June 1, the stock market finishes day with four 8s, a lucky number in China.

The jobless rate climbed to 9.2 percent in the 16 Eurozone nations of the EU, the highest rate in a decade. In the U.S. unemployment has hit a 25-year high of 8.9 percent and Hong Kong unemployment hit a three-year high of 5.3 percent in April.

Meeting in Geneva this week, the International Labor Organization predicts global unemployment could eclipse 7 percent for the first time since it began keeping data in 1991. The ILO predicts unemployment will rise into 2011 and potentially trigger social unrest, according to the report "Tackling the Global Jobs Crisis" released this week.

Meanwhile, global equity markets have rebounded in the past five months. Since March, the S&P 500 Index has regained its losses for 2009. The MSCI Asia Pacific Index is up 49 percent since March 9, when it hit a five-year low.

On June 1, the Hang Seng Index in Hong finished the day at 18,888 -- "8" being an auspicious number in China, a mood matched by the fact the market rose 17 percent in the month of May.

Markets appear buoyed by the decreasing speed of gloomy economic data in the tumult following the collapse of Lehman Brothers last September. With the exception of the General Motors bankruptcy protection announcement this week, the number of "mass layoffs" by companies seems to be tapering off.

"We are seeing in every major sector across the board that job losses are beginning to wane," Lakshman Achuthan, managing director of Economic Cycle Research Institute, recently told CNN. "The slash and burn that we were seeing a few months ago is starting to ease off and that is the first sign, a key first sign that the recession is drawing to a close."

Unemployment lags behind other statistics that signal a contracting or rebounding economy such as stock market returns. However, there is a chicken-and-egg question among analysts whether any recovery without job growth can truly be called a "recovery."

"I, sadly, have full confidence in a very bleak scenario simply because of this expansion of unemployment," said Kirby Daley, senior strategist for Newedge Group.

The Organization for Economic Co-operation and Development predicts the U.S. jobless rate to eclipse 10 percent next year. The number of people on unemployment benefits in G7 nations will reach 36 million in 2010, nearly double the number in 2007, the OECD predicts.

The growth of the global economy was primed by the spending might of U.S. consumers. And Americans have quickly turned down the spending spigot: personal savings rates in the U.S. increased to 5.7 percent in April -- a 14-year high, according to the U.S. Department of Commerce.

"You can't credibly talk about green shoots in an economy that's driven 70 percent by consumer spending," Daley said. The market rebound "is more because of cheerleading by the Obama administration, banks and CEOs ... there is nothing to sustain it," he added.

So far, the U.S. has lost 5.7 million jobs in the downturn. Many of those jobs won't return. "We're probably going to lose maybe a million more before this recession's over, (and) to regain those jobs is going to take years," Achuthan said. "That's not going to happen overnight."

All major carmakers posted higher sales in the US last month than in April, with heavy discounting boosting even General Motors and Chrysler, which are both in bankruptcy protection.

The US uptick mirrors an improvement in many other parts of the world.

The market is “starting to make a turn for the positive”, said Mike DiGiovanni, GM sales analyst. “We think we are starting to emerge from this global downturn.”

Mr DiGiovanni estimated that worldwide car and light truck sales rose to an annualised 63.6m units in May, from 60m in April and a trough of 56m last November.

Industry sales in China soared 47 per cent in the year to May, with GM posting a 75 per cent jump. “That market is smoking hot,” Mr DiGiovanni said, ascribing the surge to government stimulus measures.

In the US, sales rose to an annual rate of 9.9m units in May – well below the 14.3m units sold in May 2008, but up from an average of 9.5m in the first four months of the year, according to Autodata. Ford Motor put in an especially strong performance, raising its market share to the highest level in three years as it capitalised on its position as the only domestic carmaker not in bankruptcy protection.

Sales at both Ford and Toyota both rose about 20 per cent from April.

GM and Chrysler – which face the challenge of overcoming buyers’ nervousness that they may not be in business to honour warranties and supply parts – posted sales increases of 11 per cent and 3 per cent respectively.

In TV advertisements that start airing on Wednesday, GM will put out the message that its Chapter 11 filing “is not about going out of business; this is about getting down to business”.

CNW, an Oregon-based market research group, said more car buyers have been willing to consider GM vehicles as talk of its restructuring has shifted to a “leaner, meaner GM” rather than a “bloated has-been”.

Chrysler’s retail sales were the highest for the year, offsetting minuscule sales to rental-car and other fleet operators. Analysts said the results were distorted by bargain-basement prices offered by hundreds of Chrysler dealers whose franchises will be revoked next week under the carmaker’s restructuring plan.

However, some prospective buyers may be holding back in anticipation of “cash-for-clunker” incentives making their way through Congress.