The oil market is ignoring political turmoil in Iran, the world’s fifth-largest oil exporter, as global production spare capacity is today more than enough to cover any potential shortfall, analysts and traders said.

The US Department of Energy estimates that Opec’s production spare capacity has surged to a seven-year high of 4.7m barrels a day – up from 1.5m b/d last year – as demand for oil has dropped because the impact of the economic recession.

The cushion is enough to cover twice the level of Iran’s oil exports, analysts said.

“There is a lot of spare capacity out there,” said Michael Wittner, global head of oil research at Société Générale in London.

Opec’s production spare capacity hit a record low of 1m b/d in 2005 but, as the economic crisis has reduced oil demand worldwide over the last year, the cartel’s idle pumping capacity has surged.

In the past, the oil market has reacted with panic to geopolitical events in Iran as spare capacity was not enough to cover even a relatively small disruption in supplies.

This time, however, the largest demonstrations in Iran since 1979 have not hit prices because of the production cushion and record high inventories.

West Texas Intermediate, the US oil benchmark, was hovering at the $70 a barrel mark on Wednesday, down from last week’s 8-month peak of $73.23 a barrel.

The coolness of the oil market in the current Iran turmoil signals that the increase in spare capacity will allow Opec, the oil cartel, to manage oil prices more effectively during a geopolitical crisis.

From 2005 until early- 2008, the cartel almost lost control of the market as razor-thin spare capacity meant the threat of a supply disruption in countries such as Nigeria, Iraq or Venezuela pushed prices higher.

Commercial stocks of crude oil are also extremely high as result of low demand.

Oil traders in the physical market said Iran’s oil exports were running at normal levels in spite of the turmoil, noting that the country’s oil fields and export terminals were far away from the capital, Tehran, the centre of the demonstrations.

Iran last month produced about 3.65m b/d, according to the International Energy Agency, the western countries’ oil watchdog.

As Iran’s domestic demand absorbs about 1.4m b/d, the country’s oil exports are running just above 2.2m b/d.

Mr Wittner, a former intelligence official at the CIA, said Saudi Arabia, Opec’s most reliable member, has alone almost 3m barrels a day of spare production capacity of a “crude oil of similar quality to the one pumped by Iran”.

Riyadh spare capacity is set to increase further as the country is bringing into stream this month a new oil field, the massive 1.2m b/d Khurais development.

Japan, China and India are the largest importers of Iranian oil, accounting for almost half the country’s exports. South Korea, Italy and France are also important clients, according to data from the US Department of Energy.

Crude oil rose for a second day in New York after militants attacked a pipeline in Nigeria, Africa’s largest producer.

A “major” delivery pipeline at Royal Dutch Shell Plc’s Forcados terminal was breached using high explosives yesterday, the Movement for the Emancipation of the Niger Delta said in a statement. U.S. crude stockpiles fell a more than-estimated 3.87 million barrels last week to 357.7 million, the Energy Department said yesterday.

“The supply side will become more important in the next few months as fundamentals improve, and things like Nigeria will be important again, said Hannes Loacker, an analyst at Raiffeisen Zentralbank Oesterreich in Vienna.

Crude oil for July delivery climbed as much as 70 cents, or 1 percent, to $71.73 a barrel in electronic trading on the New York Mercantile Exchange, and traded at $71.16 at 9:38 a.m. London time. Prices are up 60 percent this year, having reached a seven-month high of $73.23 on June 11.

Nigerian militants blew up a delivery line that carries crude oil from the Tunu, Opukusu and Ugbotubu flow stations in Bayelsa state at 8:30 p.m. local time, according to the statement from Jomo Gbomo, a spokesman for MEND. Shell said it’s investigating the claims.

“If there is a significant enough disruption, that could flow through to the fundamentals and support the price,” said Toby Hassall, an analyst with Commodity Warrants Australia Ltd. in Sydney.

Brent crude for August settlement gained as much as 60 cents, or 0.9 percent, to $71.45 a barrel on London’s ICE Futures Europe exchange.

Gasoline inventories climbed 3.39 million barrels to 205 million last week, the biggest gain since January. Gasoline use increased 213,000 barrels a day to 9.35 million.

Ask a group of oil analysts about the recent surge in crude costs and here's the consensus answer you'll get: Prices have run up too far, too fast and they aren't supported by the fundamentals.

Ask them about where prices will be two years from now, however, and the majority will offer this prediction: A lot higher.

"We're concerned about oil prices rising so rapidly in the near-term," says Hussein Allidina, head of commodities research at Morgan Stanley. "But the bet in the long-term is one way, and that's just up."

Oil shot past $70 a barrel last week, meaning the cost per barrel has doubled since hitting a low in mid-February. And the swiftness of that move has plenty of observers wondering if we're headed toward another period of even more dramatic price gains.

Among the oil insiders worried about such a scenario is Royal Dutch Shell CEO Jeroen van der Veer, a 38-year veteran of the energy giant, who is scheduled to retire June 30. "If the oil prices stay volatile I'm afraid there will be too much slowdown in investment," he said at an energy conference in Abu Dhabi in early June, according to Reuters, while reiterating that Shell would follow through on its spending plans for this year. "I think too low capacity means the next price spike is to come."

The last spike, of course, was a year ago at this time, when oil zoomed all the way up to $147 per barrel and Congress began holding hearings to discuss whether speculators were manipulating prices. Then a market correction that began in the middle of last summer was accelerated by the global financial crisis. Oil plunged to multi-year lows, with the price of benchmark West Texas Intermediate crude dropping under $35 in December and again in February.

To understand the odds of oil moving back above $100, it helps to first examine the reasons that the price has rebounded so strongly in recent weeks.

Much of the recent rally actually has nothing to do with the oil market's current supply-and-demand situation. The latest estimate from the International Energy Agency (IEA) projects that worldwide oil use will be almost 2.5 million barrels a day lower on average this year than in 2008. And despite the fact that OPEC has been cutting back on production since last September to boost prices, oil inventories around the world are still high compared to historical levels.

"Considering that supply seems ample and demand is weak, the fact that oil is going up looks kind of weird," says Adam Sieminski, chief energy economist at Deutsche Bank. "But those factors are being overwhelmed by a huge sigh of relief that we're not going to have the Great Depression. A lot of money is coming out of mattresses."

That inflow is lifting stocks and commodities alike. Research by Morgan Stanley found the correlation between crude oil prices and equities has recently been at a record high -- with both rising strongly on the hope that the economic cycle has already bottomed.

"Historically, equities have been a leading indicator of economic growth and commodities have been a coincident indicator," says Morgan Stanley's Allidina. "Right now you're seeing commodities and equities move up together as money comes back in at the same time."

Just as important, Morgan Stanley found that the inverse correlation between a weakening U.S. dollar and rising crude prices was also closing in on a record high. Because oil is priced in dollars, when the value of the dollar falls it makes oil cheaper in other currencies -- simultaneously boosting consumption outside the U.S. and motivating non-U.S. producers to raise prices to make up for the purchasing power they've lost in the currency conversion.

Concerns about the ballooning deficit in the U.S. have caused investors to begin fleeing the dollar. The U.S. dollar index, which measures the value of the greenback against six major world currencies, has dropped 9% since the beginning of March. As it falls, oil prices are rising. If it falls further, they'll rise higher.

But just how high oil prices go from here -- and how fast they get there -- will ultimately depend on the ability of producers to meet future demand. And any robust rebound in consumption is sure to put a strain on global supply.

The investment cutbacks warned about by Shell's Van der Veer only make that more likely. In its World Energy Outlook 2008, released last November, the IEA warned that production declines from existing supplies would keep the market tight and called for $26 trillion in new infrastructure spending worldwide over the next two decades. Right now, the opposite is happening. In May, the IEA said it expected a 21% drop in oil and gas investment budgets globally in 2009 compared to 2008, or nearly $100 billion less. A cautious OPEC has said that a lot of its member countries' new drilling projects remain on hold.

Meanwhile, there are signs that a demand recovery could be on the way in Asia. China's crude consumption averaged 7.6 million barrels per day in April, according to Allidina, the highest level on record, amid reports that the government was stockpiling commodities. Goldman Sachs was confident enough of a demand rebound to come out in early June with a price target of $85 a barrel for West Texas Intermediate crude by the end of 2009 and $95 by the end of 2010.

Deutsche Bank's Sieminski agrees that prices are going higher over time. "Our forecast has been that oil will be at $100 in 2015 and it could happen faster if the economy recovers," he says. Because oil is generally considered an "inelastic" commodity -- meaning it takes a big increase in price to produce a small change in demand -- the chances of a spike increase once supplies get tight.

"If you get close to the balance, prices can go haywire very quickly and there's very little that can be done about it," says Sieminski. "Something happens on the margin to put pressure on the market and instead of the price adjustment being gradual it's a step change. Last time gasoline had to go to $4 a gallon and crude had to go to $150 a barrel to rebalance things. And that's how we could get there again."

Let's hope we don't get there for a while.

The Western economies remain in the doldrums, yet oil prices just surged above $70 a barrel. Back in mid-March, oil for immediate delivery was $45, while crude to be delivered in 2012 was up at $62. Today, that same futures curve registers prices stretching from $72 at "the front end", all the way up to $88 in three years' time.

Since March, then, the entire oil futures curve has shifted decisively upward. But during that period the International Monetary Fund downgraded its global growth forecasts – suggesting the world will use less crude over the next few years.

That should mean lower prices. But crude is now a shocking 120pc dearer than in mid-February – and shows no sign of weakening soon.

Oil prices matter – a lot. So far in 2009, crude has averaged $52 a barrel, compared to $94 last year. That's yielded a windfall for the world's oil importers, not least the major Western economies, of over $1,600bn (£1,000bn) – more than the heralded fiscal stimulus packages announced by the UK, US and Eurozone for this year and next.

This recent oil price rise should cause the Western powers to reflect seriously on their place in the world. For months, mainstream analysts have insisted oil markets were dominated by "demand destruction".

This was a "comfort-blanket" argument – suggesting oil would stay "fundamentally low" as long as the West remained in a slump. That alternative – an ongoing Western recession and high oil prices – was too grizzly to contemplate. But that's what we now face.

The "demand destruction" argument was always overdone. Across the Western world, oil demand is relatively "income inelastic", seeing as people want to get around, heat their homes in winter and keep cool in summer whether the economy is slowing or not. So Western oil use hasn't fallen that much.

But the main reason "demand destruction" is nonsense is that the populous emerging markets have, for the most part, continued to grow despite the credit-crunch. And, as more and more of their people get richer – buying cars, air-conditioners and white goods for the first time – per capita oil use in these nations is growing faster still.

The latest edition of the excellent BP Statistical Review of World Energy, published last week, shows that, for the first time, total oil demand in the emerging markets now outstrips the West. That's an important milestone. From now on, the Western world can slump but global oil prices can stay "fundamentally" strong.

As the graph shows, Brazil, Russia, India and China (BRIC) now account for over 20pc of global GDP – the same share as the US, the world's largest crude importer. Over the next few years, the BRICs' share of global commerce, along with that of all the other emerging markets, continues to rise sharply.

In each of these fast-industrialising, energy-hungry societies, per capita oil use will continue to crank up from its current low base. That's why global crude demand will soar over the medium-term, even if Western growth barely recovers.

The BRICs' emergence is a trend of massive economic – and political – importance. The painful deleveraging process associated with "sub-prime" means the world economy will be haunted by systemic risk for years to come. Countries with large reserves, though, will be able to stabilise their banking systems, defend their currencies and boost their economies without resorting to yet more borrowing or (even worse) the central bank's printing press.

While accounting for a fifth of the world economy, the BRICs now control no less than half of the world's currency reserves. Excluding Japan, the G7 nations have only 6pc. And, in today's climate, reserves amount to raw power.

For years, the G7 has largely excluded the BRICs' from the institutions that are meant to oversee the global economy. Brazil is the world's 10th-largest economy, yet Belgium has more IMF votes.

So, we shouldn't be surprised the BRICs are this week holding their own summit – in the Russian city of Yekaterinburg. Western leaders will hold their breath – at least those who are economically-literate. If the BRICs decide to get nasty, and lend less money to the debt-soaked "advanced" nations, the deepest Western recession in 50 years could get a whole lot worse.

The sub-prime debacle and its fallout have emboldened the "emerging giants" to demand a bigger say in the management of the global economy. That's an inevitable long-term trend, which the West is unwise to resist.

In the here and now, though, whatever the West says or does, the BRICs and the other emerging markets are making their presence felt by pushing oil prices "fundamentally" higher.

These economies are home to no less than two-thirds of the world's population. They're in the midst of the fastest, most widespread industrial revolution the world has ever seen. Demand destruction? Don't make me laugh

Dictatorships, as well as democracies, depend on money, although North Korea and Zimbabwe would like to prove the contrary. Dictators have their own constituencies and their constituencies have their own costs.

The victory of Mahmoud Ahmadinejad may have been fraudulent; it is certainly bad news for the Iranian people and the world. It means that the theocratic dictatorship of Iran will not benefit even from the modest reforms promised by Mir Hossein Mousavi. The result will alienate the young urban middle class, particularly women. It will do nothing but damage to Iran's foreign relations.

It would be pleasant to suppose that the underlying trends of the economy would bring down this oppressive regime.

President Ahmadinejad is a dangerous populist who prides himself on his own ignorance, particularly of economics. He once said that he prayed to God that he would never know anything about economics because he regarded the whole subject as “a tool of Western imperialism”. His prayer seems to have been answered; in 2007 he had to introduce petrol rationing in a leading oil-producing country.

Iran is primarily an oil economy; the global oil market is in the middle of an economic transformation.

The price of oil has been extraordinarily volatile. At the beginning of the recession it fell by about 80 per cent as world expectations were lowered. In the past six months, the price has recovered by about 100 per cent, taking oil back to $70 a barrel.

These price gyrations need to be explained, particularly the strength of the price recovery in 2009; the recession may have reached bottom but it has certainly not reached this level of recovery.

Part of the explanation is the shift of the global economy from mature to emerging countries, particularly to the four biggest emerging markets of Brazil, Russia, India and China, the so-called Bric countries, which are holding their own economic summit in Yekaterinburg this week.

In coming years Bric is expected to soar above the US and Europe; China alone will catch up with the US in five to ten years' time. The big emerging countries have continued to increase their demand for oil, even during the recession.

The swing of effective demand to the emerging countries is not in dispute, but there are different views about an even greater shift in the oil market, so-called “peak oil”. That is the point in time when flows of new production are fully cancelled out by declines in existing production. That does not mean that oil is running out; but it does mean that demand will outstrip new supply, as has happened in the North Sea and North America. This time it will be a universal shortfall.

Many experts believe that the recession has indeed passed its low point; in that case demand for oil will recover in the countries worst hit, but will also continue to increase in the emerging countries, particularly the Bric countries. Much of the discussion in Yekaterinburg will centre on the future of oil supplies and particularly on the possible diversion of Russian oil from Europe to China.

If the peak oil theory does prove correct, the present recovery in prices will only be the beginning. Those oil economists who accept the peak oil argument tend to expect the price to reach $150 a barrel, probably in 2010.

This might be accompanied by a rise in the gold price above $1,000 an ounce. Oil and gold prices tend to move together, and the emerging countries have larger dollar reserves than they would altogether like. Gold is the one real alternative to paper currencies as a reserve asset.

The old assumptions are being undermined. It is only too clear that most politicians are still living in the 20th-century world, the world in which they grew up. The peak oil market may already have been reached, but in any case it will be reached eventually. The only question is when. Power is passing from the North West to the SouthEast, from the US to China.

Europe and the euro are very different from what they were. The euro is an oil-poor currency; oil-rich emerging currencies have the edge. Unfortunately, the natural logic of liberal democracy does not fit the natural logic of the oil market. Countries tend to become more liberal when the people are rich and the state is poor.

In 1215 King John was weak and he had to make concessions to the barons. That was how England got Magna Carta. When the state becomes independently wealthy, as the oil states now are, they do not have to persuade their people, because they can rely on external income. Unfortunately, there is a global shift of wealth in favour of the oil countries, few of which are democracies. Even in Russia one can see that the post-communist administrations have been more or less authoritarian according to the price of oil. Boris Yeltsin's liberalism was a response to a fall in the oil price; Vladimir Putin's authoritarianism is equally a response to a high oil price, which has boosted his revenues. The Iranian dictatorship has increasing revenue from oil.

President Ahmadinejad does not have to worry too much about elections because he knows where his regime's money will be coming from. It will come from oil and not from the people - and the price will continue to rise. As an economist, he is not as stupid as he makes out.

It has been called the world's second "oil war", but the only similarity between Iraq and events in the jungles of northern Peru over the last few weeks has been the mismatch of force. On one side have been the police armed with automatic weapons, teargas, helicopter gunships and armoured cars. On the other are several thousand Awajun and Wambis Indians, many of them in war paint and armed with bows and arrows and spears.

In some of the worst violence seen in Peru in 20 years, the Indians this week warned Latin America what could happen if companies are given free access to the Amazonian forests to exploit an estimated 6bn barrels of oil and take as much timber they like. After months of peaceful protests, the police were ordered to use force to remove a road bock near Bagua Grande.

In the fights that followed, at least 50 Indians and nine police officers were killed, with hundreds more wounded or arrested. The indigenous rights group Survival International described it as "Peru's Tiananmen Square".

"For thousands of years, we've run the Amazon forests," said Servando Puerta, one of the protest leaders. "This is genocide. They're killing us for defending our lives, our sovereignty, human dignity."

Yesterday, as riot police broke up more demonstrations in Lima and a curfew was imposed on many Peruvian Amazonian towns, President Garcia backed down in the face of condemnation of the massacre. He suspended – but only for three months – the laws that would allow the forest to be exploited. No one doubts the clashes will continue.

Peru is just one of many countries now in open conflict with its indigenous people over natural resources. Barely reported in the international press, there have been major protests around mines, oil, logging and mineral exploitation in Africa, Latin America, Asia and North America. Hydro electric dams, biofuel plantations as well as coal, copper, gold and bauxite mines are all at the centre of major land rights disputes.

A massive military force continued this week to raid communities opposed to oil companies' presence on the Niger delta. The delta, which provides 90% of Nigeria's foreign earnings, has always been volatile, but guns have flooded in and security has deteriorated. In the last month a military taskforce has been sent in and helicopter gunships have shelled villages suspected of harbouring militia. Thousands of people have fled. Activists from the Movement for the Emancipation of the Niger Delta have responded by killing 12 soldiers and this week set fire to a Chevron oil facility. Yesterday seven more civilians were shot by the military.

The escalation of violence came in the week that Shell agreed to pay £9.7m to ethnic Ogoni families – whose homeland is in the delta – who had led a peaceful uprising against it and other oil companies in the 1990s, and who had taken the company to court in New York accusing it of complicity in writer Ken Saro-Wiwa's execution in 1995.

Meanwhile in West Papua, Indonesian forces protecting some of the world's largest mines have been accused of human rights violations. Hundreds of tribesmen have been killed in the last few years in clashes between the army and people with bows and arrows.

"An aggressive drive is taking place to extract the last remaining resources from indigenous territories," says Victoria Tauli-Corpus, an indigenous Filipino and chair of the UN permanent forum on indigenous issues. "There is a crisis of human rights. There are more and more arrests, killings and abuses.

"This is happening in Russia, Canada, the Philippines, Cambodia, Mongolia, Nigeria, the Amazon, all over Latin America, Papua New Guinea and Africa. It is global. We are seeing a human rights emergency. A battle is taking place for natural resources everywhere. Much of the world's natural capital – oil, gas, timber, minerals – lies on or beneath lands occupied by indigenous people," says Tauli-Corpus.

What until quite recently were isolated incidents of indigenous peoples in conflict with states and corporations are now becoming common as government-backed companies move deeper on to lands long ignored as unproductive or wild. As countries and the World Bank increase spending on major infrastructural projects to counter the economic crisis, the conflicts are expected to grow.

Indigenous groups say that large-scale mining is the most damaging. When new laws opened the Philippines up to international mining 10 years ago, companies flooded in and wreaked havoc in indigenous communities, says MP Clare Short, former UK international development secretary and now chair of the UK-based Working Group on Mining in the Philippines.

Short visited people affected by mining there in 2007: "I have never seen anything so systematically destructive. The environmental effects are catastrophic as are the effects on people's livelihoods. They take the tops off mountains, which are holy, they destroy the water sources and make it impossible to farm," she said.

In a report published earlier this year, the group said: "Mining generates or exacerbates corruption, fuels armed conflicts, increases militarisation and human rights abuses, including extrajudicial killings."

The arrival of dams, mining or oil spells cultural death for communities. The Dongria Kondh in Orissa, eastern India, are certain that their way of life will be destroyed when British FTSE 100 company Vedanta shortly starts to legally exploit their sacred Nyamgiri mountain for bauxite, the raw material for aluminium. The huge open cast mine will destroy a vast swath of untouched forest, and will reduce the mountain to an industrial wasteland. More than 60 villages will be affected.

"If Vedanta mines our mountain, the water will dry up. In the forest there are tigers, bears, monkeys. Where will they go? We have been living here for generations. Why should we leave?" asks Kumbradi, a tribesman. "We live here for Nyamgiri, for its trees and leaves and all that is here."

Davi Yanomami, a shaman of the Yanomami, one of the largest but most isolated Brazilian indigenous groups, came to London this week to warn MPs that the Amazonian forests were being destroyed, and to appeal for help to prevent his tribe being wiped out.

"History is repeating itself", he told the MPs. "Twenty years ago many thousand gold miners flooded into Yanomami land and one in five of us died from the diseases and violence they brought. We were in danger of being exterminated then, but people in Europe persuaded the Brazilian government to act and they were removed.

"But now 3,000 more miners and ranchers have come back. More are coming. They are bringing in guns, rafts, machines, and destroying and polluting rivers. People are being killed. They are opening up and expanding old airstrips. They are flooding into Yanomami land. We need your help.

"Governments must treat us with respect. This creates great suffering. We kill nothing, we live on the land, we never rob nature. Yet governments always want more. We are warning the world that our people will die."

According to Victor Menotti, director of the California-based International Forum on Globalisation, "This is a paradigm war taking place from the arctic to tropical forests. Wherever you find indigenous peoples you will find resource conflicts. It is a battle between the industrial and indigenous world views."

There is some hope, says Tauli-Corpus. "Indigenous peoples are now much more aware of their rights. They are challenging the companies and governments at every point."

In Ecuador, Chevron may be fined billions of dollars in the next few months if an epic court case goes against them. The company is accused of dumping, in the 1970s and 1980s, more than 19bn gallons of toxic waste and millions of gallons of crude oil into waste pits in the forests, leading to more than 1,400 cancer deaths and devastation of indigenous communities. The pits are said to be still there, mixing chemicals with groundwater and killing fish and wildlife.

The Ecuadorian courts have set damages at $27bn (£16.5bn). Chevron, which inherited the case when it bought Texaco, does not deny the original spills, but says the damage was cleaned up.

Back in the Niger delta, Shell was ordered to pay $1.5bn to the Ijaw people in 2006 – though the company has so far escaped paying the fines. After settling with Ogoni families in New York this week, it now faces a second class action suit in New York over alleged human rights abuses, and a further case in Holland brought by Niger Delta villagers working with Dutch groups.

Meanwhile, Exxon Mobil is being sued by Indonesian indigenous villagers who claim their guards committed human rights violations, and there are dozens of outstanding cases against other companies operating in the Niger Delta.

"Indigenous groups are using the courts more but there is still collusion at the highest levels in court systems to ignore land rights when they conflict with economic opportunities," says Larry Birns, director of the Council on Hemispheric Affairs in Washington. "Everything is for sale, including the Indians' rights. Governments often do not recognise land titles of Indians and the big landowners just take the land."

Indigenous leaders want an immediate cessation to mining on their lands. Last month, a conference on mining and indigenous peoples in Manila called on governments to appoint an ombudsman or an international court system to handle indigenous peoples' complaints.

"Most indigenous peoples barely have resources to ensure their basic survival, much less to bring their cases to court. Members of the judiciary in many countries are bribed by corporations and are threatened or killed if they rule in favour of indigenous peoples.

"States have an obligation to provide them with better access to justice and maintain an independent judiciary," said the declaration.

But as the complaints grow, so does the chance that peaceful protests will grow into intractable conflicts as they have in Nigeria, West Papua and now Peru. "There is a massive resistance movement growing," says Clare Short. "But the danger is that as it grows, so does the violence."

Furious protests threaten to undermine the Iraqi government's controversial plan to give international oil companies a stake in its giant oilfields in a desperate effort to raise declining oil production and revenues.

In less than two weeks, on 29 and 30 June, the Iraqi Oil Minister, Hussain Shahristani, will award service contracts to the world's largest oil companies to develop six of Iraq's largest oil-producing fields over 20 to 25 years.

Senior figures within the Iraqi oil industry have denounced the deal. Fayad al-Nema, the director of the South Oil Company, which comes under the Oil Ministry and produces most of Iraq's crude, said on the weekend: "The service contracts will put the Iraqi economy in chains and shackle its independence for the next 20 years. They squander Iraq's revenues." Mr Nema is reported to have since been fired because of his opposition to the contracts, which he says is shared by many other officials in Iraq's state-owned oil industry.

The government maintains that it is not compromising the ownership of Iraq's oil reserves – the third largest in the world at 115 billion barrels – on which the country is wholly dependent to fund its recovery from 30 years of war, sanctions and occupation.

But the fall in the oil price over the past year has left the government facing a financial crisis; 80 per cent of its revenues go to pay for salaries, food rations and recurrent costs. Little is left for reconstruction and the government is finding it hard to pay even for much-needed items such as an electrical plant from GE and Siemens.

The development of Iraq's oil reserves is of great importance to the world's energy supply in the 21st century. They may be even larger than Saudi Arabia's, as there was little exploration while Iraq was ruled by Saddam Hussein. International oil companies are desperate to get their foot in the door.

"Everyone wants to be in Iraq," says Ruba Husari, an expert on Iraqi oil. "Together with Iran, this is the only oil province in the world that has great potential. It is a great opportunity for oil companies because nobody knows the size of Iraq's reserves. Iraq itself needs to know what is under its soil."

But Iraqis are wary of the involvement of foreign oil companies in raising production in super giant fields like Kirkuk and Bai Hassan in the north and Rumaila, Zubair and West Qurna in the south. They suspect the 2003 US invasion was ultimately aimed at securing Western control of their oil wealth. The nationalisation of the Iraqi oil industry by Saddam Hussein in 1972 remains popular and the rebellion against the service contracts has been gathering pace all this week.

Parliament is demanding that bidding be delayed. MPs summoned Mr Shahristani, a nuclear scientist imprisoned and tortured under Saddam Hussein, to answer questions about the service contracts and the fall in Iraq's oil production and exports. Jabir Khalifa Kabir, the secretary of parliament's oil and gas committee, says the contracts will "chain the government with complex contractual terms" and will abort South Oil Company's own plans to raise production. The government says the bidding must go ahead.

The contracts are not particularly favourable to the international oil companies. They are rather the outcome of the companies' extreme eagerness to get into Iraq and the government's attempt to obtain expertise and investment without ceding control. The companies will be paid a fee linked to first restoring and then increasing oil output. They will, however, have greater control when there is a second round of bidding for oilfields which have been discovered but not yet developed. Separate again is the question of exploration for as yet undiscovered oil reserves.

Critics of the deal in parliament say that Iraq has already invested $8bn (£4.9bn) in developing its super giant fields. But Mr Shahristani needs $50bn over the next five or six years to raise current production levels from 2.5 million barrels a day of crude and knows the money and expertise can only come from outside Iraq.

The government in Baghdad may be near broke but Iraqis ask whose fault that is. The Oil Ministry, like much of the government, is dysfunctional when it comes to carrying out long-term projects. Mr Shahristani is blamed for poor management skills, though he eloquently defends himself by saying that when he took over the ministry in 2006, he had to cope with attacks by guerrillas who once were blowing up a pipeline every day.

This explains Mr Shahristani's problems in northern Iraq, where the Sunni Arab insurgency of 2003-08 was strong, but not in the far south, where the Shia community is dominant and there was no uprising.

Jabbar al-Luaibi, the former head of the South Oil Company, who battled to maintain oil production in these years, gave a devastating interview detailing the failings of the Oil Ministry to provide the most basic equipment needed to monitor the oil reservoirs.

"It's like driving your car without any indicators on the dashboard," he said, adding that if mismanagement continued in the same way as in the past "who knows, we might have to start importing crude oil".

The Iraqi government made two other mistakes for which it is now paying. It optimistically believed the price of oil would stay high at $140 a barrel. Instead of investing extra revenues by paying for outside expertise and equipment to raise production in the oilfields, it spent the money on raising the pay of government employees and increasing their number.

This increased Prime Minister Nouri al-Maliki's popularity in the provincial elections in January but left the government short of cash when oil prices collapsed. Prices have risen since then, but not nearly enough to solve the government's problems.

In June 2008 the Iraqi oil industry seemed poised to receive foreign help by signing two-year technical support contracts with oil companies. Control would have remained with Iraq. However, at the last minute, the contracts were cancelled despite being supported by Mr Shahristani and the council of ministers. The reason why this happened explains much about why the state machine is unable to carry out long-term policies. Jobs are allocated to members of political parties regardless of their experience or abilities. After 2003 the Oil Ministry had been the fief of the Fadhila, a Shia Islamic party strong in Basra, and, though it left the government, it never wholly accepted Mr Shahristani as minister.

Showing a certain cheek, Fadhila members – having sabotaged the plan to acquire foreign expertise when money was available to buy it last year – now criticise the government for being forced to accept worse terms because it cannot invest itself.

Many Iraqis will be angered to see their historic oilfields being partially run by foreign companies. But the government believes it has no choice.

This month an Iraqi politician will appear on television to open envelopes and reveal the winners of a long and hard-fought contest. In the balance hangs the wellbeing of 28m people, tens of billions of dollars of contracts and how much you and I pay for everything from yoghurt pots to petrol.

It should make good viewing. For the hopeful contestants, it has been a long wait — since 1972 to be exact. That was when the Iraqi oil industry was nationalised and foreign operators were booted out.

Now the oil giants have been invited back. At the ceremony on June 29 and 30, Hussain al-Shahristani, the oil minister, will reveal which of them will be the first to be let back into the south of the country, where most of its oil and gas resources are found.

Up for grabs are 20-year concessions to operate six huge oilfields and two gas fields. In all, 32 companies are bidding, including BP, Shell, Sinopec of China, Lukoil of Russia and Total of France.

“It’s a once-in-a-lifetime opportunity,” said Manouchehr Takin, analyst at the Centre for Global Energy Studies. “Fields like this don’t exist anywhere else in the world.”

The excitement is understandable. Iraq owns the world’s largest oil reserves after Saudi Arabia and Iran, but produces the same amount per day, about 2.5m barrels, that it did in 1976. Decades of underinvestment, wars, Saddam Hussein’s regime, and political infighting have meant that hundreds of billions of dollars worth of the black stuff have remained underground.

There have been many false dawns, however, and jumping back into the oil industry in Iraq brings as much risk as opportunity.

The country is still occupied by more than 130,000 American troops and nobody can be sure how the security situation will hold up. Visitors to Kurdistan, the most stable part of the country and where many of the early oil deals have been struck, still travel in armed convoy. Hotels are cordoned off behind blast walls patrolled by guards wielding AK47s.

The contracts have been put out to tender but a highly controversial hydrocarbon law — intended to govern how oil proceeds are split among the population – remains locked in parliament, more than four years after it was first proposed.

Al-Shahristani is fighting for his political life. He has been heavily criticised in recent weeks by MPs angry about the stagnation of the industry at a time when the country desperately needs revenue.

Yet the oil companies are unfazed by the uncertainty. Iraq is sitting on 115 billion barrels of proven reserves. At a time when explorers are going to great lengths to get at new sources, Iraq’s is the “easiest” oil in the world. It costs between $2 and $4 a barrel to extract, compared with $50 or more for tar sands or deep-sea drilling.

In its annual review of world energy, BP announced last week that global reserves fell for the first time in more than a decade. Lambert Energy, a consultancy, predicts that at present rates of decline the world will need 40m barrels a day of new production capacity within a decade just to keep up with current demand.

Philip Lambert, its founder, said: “The world needs Iraq, both the north and the south, to work. There is nothing else that can fill the gap.”

So will this latest initiative succeed? Industry insiders say it has a good chance. On June 1, Jalal Talabani, the Iraqi president, hosted a gala ceremony celebrating the connection of a pipeline out of Kurdistan, in the north of the country. It was a momentous occasion. It connected two fields, Taq Taq and Tawke – the first to be developed since the 1970s – to the port of Ceyhan in Turkey.

Talabani’s presence was key. Since 2003, the Baghdad government and Erbil, the capital of the semi-autonomous Kurdistan, have been locked in a bitter row. Ashti Hawrami, the Kurdish oil minister, has signed 30 contracts with foreign companies without the blessing of the federal oil ministry. These so-called production-sharing agreements are generous. They give oil companies a 10%-20% cut of revenues.

The deals infuriated Al-Shahristani, who blacklisted any company that dealt with the Kurds. That is why no big oil company entered the region, leaving it to minnows such as Heritage Oil, Addax Petroleum and Norway’s DNO.

Talabani’s blessing at the opening was seen as a shift in the government’s stance. Uncertainties remain, though. The Kurdish contracts have yet to be ratified by parliament, while the law to determine how oil income – 95% of Iraq’s GDP – will be distributed remains mired in controversy.

The deals offered to the oil giants in the south won’t be nearly as attractive as those in Kurdistan. They are technical contracts, under which companies are paid a fee to increase production. Oil groups have found such deals in other countries such as Iran unappealing. However, the contracts do provide for additional payments if production targets are passed.

Fortunes are already being made. Last week Heritage, the group run by Tony Buckingham, agreed a merger with Genel Enerji, a Turkish group that shares ownership of the Taq Taq and Tawke fields. After the deal, Buckingham’s 16% stake in the new group, which is set to enter the FTSE 100, will be worth about $1 billion (£610m).

Sinopec and Korea National Oil Company are circling Addax , the London and Toronto-listed group that also has operations in Kurdistan. It could be taken over for as much as $8 billion, which would mean a $2 billion payday for boss Jean Claude Gandur, who owns about a third of the firm.

Since 2003, the oil giants have been manoeuvring for position. BP sent in workers to help the government carry out field studies.

The big prizes lie in exploration because much of the country’s oil remains undiscovered – Takin estimates that up to 200 billion barrels could be realised – and that would put Iraq comfortably ahead of Saudi Arabia as the world’s largest owner of oil reserves.

The Iraqi government will this year auction off new blocks for exploration. Paul Atherton, chief financial officer of Heritage Oil, said: “It’s all about getting in early and cherry-picking the best assets.”

Some sessions of an inquiry into the Iraq war may be held in public, Prime Minister Gordon Brown's spokesman said on Thursday, after critics accused the government of a cover-up.

"The issue of public or private is not a great issue of theology for us," the prime minister's spokesman told reporters.

"It will be up to (inquiry chairman) Sir John Chilcot to consider how the precise format of the inquiry will be structured," he added.

Brown announced the inquiry on Monday in a move seen as an attempt to heal some of the rifts in the Labour Party caused by the decision to join the U.S.-led invasion six years ago.

However, the decision to hold the inquiry in private brought criticism from the opposition and senior military figures.

The spokesman said the government wanted to avoid a protracted inquiry which took years to establish the facts and became bogged down in red tape.

The inquiry is expected to report next year but not before a general election due by June 2010.

Brown said in a letter that he hoped that Chilcot would meet the families of British personnel killed in Iraq, adding that this could be in public or private, at their request.

A total of 179 British soldiers and military personnel have been killed in Iraq.

Brown said he had written to all relevant and current former ministers to underline the importance of their full cooperation with the inquiry. Tony Blair was prime minister when Britain went to war.

Editing by Steve Addison

Gazprom, the world's biggest gas producer, may delay the launch of a major field because it expects gas demand in Russia and Europe to be depressed through 2012, an executive said on Tuesday.

Deputy Chief Executive Alexander Ananenkov told a news conference Gazprom may postpone the giant Bovanenkovo field by one year to the third quarter of 2012.

"We see that there will be no demand for that gas. So why invest money in what is not in demand?" said Ananenkov.

Bovanenkovo is due to become the first deposit to go on stream on the Arctic Yamal peninsula and if postponed would become Gazprom's first major project to be hit by the crisis.

Ananenkov said Gazprom expects to produce 507 billion cubic metres in 2010, 510 bcm in 2011 and 523 bcm in 2012 -- sharply down from 550 bcm in 2008.

In 2009, Gazprom could produce as little as 450 bcm and as much as 510 bcm this year, he said. The final figure would depend on the economic recovery and on the weather.

"If the fourth quarter is cold, no-one will save money on their own health," he said.

The delay in the launch of Bovanenkovo would allow Gazprom to reduce 2009 capital expenditure to 500 billion roubles ($16.05 billion) from the earlier planned 637 billion roubles.

"There is a need to change our investment programme - not to fully stop but to slow it down - and to lower capital expenditures", he said.

Gazprom has been steadily increasing its production over the past decade to achieve its goal of boosting its market share in Europe to 33 percent from 25 percent.

But the global financial crisis has knocked it back by two decades in terms of production volumes because of lower demand from industry.

European consumers have been also delaying gas purchases since the start of the year, waiting for prices to finally catch up with lower oil prices and switching to alternative fuels or pumping gas from underground storage.

"Customers, being pressured by the global financial and economic crisis, have naturally reduced purchases as they know that gas prices will be lower in six months' time," he said.

"In the first quarter we have witnessed daily demand on the Western markets reaching 260-280 million cubic metres. It was 200-170 mcm lower than in the same period of 2008".

"But from April-May we have already seen a significant growth in consumption on Western markets. Today it is reaching as much as 430 million cubic metres (per day)," he said.

Editing by Anthony Barker

Vaclav Havel, the dissident playwright who led his countrymen in revolt against their Soviet-backed regime, said Central Europe should reject Russian energy supplies rather than be “blackmailed” by the government in Moscow.

The nations that threw off Soviet rule in 1989 mustn’t yield to efforts by Russia’s Prime Minister Vladimir Putin and its President Dmitry Medvedev to extend Moscow’s influence in central and eastern Europe by turning off the gas to their countries, Havel said in a Bloomberg interview in Prague yesterday.

“It is necessary to say politely and with a friendly smile that we are free and we will do what we want,” said Havel, 72, who was Czech president from 1993 until 2003. “We will not be manipulated or blackmailed, and if you threaten that you will not deliver gas to us, well then, keep it.”

Some 20 European countries, including former Soviet bloc members Slovakia, Bulgaria and Hungary, ran short of natural gas in January after Russia cut supplies to Ukraine. The dispute highlighted Europe’s dependence on Russian companies such as OAO Gazprom for its energy needs.

European gas imports from the former Soviet Union fell 35 percent to 26.9 billion cubic meters from a year earlier, the International Energy Agency said in a report posted on its Web site June 15.

New Pipeline

Rather than buy gas from Russia, Europe should pursue projects like the Nabucco pipeline, to import gas from the Caspian Sea region through Turkey, Havel said. On May 6, the European Union approved an initial investment of 200 million euros ($277 million) for the pipeline which was endorsed by Turkey two days later. It’s expected to begin operation in 2015, according to the EU.

“They should have come up with that years ago,” Havel said referring to the Nabucco plan, and said Europe must wean itself from fossil fuels.

“We are living in the cult of growth and at the same time a cult of growing energy consumption, when it should actually be the other way around,” he said.

“It would be better to take care of the problem by ourselves, than to be forced to do so by someone else turning off the tap,” he said.

Russia still aims “to get neighboring states into their sphere of influence or under their dominance,” Havel said, although “everything is more sophisticated than under Brezhnev.” Leonid Brezhnev was Soviet leader from 1964 to 1982 and ordered the invasion of Czechoslovakia in 1968.

‘Russia’s Wish’

“The Russians wish, and they show it, that the states of central Europe fall under their influence,” Havel said. “They want to decide about membership in the EU and NATO. They want us to ask them what we may and may not do.”

He called the Russian government “a very special and new form of semi-authoritarian regime.”

During Havel’s presidency, the North Atlantic Treaty Organization expanded to include the Czech Republic, Poland and Hungary, while the EU added eight former communist nations in 2004.

U.S. efforts to further expand the NATO alliance have hit resistance, with Russia objecting to membership for the former Soviet republics of Georgia and Ukraine.

Havel also warned that Iran’s President Mahmoud Ahmadinejad is a man possessed and could “damage a lot of people.”

‘A Man Possessed’

“The Iranian president does not represent any religious nor national or other ideas,” Havel said. “In my eyes he is a man possessed. Unfortunately we are living at a time when a man possessed could easily inflict damage to a lot of people, due to modern technology.

“It is important that the West should not consider oil to be more important than human rights,” he added.

The West could consider embargoes or boycotts aimed at the Iranian government, taking care to ensure they don’t harm the people, Havel said.

Western Europe and the U.S. won’t let Russia control the economic fate of central and eastern Europe, he said.

“What is possible and what I would repeatedly warn against is the policy of compromise and the notion that if we don’t provoke evil, it will just go away by itself,” Havel said. “On the contrary, that would just make it stronger.”

Most of Russia’s neighbors don’t want to fall under its influence “if only because economic development in Russia is worse than in the Euro-Atlantic zone,” said Havel.

‘Sincerity Required’

“We should be on terms of partnership with everybody, but partnership requires sincerity,” Havel said.

Russian oil output fell 0.8 percent last year, the first decline in a decade. State-run Gazprom, the world’s biggest producer of natural gas, said its output may shrink as much as 18 percent this year.

After fighting communism as a human rights activist and writer for three decades, Havel became a symbol for the toppling of totalitarian regimes after the 1989 Velvet Revolution.

European Union countries should hand the European Commission powers to coordinate gas flows in the 27-member bloc in the event of a gas crisis, according to a draft Commission report.

The proposal is the EU's main policy response to the supply disruption that occurred in January following a pricing dispute between Russia and transit country Ukraine.

Tension between Moscow and Kiev has mounted in recent weeks and many energy experts forecast a repeat in coming months.

"In a European emergency, the Commission may require member states ... to release gas from strategic gas storage," said the draft report, seen by Reuters on Wednesday.

During such gas emergencies EU states would have to provide the Commission with daily updates of supply and demand forecasts for the following three days, with updates on withdrawals from stocks and the impact on their economies and power sectors.

EU states have asked the bloc's executive Commission for new rules to bolster energy security, but at the same time they have proved unwilling in recent negotiations to cede control of energy supplies.

Last week, EU energy ministers approved a similar proposal on oil stocks, having stripped it of its most important provisions -- a move that European Energy Commissioner Andris Piebalgs said he deeply regretted.

EU states would also have to seek Commission approval before slowing gas flows to their neighbours during a crisis, as some countries were suspected of doing in January.

"The competent authority shall not introduce any measure restricting the flow of gas within the EU market at any time unless duly justified and authorised by the Commission," the draft said. The proposal, which will be fine-tuned and then put before member states and the European Parliament for approval in coming weeks, would also establish a permanent gas monitoring force composed of industry and Commission experts.

EU states would have to prepare national emergency plans, outlining the potential for cooperating with neighbouring countries and detailing different levels of alert.

"Increasing the security of gas supplies is something that was asked for by member states and parliament after the gas crisis, and we will have to wait to see how they react to this," said a Commission official.

Editing by Dale Hudson

Ed Miliband, the energy secretary, said four new "carbon capture and storage" trials would eventually add 2pc to bills through a levy on electricity suppliers – the day after the Government announced a tax on fixed telephone lines to fund high-speed broadband.

It is too early to estimate the total cost of the project, he added, but the Government hopes it could create 60,000 jobs and boost the economy by £4bn. Analysts predicted that the scheme might cost between £750m and £6bn, with some funding potentially from the European Union.

New coal power stations to be built which may not cut emissionsFour energy companies, BP Alternative, E.On, Peel Power and Scottish Power, are competing for contracts to build trial plants, using £90m allocated in the Budget to fund research.

Ian Parrett, an analyst at Inenco, said capturing carbon "had to be done" and could help lead a revival of the British coal industry.

"But we have concerns that no one knows whether carbon capture is commercially viable," he said. "And the Government isn't putting any money in at all. If all emissions reduction schemes add 2pc to bills, we are talking about electricity costs being hugely higher."

The Government is also forming a contingency plan for reducing emissions from coal-powered plants, since the technology behind transporting and burying carbon is not yet proven.

Simon Hughes, the Liberal Democrat shadow energy secretary, described the plans to build more coal power stations before it is known whether the technology works as "a huge gamble".

Europe could build an electricity supply based entirely on renewable energy by 2030, according to scientists making a presentation at the House of Commons this week.

MPs will hear that an electricity "supergrid" across Europe and North Africa could solve the problem of the intermittency of wind turbines and solar power and dispense with the need for nuclear and "clean coal" power stations altogether.

The supergrid would stretch from Britain to Kazakhstan, and Scandinavia to Morocco, and transport huge amounts of renewable power back and forth to marry supply with demand.

MPs will hear from Dr Gregor Czisch, a German energy consultant who has devised a computer model which is based on historical weather and demand data. It is designed to find the cheapest electricity supply based wholly on renewables.

The supergrid would require tens of thousands of kilometres of overhead lines and undersea cables, and the entire system would cost more than €€1.5trn (£1.3trn) over 20 years.

Britain could become a booming market for solar power from next year when the UK introduces a support system used successfully by dozens of other countries.

Last week 240 MPs signed a parliamentary motion supporting the mass rollout of solar photovoltaic (PV) power. The support was the biggest of any such motion introduced in this parliament.

Colin Challen MP, who tabled the motion, said: "There is an enormous opportunity to drive forward this technology through the forthcoming feed-in tariffs."

Feed-in tariffs (FITs) work by paying a guaranteed, above-market price for any electricity fed into the grid for a period of 20-25 years. They have been designed to offer returns close to 10%, thereby reducing payback times for any household investing in a PV system to 10 years or less.

Similar tariffs have boosted solar power in the 50-odd countries that have introduced them in the past decade, in turn promoting production of PV panels and pushing down prices to the extent that PV will not need subsidies for much longer.

"FITs have been very effective at improving take-up," Kenichiro Wakisaka, senior manager at the Japanese electronics group and PV maker Sanyo, said at the recent Intersolar trade fair in Munich. "Japan has reintroduced one and the market there will double at least. The same will happen in the UK and we will increase our allocation to the UK market."

"We are very excited about this," said Clive Collison, head of Action South Facing, a solar system installer based in Hertfordshire. "We are now getting all sorts of inquiries from companies, local authorites and individuals. But nothing is guaranteed. We don't know the level it will be set at yet and the big energy companies are still lobbying against it."

Jerermy Leggett, chairman of the British solar group Solar Century, says the British market has tremendous potential but is also concerned that some officials at the Department for Energy and Climate Change may stall the introduction of the FIT at the behest of groups arguing that nuclear power is the answer.

"If so, UK plc will essentially have to sit and watch as other countries create jobs, tax income and energy security in one of the fastest-growing industries within the emerging green industrial revolution."

The British market, along with those of China, Japan and the United States, which have also recently announced plans for feed-in tariffs and other forms of support, offers a bright future for the solar industry. After several years of meteoric growth, it has been laid low this year by the credit crunch and a change to Spain's feed-in tariff that has reduced demand in one of the world's fastest-growing markets.

The global financial crisis has hit the industry hard because its costs are high and it has had trouble accessing bank financing. This has forced companies to rein in production and cut their prices in a bid to maintain their growth.

At the same time the supply of silicon, from which PV panels are made, has finally caught up with, and overtaken, demand, giving another nudge down to prices – to the benefit of consumers.

"Prices to end-users are down about 16% this year," says Georg Salvamoser, head of the German solar industry association, BSW. "This is hard for firms' margins but it does move us an important step towards making solar energy cheaper."

He predicts that the number of projects installed in Germany – Europe's biggest market – will grow this year, although more slowly than in recent years. "Last year we installed 1.5 gigawatts peak [GWp] of PV in Germany and this year I think there will be slightly more," he said.

That total is equivalent to the power produced from about two conventional coal or gas power stations. PV in Germany accounts for about 1% of total electricity production but the country hopes to boost that to 12% by 2020 and 25% by 2030.

Stefan Dietrich, spokesman for Q-Cells – the world's largest producer of silicon PV cells – said prices had tumbled 20% this year. "Things have changed a lot. It's a buyer's market right now. But in the short term that is good because it will help the industry reach grid parity."

"Grid parity" – the point at which PV electricity is as cheap as that coming from conventional power stations – is the PV industry's holy grail. It depends on how sunny a country is and the cost of its electricity.

Dietrich thinks Italy will be the first country in Europe to hit grid parity – possibly as soon as next year. Other candidates are Hawaii and California, where grid electricity is expensive. Many other countries, including Britain, will achieve parity within three to five years, say experts.

Once that happens, demand is potentially infinite. Solar PV also has the advantage that, once installed, the buyer is protected from rising oil and gas prices for several decades.

Industry analysts iSuppli forecast in a recent report that worldwide PV installation would tumble by a third this year to about 3.5GWp. But it expects growth to explode again from 2011, reaching 25GWp annually by 2013 and giving the industry an annual turnover of nearly $100bn.

But Jerry Stokes, vice-president for strategy at Chinese group Suntech – the world's biggest maker of PV panels – says life has got tougher.

"The market is very challenging now and there is a flight to quality going on," he says. "Project developers and investors are very cautious about what they spend their money on.

"It's not just about cost per watt but the number of kilowatt-hours you will get over the lifetime of a project, 20 years and more. And we are confident that we are in front in the race to grid parity – we don't want to live off government subsidies any more."

Public borrowing hit a record £19.9 billion in May as the recession continues to take its toll, official figures revealed this morning.

May's borrowing was nearly double the £10.6 billion borrowed in April. Public sector net borrowing for this financial year is now £30.5 billion — more than twice the level seen at the same stage 12 months earlier.

Even though May is traditionally a weaker month for public finances, borrowing over the month is the biggest figure since the Office for National Statistics’ (ONS) records began in 1993.

"Tax revenues continued to be decimated across the board by contracting economic activity, declining corporate profitability, elevated and rising unemployment, markedly reduced bonus payments, the VAT cut, and low housing market activity and prices," Howard Archer, chief European and UK economist at IHS Global Insight, said.

Public sector net debt reached £774.8 billion last month, equivalent to 54.7 per cent of gross domestic product (GDP), far exceeding Labour's now defunct fiscal rules which said that debt would never exceed 40 per cent of GDP.

The number of people claiming unemployment benefits has risen by more than 80 per cent over the last year as companies cut jobs in the face of the sharp economic slowdown.

Alan Clarke, UK economist at BNP Paribas, said: "May's UK public finances were every bit as dire as we have been bracing for. To put the borrowing figure in context, a few years ago, £19.9 billion would represent half of the borrowing requirement for the entire year — and now we are achieving this in a single month."

The chancellor of the exchequer, Alistair Darling, has forecast that borrowing will reach £175 billion this year as tax revenues dwindle and spending on benefits soars.

"Mr. Darling clearly has a major battle in limiting the PSNBR to £175 billion in 2009/10, although current signs that the economy could be at least temporarily stabilizing gives him hope, Whether or not he does hit his targets for this year, it is evident that further major fiscal tightening measures will be needed to get the public finances back to a sustainable state over the long term," Dr Archer said.

Alistair Darling, the Chancellor, has warned against banking on an early end to the recession, saying high oil prices could hold back recovery.

An influential think-tank this week claimed the UK economy returned to growth in April and May, suggesting the downturn may have bottomed out.

Mr Darling used an interview with the Financial Times to warn: "I think it is important that people should not become complacent (about the recovery)."

He said he was sticking to his Budget forecast and expecting the recession to finish towards the end of this year.

The Chancellor said the volatile oil price - which this week reached an eight-month high above 73 dollars a barrel - had "the potential to be a huge problem as far as the recovery is concerned".

"We've got to convince everyone, including some of the Gulf states, who really have been badly affected by this downturn in their broader economies, it is in no one's interest that we allow a high oil price to impede recovery.

He also warned that getting banks lending again remained a problem, and that lenders were still struggling to build confidence.

"If you don't fix the banking problem, you'll never fix the wider economy," Mr Darling said.

Sterling rallied against both the euro and the dollar yesterday after the upbeat economic forecast from National Institute of Economic and Social Research (NIESR), which estimated GDP rose by 0.2 per cent in April and 0.1 per cent in May.

The pound, which almost reached parity with the single currency at the end of 2008, climbed to 1.174 euros and was also up against the dollar, to 1.648.

Mr Darling also commented on staying in his post after last week's Cabinet reshuffle.

It was widely expected that he would be replaced by Cabinet colleague Ed Balls, one of Gordon Brown's most trusted aides.

He told the FT: "I was always very clear there was a job of work to be done. I wanted to see through the work we started when I came here in 2007."

ALL the oil in the North Sea could not stop an independent Scotland slipping into the red, a Government report claimed yesterday.

Scotland Office research shows the country's finances would have been in the black for just nine of the last 27 years, when oil cash began pouring into Britain's coffers.

And the report says the boom years haven't made up for the bad.

It concludes that Scotland would be £20billion in the red if the country had relied on oil, rather than being part of the UK, since 1980.

The report sparked a bitter political fight between pro-union parties and the SNP last night.

Last night, Scots Secretary Jim Murphy said: "When it comes to oil and Scotland's finances, the facts are very informative.

"Oil revenue makes a valuable contribution but it is not magic.

"By sticking to the facts, this paper helps to inform the debate."

The report by Scotland Office, Treasury and Department of Energy officials claims Scotland has been in deficit every year for the last 18 years.

Reliant That means if oil taxes had gone to Scotland alone, rather than the Treasury, they still would not have produced enough cash to match public spending since 1989.

And it questions the viability of an independent country so reliant on volatile oil prices.

The price of oil stands at $72 a barrel - less than half the $147 a barrel of a year ago. Experts believe that will cut tax revenues from £12.9billion to £6.9billion this year.

The report says: "The volatility of the oil price would have a severe impact on spending plans."

The report points out that reserves are slowly running dry and an independent Scotland would struggle even more in future years.

In a direct attack on SNP policy, it says a Scotland could not afford to save up an "oil fund" for long-term investment.

It says: "Oil revenues can be used only once - you can't spend them to offset an expenditure black hole and invest them at the same time."

Alex Salmond has fought successive elections issuing a demand for independence and "Scotland's oil".

But yesterday's figures suggest it would take much more than oil to maintain the standard of living and levels of public services.

Part of the reason is Scotland gets higher levels of public spending per head than other parts of the UK because of social and geographical needs.

But last night the SNP hit back at "fiddled" figures. Finance secretary John Swinney's spokesman said: "These figures are plain wrong and this is a joke report.

"The serious study and official figures will be published by the Scottish government.

"The Scotland Office have proved once again that they are headed by the Secretary of State AGAINST Scotland.

"The reality is, around £270billion in North Sea revenues have flowed to the Treasury in London.

"There are hundreds of billions worth of reserves still to be recovered, and we have not even reached the halfway point in terms of revenues."

Manchester's toilets will soon be contributing to the local gas network under a green energy project planned by United Utilities Group Plc and National Grid Plc.

In a UK first, the two companies plan to turn a by-product of the wastewater treatment plant at Davyhulme in Manchester, northwest England into gas for the local network and fuel for a fleet of sludge tankers.

The Mancunian biogas will be upgraded to remove carbon dioxide and trace elements, leaving biomethane which will be conditioned with propane and odorants before being pumped into the network and back into their homes.

"Biomethane is a fuel for the future," Janine Freeman, head of National Grid's Sustainable Gas Group said. "Not only are we reusing a waste product, but biomethane is a renewable fuel, so we helping to meet the country's target of 15 percent of all our energy coming from renewable sources by 2020."

Biogas is produced through a process called "anaerobic digestion" when wastewater sludge is broken down by the action of microbes.

The 4.3 million pound ($7.10 million) project should be operational by early 2011 and supply enough gas for about 500 homes. The overall potential of biomethane from a plant like Davyhulme would be to supply about 5,000 homes, National Grid said.

Unlike electricity generated from wind turbines, biogas offers a steady stream of green energy.

"Sewage treatment is a 24-hour process so there is an endless supply of biogas," Caroline Ashton, United Utilities biofuels manager, said.

"It is a very valuable resource and it's completely renewable. By harnessing this free energy we can reduce our fuel bills and reduce our carbon footprint."

One of United Utilities' sludge tankers has already been converted to run on the gas and the company expects to save hundreds of thousands of pounds a year in fuel costs with the 24 tankers it aims to convert initially.

It was not clear whether Manchester's home-made gas suppliers will get a discount on their own bills for their efforts.

Green shoots are bursting out. Or so we are told. But before concluding that the recession will soon be over, we must ask what history tells us. It is one of the guides we have to our present predicament. Fortunately, we do have the data. Unfortunately, the story they tell is an unhappy one.

Two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O’Rourke of Trinity College, Dublin, have provided pictures worth more than a thousand words (see charts).* In their paper, Profs Eichengreen and O’Rourke date the beginning of the current global recession to April 2008 and that of the Great Depression to June 1929. So what are their conclusions on where we are a little over a year into the recession? The bad news is that this recession fully matches the early part of the Great Depression. The good news is that the worst can still be averted.

First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan’s industrial collapse has been far worse than in the 1930s, despite a very recent recovery.

Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures.

Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression.

The two authors sum up starkly: “Globally we are tracking or doing even worse than the Great Depression ... This is a Depression-sized event.”

Yet what gave the Great Depression its name was a brutal decline over three years. This time the world is applying the lessons taken from that event by John Maynard Keynes and Milton Friedman, the two most influential economists of the 20th century. The policy response suggests that the disaster will not be repeated.

Profs Eichengreen and O’Rourke describe this contrast. During the Great Depression, the weighted average discount rate of the seven leading economies never fell below 3 per cent.

Today it is close to zero. Even the European Central Bank, most hawkish of the big central banks, has lowered its rate to 1 per cent. Again, during the Great Depression, money supply collapsed. But this time it has continued to rise. Indeed, the combination of strong monetary growth with deep recession raises doubts about the monetarist explanation for the Great Depression. Finally, fiscal policy has been far more aggressive this time. In the early 1930s the weighted average deficit for 24 significant countries remained smaller than 4 per cent of gross domestic product. Today, fiscal deficits will be far higher. In the US, the general government deficit is expected to be almost 14 per cent of GDP.

All this is consistent with the conclusions of an already classic paper by Carmen Reinhart of the university of Maryland and Kenneth Rogoff of Harvard.** Financial crises cause deep economic crises. The impact of a global financial crisis should be particularly severe.

Moreover, “the real value of government debt tends to explode, rising an average of 86 per cent in the major post–World War II episodes”. The chief reason is not the “bail-outs” of banks but the recessions. After the fact, runaway private lending turns into public spending and mountains of debt. Creditworthy governments will not accept the alternative of a big slump.

The question is whether today’s unprecedented stimulus will offset the effect of financial collapse and unprecedented accumulations of private sector debt in the US and elsewhere. If the former wins, we will soon see a positive deviation from the path of the Great Depression.

If the latter wins, we will not. What everybody hopes is clear. But what should we expect?

We are seeing a race between the repair of private balance sheets and global rebalancing of demand, on the one hand, and the sustainability of stimulus, on the other.

Global economy

Robust private sector demand will return only once the balance sheets of over-indebted households, overborrowed businesses and undercapitalised financial sectors are repaired or when countries with high savings rates consume or invest more. None of this is likely to be quick. Indeed, it is far more likely to take years, given the extraordinary debt accumulations of the past decade. Over the past two quarters, for example, US households repaid just 3.1 per cent of their debt. Deleveraging is a lengthy process. Meanwhile, the federal government has become the only significant borrower. Similarly, the Chinese government can swiftly expand investment. But it is harder for policy to raise levels of consumption.

The great likelihood is that the world economy will need aggressive monetary and fiscal policies far longer than many believe. That is going to be make policymakers – and investors – nervous.

Two opposing dangers arise. One is that the stimulus is withdrawn too soon, as happened in the 1930s and in Japan in the late 1990s. There will then be a relapse into recession, because the private sector is still unable, or unwilling, to spend. The other danger is that stimulus is withdrawn too late. That would lead to a loss of confidence in monetary stability worsened by concerns over the sustainability of public debt, particularly in the US, the provider of the world’s key currency. At the limit, soaring dollar prices of commodities and rising long-term interest rates on government bonds might put the US – and world economies – into a malign stagflation. Contrary to some alarmists, I see no signs of such a panic today. But it might happen.

Last year the world economy tipped over into a slump. The policy response has been massive.

But those sure we are at the beginning of a robust private sector-led recovery are almost certainly deluded. The race to full recovery is likely to be long, hard and uncertain.

Willie Walsh, chief executive of British Airways, warned last night that the worst of the recession was "still ahead" for the global airline industry, in a bleak assessment that chimed with the grim mood at this week's Paris air show.

The stark comments from one of Europe's top airline executives came amid a dearth of new orders at the show that underscored the scale of the crisis facing the commercial aerospace and aviation industries. Airlines have been hit by sharply falling passenger numbers and air freight volumes since last autumn.

The downturn has forced many carriers into heavy losses and led to a collapse in new aircraft orders. Airlines are struggling to defer or cancel deliveries.

There have been few new orders announced this week in sharp contrast to the air show celebrations of recent years.

The few signs of optimism have come only from the Middle East and some low- cost airlines, which are faring better than the legacy network carriers.

Jim McNerney, chief executive of Boeing, added to the gloom in Paris, saying: "I think it will be a long, extended recession. I don't see anything that will push a quick recovery. I fear a U-shaped recession. I have to plan for continuing difficult market conditions."

In a speech in the French capital to the Financial Times/Moët Hennessy Business Club, Mr Walsh said BA had planned "on the assumption of a 24-month downturn, and we have seen nothing yet to persuade us we are over-pessimistic".

The flag carrier, one of the big three European airlines, is facing a second consecutive year of losses. In a breakthrough in its efforts to cut costs, it emerged that its pilots are to be balloted on a package of pay cuts and productivity improvements tied to a long-term share incentive scheme. There would also be up to 78 voluntary redundancies.

Mr Walsh said the trading environment was "the harshest this industry has ever faced".

More airlines would go out of business, especially as the oil price was rising again.

He said: "Though some of the financial markets may be looking better, I believe that for airlines, the worst of this recession is still ahead of us."

A "structural shift" was occurring, said Mr Walsh and he warned demand for business travel, traditionally the main engine for profits at long-haul network carriers, might never fully recover.

"It may be that demand in the highest-yielding, fully-flexible premium business market will never recover to the levels we were seeing in 2007.

"That is a sobering message for all traditional airlines. Premium travel has been central to the viability of their business model for a very long time," he said.

BA's premium traffic fell by 17 per cent year-on-year in May and Mr Walsh said some of its biggest corporate customers were "changing their behaviour as consumers".