The world is heading for a catastrophic energy crunch that could cripple a global economic recovery because most of the major oil fields in the world have passed their peak production, a leading energy economist has warned.

Higher oil prices brought on by a rapid increase in demand and a stagnation, or even decline, in supply could blow any recovery off course, said Dr Fatih Birol, the chief economist at the respected International Energy Agency (IEA) in Paris, which is charged with the task of assessing future energy supplies by OECD countries.

In an interview with The Independent, Dr Birol said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated.

But the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago. On top of this, there is a problem of chronic under-investment by oil-producing countries, a feature that is set to result in an "oil crunch" within the next five years which will jeopardise any hope of a recovery from the present global economic recession, he said.

In a stark warning to Britain and the other Western powers, Dr Birol said that the market power of the very few oil-producing countries that hold substantial reserves of oil – mostly in the Middle East – would increase rapidly as the oil crisis begins to grip after 2010.

"One day we will run out of oil, it is not today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us, and we have to prepare ourselves for that day," Dr Birol said. "The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously," he said.

"The market power of the very few oil-producing countries, mainly in the Middle East, will increase very quickly. They already have about 40 per cent share of the oil market and this will increase much more strongly in the future," he said.

There is now a real risk of a crunch in the oil supply after next year when demand picks up because not enough is being done to build up new supplies of oil to compensate for the rapid decline in existing fields.

The IEA estimates that the decline in oil production in existing fields is now running at 6.7 per cent a year compared to the 3.7 per cent decline it had estimated in 2007, which it now acknowledges to be wrong.

"If we see a tightness of the markets, people in the street will see it in terms of higher prices, much higher than we see now. It will have an impact on the economy, definitely, especially if we see this tightness in the markets in the next few years," Dr Birol said.

"It will be especially important because the global economy will still be very fragile, very vulnerable. Many people think there will be a recovery in a few years' time but it will be a slow recovery and a fragile recovery and we will have the risk that the recovery will be strangled with higher oil prices," he told The Independent.

In its first-ever assessment of the world's major oil fields, the IEA concluded that the global energy system was at a crossroads and that consumption of oil was "patently unsustainable", with expected demand far outstripping supply.

Oil production has already peaked in non-Opec countries and the era of cheap oil has come to an end, it warned.

In most fields, oil production has now peaked, which means that other sources of supply have to be found to meet existing demand.

Even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production, and six Saudi Arabias if it is to keep up with the expected increase in demand between now and 2030, Dr Birol said.

"It's a big challenge in terms of the geology, in terms of the investment and in terms of the geopolitics. So this is a big risk and it's mainly because of the rates of the declining oil fields," he said.

"Many governments now are more and more aware that at least the day of cheap and easy oil is over... [however] I'm not very optimistic about governments being aware of the difficulties we may face in the oil supply," he said.

Environmentalists fear that as supplies of conventional oil run out, governments will be forced to exploit even dirtier alternatives, such as the massive reserves of tar sands in Alberta, Canada, which would be immensely damaging to the environment because of the amount of energy needed to recover a barrel of tar-sand oil compared to the energy needed to collect the same amount of crude oil.

"Just because oil is running out faster than we have collectively assumed, does not mean the pressure is off on climate change," said Jeremy Leggett, a former oil-industry consultant and now a green entrepreneur with Solar Century.

"Shell and others want to turn to tar, and extract oil from coal. But these are very carbon-intensive processes, and will deepen the climate problem," Dr Leggett said.

"What we need to do is accelerate the mobilisation of renewables, energy efficiency and alternative transport.

"We have to do this for global warming reasons anyway, but the imminent energy crisis redoubles the imperative," he said.

Oil: An unclear future

*Why is oil so important as an energy source?

Crude oil has been critical for economic development and the smooth functioning of almost every aspect of society. Agriculture and food production is heavily dependent on oil for fuel and fertilisers. In the US, for instance, it takes the direct and indirect use of about six barrels of oil to raise one beef steer. It is the basis of most transport systems. Oil is also crucial to the drugs and chemicals industries and is a strategic asset for the military.

*How are oil reserves estimated?

The amount of oil recoverable is always going to be an assessment subject to the vagaries of economics – which determines the price of the oil and whether it is worth the costs of pumping it out –and technology, which determines how easy it is to discover and recover. Probable reserves have a better than 50 per cent chance of getting oil out. Possible reserves have less than 50 per cent chance.

*Why is there such disagreement over oil reserves?

All numbers tend to be informed estimates. Different experts make different assumptions so it is under- standable that they can come to different conclusions. Some countries see the size of their oilfields as a national security issue and do not want to provide accurate information. Another problem concerns how fast oil production is declining in fields that are past their peak production. The rate of decline can vary from field to field and this affects calculations on the size of the reserves. A further factor is the expected size of future demand for oil.

*What is "peak oil" and when will it be reached?

This is the point when the maximum rate at which oil is extracted reaches a peak because of technical and geological constraints, with global production going into decline from then on. The UK Government, along with many other governments, has believed that peak oil will not occur until well into the 21st Century, at least not until after 2030. The International Energy Agency believes peak oil will come perhaps by 2020. But it also believes that we are heading for an even earlier "oil crunch" because demand after 2010 is likely to exceed dwindling supplies.

*With global warming, why should we be worried about peak oil?

There are large reserves of non-conventional oil, such as the tar sands of Canada. But this oil is dirty and will produce vast amounts of carbon dioxide which will make a nonsense of any climate change agreement. Another problem concerns how fast oil production is declining in fields that are past their peak production. The rate of decline can vary from field to field and this affects calculations on the size of the reserves. If we are not adequately prepared for peak oil, global warming could become far worse than expected.

There is one major similarity between the energy crisis and the financial crisis and one main difference. These two things tell us a lot about the role of cultures in how our modern version of capitalism plays out.

The similarity is that we are dealing with two massive global industries who have their asset assessment systemically, and roundly, wrong. The difference is that few people and organisations warned about the credit crunch as it approached, where as with the oil crunch, a host of people – many in and around the oil industry – are shouting a warning, and so to are a few good organisations concerned companies span British industry.

As for the international energy agency, it is as the World Bank was warning about the credit crunch a few years before it hit. In 2007, I convened an industry task-force on peak oil and energy security in the UK. It is chaired by Virgin, and members include Scottish and Southern energy, Arup, Foster + Partners, Stagecoach and my own company, Solarcentury. We released our first report at the London Stock Exchange last November, and our second will be released in November this year.

The first report concluded that peak oil is a grave risk for the global economy. Specifically, what concerns us is the threat in the premature peak in global oil production caused by either or both of a collective overestimation of reserves by the global oil industry, and an inability to deliver enough flow capacity because of underinvestment. The second report will examine, among other things, the impact of the recession on the global prices.

My own view of the state of play is that the recession might have bought us a little time, but has deepened the crisis beyond. The central problem is that the underinvestment in the oil industry today will play out as a tighter crunch in the middle of the next decade. It takes an average of six and a half years from finding an oil field to bringing it onstream and, in the rare case of giant fields, often more than 10 years. Why haven't more people in government, and the oil industry itself, seen this particular crisis coming? Why aren't they acting proactively to soften the blow?

The same question can be asked, with hindsight, of the bonus cultists who gave us the credit crunch, and their institutional fans. Gillian Tett of the Financial Times, a trained anthropologist, describes in her recent book the effort made by the banking elite at "ideological domination" ahead of the financial crash. Elites do this to maintain power, she explains. They decide what is talked about and what is not. There was a major "social silence" around the epidemic growth of derivatives.

This is exactly what I see going on among my old friends in the oil industry when it comes to weighing their assets. And their dysfunctional culture extends right into Whitehall, which is asleep on this issue. Civil servants will barely engage with the UK industry task-force.

One of the few financiers who saw the credit crunch coming said derivatives were financial hydrogen bombs built by 26-year-olds with MBAs. Here is another set of similarities and differences. The oil crunch is an economic hydrogen bomb. But it is being built by men close to retirement. The average age in the oil industry is 49, one of the biggest problems. It will fall to 26-year-olds to clear up their mess. Few of them have ever found an oilfield, much less built a refinery.

Crude oil fell for a second day as a drop in Asian equity markets renewed concerns that the global recession will erode fuel demand.

Asian stocks dropped for the third time in four days, extending a decline in U.S. equity markets. Crude oil inventories in the U.S. rose 1.67 million barrels to 349.5 million last week, 10 percent above the five-year average, an Energy Department report showed Aug. 5.

“There are definitely some investors that are reassessing the global outlook,” said Ben Westmore, an energy and minerals economist with National Australia Bank Ltd. in Melbourne in a Bloomberg Television interview. “You’ve still got weak fundamentals. Until you see some draw downs in oil product inventories, you won’t be able to get a sustained increase in oil prices in the short-term.”

Crude oil for September delivery on the New York Mercantile Exchange fell as much as 46 cents, or 0.6 percent, to $71.48 a barrel in after-hours electronic trading. It was at $71.55 a barrel at 3:17 p.m. in Singapore. Yesterday, the contract slipped 3 cents to settle at $71.94.

Futures have gained 61 percent this year and climbed 20 percent in the past four weeks.

“The market has been showing the same kind of resilience as stocks and the euro, but still demand for products is low,” said Ken Hasegawa, a commodity derivatives sales manager at broker Newedge in Tokyo.

Weekly Gains

Oil is set to rise 3.1 percent this week as U.S. equities increased and the dollar weakened, boosting investor demand for commodities priced in the U.S. currency.

The MSCI Asia Pacific Index lost 0.5 percent to 112.03 as of 3:30 p.m. in Tokyo. The gauge has climbed 58 percent from a five-year low.

The Standard & Poor’s 500 Index, which reached a nine-month high on Aug. 3, yesterday fell 0.6 percent to 997.07. The Dow Jones Industrial Average declined 0.3 percent to 9,256.26.

U.S. stockpiles of distillate fuel, which includes heating oil and diesel, are 25 percent above the five-year average and gasoline inventories are 3 percent higher, according to the Energy Department. Fuel demand in the nation averaged 18.9 million barrels a day in the past four weeks, down 3.1 percent from a year earlier.

Weaker Dollar

“Either the bulls are running out of steam in the Nymex crude oil pit or they are consolidating for a run back at $75,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a note to clients. The market is “entrenched in a well-defined bullish channel, rising supplies of the physical notwithstanding,” he said.

The dollar is headed for a fifth weekly drop against the currencies of six major U.S. trading partners as investors sought higher-yielding assets ahead of a Labor Department report forecast to show companies cut fewer jobs.

The Dollar Index traded at 77.961 as of 1:01 p.m. in Tokyo from 78.053 in New York yesterday and 78.347 on July 31.

Brent crude oil for September settlement fell as much as 39 cents, or 0.5 percent, to $74.44 a barrel on London’s ICE Futures Europe exchange. It was at $74.52 at 3:18 p.m. in Singapore. Prices declined 68 cents, or 0.9 percent, to $74.83 yesterday.

The Organization of Petroleum Exporting Countries increased oil output for a fourth month in July, with quota compliance slipping as some members took advantage of strong prices, a Bloomberg News survey showed.

Oil output averaged 28.39 million barrels a day last month, up 45,000 from June, according to the survey of oil companies, producers and analysts. The 11 OPEC members with quotas, all except Iraq, pumped 26.035 million barrels a day, 1.19 million 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 is scheduled to meet and discuss production levels in Vienna on Sept. 9.

The United Arab Emirates increased production 40,000 barrels a day to 2.27 million barrels a day, the biggest increase of any member last month. The gain left output 47,000 barrels a day above the country’s quota.

Saudi Arabia, Kuwait and Qatar were the only OPEC members to produce less oil than their targets in July. Saudi Arabia, the world’s biggest oil exporter, pumped 8.02 million barrels of crude oil a day in July, unchanged from the previous month, the survey showed.

Nigeria’s production slipped 100,000 barrels a day to an average 1.75 million in July because of attacks by militants on oil facilities in the country’s oil-rich Niger River delta. It was the biggest decline by any OPEC member and left Nigerian output at the lowest level since August 1994.

The Movement for the Emancipation of the Niger Delta, the country’s main militant group, declared a 60-day cease-fire in its campaign targeting oil and gas installations on July 15 after authorities freed leader Henry Okah. Violence in the region intensified in May when the government launched an offensive against MEND bases.

It was a week of unrelenting gloom for the oil industry. As one boss after another revealed unprecedented plunges in profits, tens of billions of dollars were wiped off company values. They warned of savage jobs cuts to come and none ventured a guess as to when the recession might end. All is not well in oil-land.

Yet it was a largely ignored announcement by Shell that illustrates the depth of the probems facing the industry. The company approved a plan to build a fleet of floating natural gas plants. Each will be twice the length of a Royal Navy aircraft carrier and weigh 200,000 tons. They will sail to gas fields located either so far out to sea or in such environmentally sensitive areas that the pipelines and surface infrastructure required make them unviable. Until recently, the idea was dismissed.

“We’ve been looking at this for more than a decade,” said Jon Chadwick, executive vice-president of Shell’s Upstream division. “But in the last couple of years, things have changed.”

Liquefied natural gas (LNG) plants, which extract gas from deep underground and purify, compress and superchill it to liquid form, are expensive and technologically complex. One can easily cost $4 billion (£2.4 billion). Chadwick declined to say how much it will cost to make LNG plants seaworthy, but shipping sources say the price could top $6 billion.

“This way we can drain one field and move on to the next. Nobody has ever built anything like this,” Chadwick said. It seems an extraordinary effort to reach fields that recently were deemed unviable.

Shell, like its rivals, is facing a harsh reality. A combination of the recession, last year’s drop in the oil price, weak gas prices in America, high costs and dwindling natural resources could lead, say insiders, to a reshaping of the sector as profound as the 1990s merger frenzy in which several big names disappeared.

Jeremy Wilson, vice-chairman of energy at JP Morgan, the investment bank, said: “The bottom line is that oil is a challenging industry. Growth of more than 1%-2% a year outside of Opec will be difficult to deliver. Oil companies aren’t like Coca-Cola or Microsoft, which have differentiated products and sustainable competitive advantage. The industry is full of similar companies with similar capabilities, delivering the same products.”

Executives are already tackling the most pressing problems: high costs and unpredictable cashflow. The oil price has more than halved from its record $147 a barrel last summer, while costs that rocketed in the boom have been slow to fall. The result is that oil firms’ cashflow is being eaten up by dividends and exploration, so many are having to borrow to meet payments.

Bosses are having to wield the axe. BP has shed 5,000 staff and Tony Hayward, chief executive, said last week he expected to shave another $1 billion from costs, mostly by squeezing suppliers. Peter Voser, who took over at Shell a month ago, could cut 10,000 staff. Exxon Mobil, which last week posted a two-thirds drop in quarterly profits, may freeze spending levels.

Solving the fundamental problem of replacing falling reserves is more difficult. Consider Shell. Last year it spent $30 billion on exploration and production, one of the largest investment programmes of any company in the world, while its production fell 5%.

Gordon Gray, an analyst at the broker Collins Stewart, said: “The decline of mature assets is relentless. They are all fighting hard against it but they are approaching it in different ways.” Analysts say, however, that cuts now will only lead to a new oil price spike when the developed economies come out of recession.

Anthony Lobo, head of oil and gas at KPMG, said that in the short term small mergers of, say, £20 billion, and joint ventures with national oil companies (NOCs) are more likely than huge mergers. “The deals of £40 billion or more seen in the last decade are unlikely to happen because one international oil company [IOC] buying another arguably compounds the problem,” he said.

“The magic formula is the combination of cash and reserves. The IOCs have cash and access to debt but the NOCs hold the keys to many of the reserves. As NOCs are not up for sale, we are likely to see international oil companies proposing joint ventures.”

This is because the “easy” oil — on land and in politically friendly regions — is drying up. NOCs own 80% of the world’s reserves, leaving the industry to fight over a shrinking number of fields in hard-to-reach places. Manouchehr Takin of the Centre for Global Energy Studies said: “The IOCs need the NOCs a lot more than the NOCs need them.”

This is why companies such as Shell and Exxon have been increasingly aggressive in marketing their technological know-how. “If you can prove to the Iraqis, for example, that you can get another 10% out of a field, that could give you the edge,” said an industry source.

Companies may also shed older assets or quit entire regions to focus their spending on big-ticket projects that will bring long-lasting production on to the books. Afren, an independent producer in Nigeria, said oil giants were looking at selling 250 fields in the country, which is riven by conflict.

A month ago, Iraq auctioned rights to develop six huge oil fields and two gas fields. It was the first time in three decades that the owner of the world’s third-largest reserves had invited foreign companies into the industry. More than 30 companies expressed an interest but in the end only one bidding group, BP and China National Petroleum, won a concession on one field. The others baulked at the harsh terms.

One source said: “BP is going to make $2 a barrel on that. Unfortunately, that is a sign of things to come.”

Secretary of State Hillary Clinton shifts to economic statecraft this week on an African tour that stops in major oil and mineral exporters as she seeks advantages for U.S. investors in a market where China is making inroads.

After six months of dealing with North Korean provocations, Iran’s election unrest and a coup in Honduras, Clinton will turn to issues of trade and energy in sub-Saharan Africa. She will spend time in Nigeria and Angola, two of the biggest suppliers of crude oil to the U.S.

China has boosted investment commitments in Africa, especially in mining, and Chinese oil purchases are expanding from countries such as Sudan. In 2007, China was the largest individual exporter to the region with a market share of 9.8 percent, the U.S. Commerce Department reported in July. The U.S. market share in 2007 fell to 5.3 percent in exports.

“China’s influence is increasing at the moment and, to some extent, African policy makers are looking to see what the American response will be,” said Derek Scissors, a research fellow at the Heritage Foundation in Washington who tracks Chinese investment on the continent.

Johnnie Carson, the assistant secretary of state for African affairs, said any suggestion that Clinton is making such an extensive trip to counter China’s rise in Africa “is a Cold War paradigm, not a reflection of where we are.”

Clinton is going to Nigeria and Angola “because we have serious political, economic and hydrocarbon interests in those countries,” Carson told reporters July 30 in Washington.

Trade Summit

Clinton’s seven-nation trip begins with an Aug. 5 free- trade summit in Kenya, followed by visits with peacekeepers in the Democratic Republic of Congo and talks with the new South African leadership. She also stops in Liberia and Cape Verde.

The Africa trip is an early example of Clinton’s stated intention to strengthen economic outreach as part of U.S. foreign policy, a goal she articulated to the Council on Foreign Relations last month.

The State Department’s attention to energy in Africa is reflected in its appointment of a coordinator on energy issues, David Goldwyn, who had been running a consulting firm focused on Africa.

Nigeria is the fifth-largest supplier of crude to the U.S. and Angola is the sixth, according to the U.S. Energy Department. Those countries combined supply about 12 percent of U.S. imports. In July, Angola pumped more oil than Nigeria, traditionally Africa’s biggest producer.

‘Enormous’ Potential

Angola “has enormous economic potential,” Carson said. San Ramon, California-based Chevron Corp. is leading the development of liquefied natural gas exports from the country.

Clinton, 61, will press Nigeria on corruption, which Carson blamed for stifling international investment. International observers concluded that Nigeria’s April 2007 presidential election of Umaru Yar’Adua was a sham. The country, ranked as one of the most corrupt by Berlin-based Transparency International, is weighing anti-graft measures.

Yar’Adua set up a panel in April to investigate the alleged bribery of state officials by foreign companies including former Halliburton Co. subsidiary KBR Inc.

KBR and Halliburton, both based in Houston, agreed to pay $579 million in February to resolve U.S. criminal and regulatory charges stemming from payments made to Nigerian officials between 1994 and 2004 in connection with a $6 billion construction contract. KBR pleaded guilty to conspiracy and violating the U.S. Foreign Corrupt Practices Act.

Violence in Delta

Of immediate concern for the energy industry is violence and abductions in the southern Niger Delta. The acts against oil installations have disrupted Nigerian production.

Irving, Texas-based Exxon Mobil Corp. and Chevron pump more than half of Nigeria’s oil and have been hit by some of the attacks. Yar’Adua may seek support through the U.S. military’s Africa Command to tackle the threat from armed groups to oil production in Nigeria.

Nigeria is also dealing with religious unrest. In northeastern Nigeria, at least 600 people have died since fighting erupted on July 26.

Such an expansive Africa tour is unusual for a U.S. secretary of state, especially so early in a new administration. The effort is “laudable” because “many people would have predicted that Africa was going to get a pretty short shrift given all the other pressing business,” said J. Stephen Morrison, senior director of Africa research at the Center for Strategic and International Studies in Washington.

Exports Measure

Clinton will explore ways of strengthening the U.S. African Growth and Opportunity Act at the Kenya forum. The 9-year-old measure is designed to encourage African exports by giving duty- free access to the U.S. market. Yet oil dominates the commerce: Petroleum products accounted for 92.3 percent of the $66.3 billion in U.S. imports under AGOA in 2008.

Supporters of the law lament that a lifting of quotas on apparel imports in 2005 shifted manufacturing to Asia just as Africa was starting to take advantage of the initiative.

“AGOA is a litmus test of are we serious about helping Africa, or are we not serious,” said Rosa Whitaker, formerly the first assistant U.S. trade representative for Africa and now a consultant.

Whitaker said she hopes President Barack Obama will make AGOA permanent and offer tax incentives to encourage U.S. investment.

Political Violence

In Kenya, Clinton will press for prosecution of the perpetrators of last year’s post-election violence. About 1,500 Kenyans were killed and another 300,000 displaced in two months of fighting triggered by accusations of vote-rigging in a December 2007 election.

Obama, whose father came from Kenya, expressed concern last month that political paralysis is preventing reconciliation.

While in Kenya, Clinton will also assess the staying power of the embattled transitional government in neighboring Somalia when she meets with its president, Sheikh Sharif Sheikh Ahmed, to discuss battles with militant Islamists in the Horn of Africa.

“The problems in southern Somalia have started to bleed regionally and internationally,” Carson said, pointing a finger at Eritrea for funneling weapons and funds to the militants. The U.S. has shipped 40 tons of arms and munitions to Somalia since fighting broke out May 7.

Kenya Ties

Clinton travels from Kenya to South Africa to repair a relationship that frayed under President George W. Bush, especially over former South African President Thabo Mbeki’s refusal to criticize Zimbabwean President Robert Mugabe.

She will visit Pretoria and Cape Town, which will host the 2010 World Cup soccer tournament. After South Africa, she heads to Angola and then to the Democratic Republic of Congo, a country rich in minerals like coltan which is critical for mobile phones and fuels violent conflict among militias in the eastern areas of the country that Clinton will visit.

Congo’s minerals have attracted companies including China’s state-owned Sinohydro Corp. and China Railway Engineering Corp., which seek to develop copper and cobalt deposits. London-based Rio Tinto Group, the world’s third-largest mining company, is exploring for diamonds and iron ore.

While in Congo, Clinton will make a push to strengthen the Congolese security forces and speak out about violence against women, Carson said.

Congo’s record on human rights has worsened. On July 23, Congolese authorities detained Golden Misabiko, a human rights leader partnered with the U.S.-funded National Endowment for Democracy, after he wrote a report critical of the government’s handling of mining concessions to foreign companies.

“Congo is such a chaotic behemoth, it’s a wrecked state, whose instability, when it’s not functioning, kind of radiates throughout the continent,” Morrison said.

An offer of an amnesty for militants in Nigeria's oil-rich Niger Delta region has come into effect.

During the next two months the government hopes about 10,000 armed men will surrender their weapons in return for a pardon and retraining.

It is not yet clear how many of the region's numerous armed groups will take part in the amnesty.

They attack oil refineries and smash pipelines in what they say is a fight for a fair share of the delta's wealth.

In recent months the violent struggle in the delta has worsened, but the amnesty offer is being hailed by analysts as one of the most significant efforts so far to end the unrest.

Timiebi Koripamo-Agary, spokeswoman for the amnesty programme, said the militants had made their point.

"They have raised the issues of the Niger Delta sufficiently to national and international consciousness," she said.

"This amnesty, I believe, offers the militants the opportunity to engage in finding lasting solutions to the problems of the Niger Delta."

She said hundreds of militants had expressed interest in taking the clemency, including one commander who said he and 800 fighters were ready to accept the offer.

'Oil war'

Officials said gunmen who accept amnesty would be given 65,000 naira ($433; £255) a month for food and living expenses during the rehabilitation programme, which runs from 6 August to 4 October.

But the main rebel group in the region, the Movement for the Emancipation of the Niger Delta (Mend), has not yet said it will take part in the amnesty.

"When we choose to disarm, it will be done freely, knowing that the reason for our uprising which is the emancipation of the Niger Delta from neglect and injustice has been achieved," the group said in statement e-mailed to the AFP news agency.

The group, which called a temporary ceasefire last month after one of its leaders was freed from jail, is in talks with senior officials about the terms of any possible amnesty.

Oil revenue is the major source of income for the entire country but the so-called oil war has cut Nigeria's oil output by about a quarter in recent years.

The militants tap into pipelines, siphon off oil and sell it on a huge scale. Some analysts estimate the illicit industry generates more than $50m a day.

The BBC's Caroline Duffield, in Nigeria, says some of the most powerful people in Nigeria directly profit from the militants' activities.

With that kind of money involved, our correspondent says, it is hard to see why the militant gangs or their powerful patrons would want peace at all.

As Mahmoud Ahmadinejad receives the endorsement of Iran's Supreme Leader Ayatollah Khamenei for a second term as president, a new confrontation with Western countries is beginning to gather strength.

The United States is leading an effort to impose sanctions on Iran's oil industry if Iran does not suspend uranium enrichment and enter talks about its nuclear programme.

Ban on refined products

Crucially, these new sanctions could include a ban on sending refined petroleum products and by-products to Iran. This means petrol, kerosene, diesel, propane and butane gas. Despite its oil wealth, Iran still cannot refine enough for its domestic needs.

The US also wants restrictions on buying oil and gas from Iran and on investments in Iran's oil and gas industries.

"Any new sanctions have to be of a different order of magnitude," was how one Western official put it recently.

Timetable

The timetable is for an assessment to be made of Iran's intentions in the last week of September, when world leaders always gather in New York for the annual meeting of the UN General Assembly. There would also be discussions at a G20 summit in Pittsburgh the same week.

If Iran continued to resist freezing its enrichment activities and failed to agree to discuss its nuclear programme, then sanctions would be imposed, or at least realistically threatened, by the end of this year.

All this follows the offer by President Obama earlier year to offer Iran an "extended hand", if Iran "unclenched its fists". This could mean direct US-Iran talks, a lifting of sanctions and the provision of aid for a civilian nuclear industry in Iran, including a guaranteed supply of enriched-uranium fuel.

The president had indicated that he might wait until the end of the year for Iran's reply. The manoeuvres now under way are designed to have sanctions ready in case the final answer is a clear "no".

In this way, the dual-track approach - offering talks and incentives on the one hand and threatening further sanctions on the other - would be back in better balance.

The US Defence Secretary Robert Gates and the National Security Adviser James Jones have already outlined the proposals to the Israeli government. The hope is that Israel will tone down its hints of military action against Iran while this new diplomatic and economic effort is given a chance.

Plans A and B

Plan A is for the sanctions to be imposed through the Security Council, which has already targeted Iran's nuclear and ballistic missile development. But plan B might be needed if Russia and China, both veto-holding members of the Council, do not agree, as they currently do not.

Plan B is for the US to lead action by itself and its allies - there are already bills authorising such action in the Senate and the House of Representatives, and threatening retaliation on foreign companies if they do not comply.

Britain would also urge the European Union to make a stand. However, there is a feeling among some member states that an EU embargo would simply leave the field free for others - China for example - to take up the slack.

As for China and Russia, a new diplomatic effort is to be made to persuade them that their strategic interests would be served by a peaceful resolution of this issue.

Iranian attitudes

Nobody expects a positive reply from Iran. President Ahmadinejad's attitude towards enrichment was seen immediately after he first took office in 2005 when he castigated Iran's then negotiating team for agreeing to a pause in enrichment and immediately ended it. He has not changed his attitude since.

Iran argues that it is simply fulfilling its right to enrich fuel for nuclear power under the Nuclear Non-Proliferation Treaty and that it does not intend to make a nuclear bomb.

The Security Council has called on Iran to show its good faith by suspending enrichment and entering talks on the package of incentives proposed by the US and EU.

And what happens if plans A and B fail to move Iran? The Israelis would probably press for a Plan C, meaning some sort of military action.

Britain's financial watchdog and the UK Treasury met oil industry representatives on Wednesday to discuss market transparency and regulation but issued no statement after the encounter.
The UK Financial Services Authority (FSA) invited 20-30 participants including oil producers, traders and funds to the meeting in Canary Wharf, London's financial hub.

The meeting coincided with hearings in Washington by the U.S. regulator, the Commodity Futures Trading Commission (CFTC), which are likely to result in tighter rules on derivatives and possibly new limits on trading positions.

The meeting was to discuss market efficiency and transparency, according to the FSA invitation to oil market participants, a copy of which was seen by Reuters.

Oil traders leaving the meeting declined to comment on the discussions with reporters.

Funds that invest heavily in energy commodities told the CFTC on Wednesday they were not responsible for the wild swings in crude oil and natural gas futures over the last two years. [nN05224906]

Crude oil prices leapt from around $60 a barrel at the start of 2007 to a peak close to $150 a barrel in July last year, in a move some economists say contributed to the global downturn.

Prices crashed to almost $30 a barrel at the start of 2009 as the recession cut demand for energy. Prices have since recovered to more than $70 a barrel.

Industry sources say the FSA and most UK market participants oppose tighter rules for markets, preferring instead to keep a lighter regulatory regime to encourage liquidity.

Both the Intercontinental Exchange (ICE) and the London Metal Exchange (LME), two of the world's largest commodity exchanges, have said they have no plans to change the way they regulate large positions on their UK-based markets.

But both the FSA and the oil trading community believe they need to be seen to be responding to the CFTC and its concerns, industry sources say.

Britain's opposition Conservative Party, which opinion polls suggest will win national elections due in less than a year, has promised to abolish the FSA and hand over its powers to the Bank of England to create a powerful super-regulator.

Editing by James Jukwey

America’s top oil market regulator called for stricter controls on trading yesterday in a move that increases the pressure on British authorities to act.

Gary Gensler, the chairman of the powerful Commodity Futures Trading Commission (CFTC), said that the organisation should “seriously consider” setting position limits in energy futures trading to curb “excessive speculation”. He said that the CFTC was compelled to act by statute to protect the American public from high and volatile oil prices. “I believe that position limits should be consistently applied across markets for physical commodities of finite supply,” Mr Gensler told a hearing in Washington.

His remarks came as the Financial Services Authority (FSA), which is under political pressure to limit oil market speculation in the City, met representatives from the Treasury and about 30 oil companies, energy traders, banks and funds to discuss “oil market transparency and efficiency”.

Critics have blamed speculators for the rise in oil prices last year to a peak of $147 per barrel, which some say contributed to the global economic crisis.

Adrian Binks, the chief executive of Argus, the energy media group, rejected concerns that speculative activity was driving prices. He warned that new rules or position limits in the City would have no impact on prices and would force trading activity offshore. “There has been a large movement of oil traders already from London to Switzerland,” he said, adding that kneejerk action from the FSA risks accelerating that process.

But he admitted that the FSA was in an awkward position. “If the CFTC introduces position limits and the FSA does not, then there will be growing political pressure on London from Washington DC to do so.”

In a joint letter last month, Gordon Brown and President Sarkozy of France called for global action on oil market volatility, which they said was a “growing call for alarm”. They said that international regulators should “consider improving transparency and supervision of the oil futures markets to reduce damaging speculation”.

The FSA and the Treasury sought to play down the meeting. A Treasury spokesman said that officials from the Treasury and the FSA met oil market stakeholders as they do “many stakeholders on a regular basis”.

The EU and international lending institutions have agreed a deal with Ukraine to help it provide stable supplies of Russian gas to Europe.

Loans worth $1.7bn (£1bn) were agreed in return for reforms to Ukraine's gas sector, the European Commission said.

The deal is meant to include money to help Ukrainian national gas company Naftogaz pay off large debts to Russia.

In January, many countries were left without gas because of a payment dispute between Moscow and Kiev.

The new deal will allow Ukraine to replenish its reserves of Russian gas before the winter.

Commission President Jose Manuel Barroso said Ukraine had made commitments which would ensure increased transparency and the long-term viability of the industry, though he did not give details.

"The agreement should provide the stability needed to significantly reduce the risk of a further gas crisis between Ukraine and Russia and therefore provide the security of supply that member states and our consumers expect," he said.

The institutions that will provide funding include the International Monetary Fund, the World Bank, and the European Bank for Reconstruction and Development.

Lenders have called for Naftogaz to end subsidies of gas supplies within Ukraine as a condition for making loans, correspondents say.

Russia provides about a quarter of the gas consumed in the EU and 80% of that is piped through Ukraine.

An “interventionist” approach by the government will be needed if security of energy supply is to be guaranteed, a report commissioned by the prime minister will conclude on Wednesday.

Malcolm Wicks, the former energy minister appointed by Gordon Brown as his special representative for international energy issues, will say that “the time for market innocence is over” and that the government needs to do more to safeguard electricity and gas supplies.

His report, published by the Department of Energy and Climate Change, raises concerns about a new “dash for gas” that could make Britain more dependent on imports from countries such as Russia, Algeria and Nigeria.

The warning comes as figures compiled by New Power, an industry journal, show that gas-fired power stations account for the majority of planned generation capacity, far exceeding any other fuel.

Mr Wicks’s report emerged out of concerns that, while energy policy was addressing the threat of climate change – as seen in the white paper launched by Ed Miliband, the energy secretary, last month – security of supply was being relatively neglected.

The recession, which has cut oil prices to less than half their peak of $147 a barrel a year ago and has sent wholesale gas and electricity prices tumbling, has eased immediate fears about energy shortages.

Dorothy Thompson, the chief executive of Drax, the operator of Europe’s biggest coal-fired power station, said there had been an “unprecedented” drop in demand for electricity.

National Grid, which owns the electricity and gas transmission networks, published forecasts in May suggesting that power demand by 2016 would still be well below its 2008 level.

But as the world economy recovers, energy demand is expected to pick up again, led by emerging economies such as China and India, and that is expected to push oil and gas prices higher.

Meanwhile, Britain’s oil and gas production from the North Sea is in decline as its mature fields are sucked dry. As a result, the country, which was self-sufficient in gas as recently as 2004, is expected to have to rely on imports for between 45 per cent and 70 per cent of its needs by 2020.

Mr Wicks argues that this shift to import dependency means the prevailing model of energy policy since the 1980s – that the market should be allowed to work freely as far as possible – is no longer workable.

“The era of heavy reliance on companies, competition and liberalisation must be re-assessed,” he said. “We must still rely on companies for exploration, delivery and supply but the state must become more active: interventionist, where necessary.”

Mr Miliband and his Labour predecessors had already begun to shift policy in that direction, but Mr Wicks’ recommendations, if implemented, would push the government further than it has so far been prepared to go.

Among his proposals, he suggests that the government should look at setting objectives for the fuel mix for the country’s electricity generation, specifying a set proportion, perhaps within bands, to come from energy sources such as gas, nuclear, coal and wind.

The government has signed up to that approach for renewables, which are supposed to provide about 30 per cent of Britain’s electricity by 2020, but not for other technologies.

Other ideas put forward by Mr Wicks include the possibility of government-backed strategic gas storage, to run alongside commercial storage sites, which could release gas to cope with supply disruptions such as the problems caused by Russia’s dispute with Ukraine in January.

SCALE OF THE POWER CHALLENGE

The scale of the challenge facing energy policy is illustrated by the list of planned investments in electricity generation compiled by New Power, the industry journal, writes Ed Crooks.

Companies have set out plans or begun construction on 30,000MW of gas-fired generation, compared to about 8,100MW of coal-fired power, 1,800MW for onshore wind power and 9,200MW for offshore wind power, according to published announcements.

The fall in energy demand caused by the recession, and the prospect of long-term demand weakness, created by the government’s commitment to raise energy efficiency, have created uncertainty over how many new power stations will be needed. However, about 10,000MW of coal-fired generation capacity is expected to shut down by 2016 to comply with EU acid rain pollution controls.

Dominic Maclaine, editor of New Power, said he expected most of that to be replaced by gas-fired power stations. “There is a new dash for gas under way,” he said.

EDF of France and a consortium of Eon and RWE of Germany, which are the two groups likely to be first to build nuclear power stations in Britain, say they want to invest in about 12,000MW of new nuclear capacity between them.

However, the first of those reactors will not be operational until the end of 2017 at the earliest.

Old plants will be shutting down faster than the new ones can open, meaning that nuclear is likely to provide a much smaller share of the country’s electricity in 2020 than it does today.

In a report on energy security by Malcolm Wicks, a former energy minister, said the UK needs to nurture better relationships with gas exporters, Norway, Qatar and Saudi Arabia, while tripling nuclear capacity and pushing for renewable energy.

The Labour MP said that the UK must avoid a costly "dash for gas" and minimise its exposure to political spats like the Russia-Ukraine row that push up spot prices.

Refinery strike: Nuclear power workers threaten to join protestThe Department of Climate Change last month said energy efficiency means that declining North Sea gas will not result in extra imports beyond next year.

But Mr Wicks' report said that "such projections are inevitably uncertain and others have estimated higher import dependence".

The MP also advised that state intervention in the energy market would be increasingly necessary. He urged the Government to consider legislation to reserve storage space in offshore gas facilities owned by energy companies for UK needs. This would stop companies diverting gas supplies to other countries in the event of a shortage.

Industry bodies and companies greeted the report with caution. "The Government is already shaping the market through various low-carbon targets and incentives, and more intervention is not necessarily the answer," said Dr Neil Bentley, the Confederation of British Industry's director of business environment.

A spokesman for Centrica, which is building terminals for storing liquefied natural gas, criticised the idea of reserving capacity for the UK. "Introducing strategic storage would immediately make it less attractive to build commercial storage," he said.

Separately, energy market players from oil majors to traders met at the Financial Services Authority to talk about market transparency.

The meeting follows concerns about price, the volatility of oil and financial markets, and the need for more disclosure, with the US regulators discussing limits on trading.

Proposals to double the proportion of electricity generated by nuclear power have been criticised by the Conservative party, which warned they could open the door for government subsidies for new reactors.

A report on energy security commissioned by the prime minister and published on Wednesday argued for an “aspiration” that nuclear power would provide 35-40 per cent of Britain’s electricity after 2030, up from 12-15 per cent today.

Malcolm Wicks, the former energy minister who is now Gordon Brown’s special representative for international energy issues, said present plans for nuclear investment would merely replace the reactors scheduled to shut down during the next two decades.

“When you add the energy security concerns to the climate change arguments, my conclusion is that we should be more ambitious,” he said.

Charles Hendry, shadow energy minister, said proposals for measures to protect energy security, such as increasing gas storage capacity, were “a mark of the government’s failure”.

But the Conservatives have refused to back Mr Wicks’ proposed commitment to a steep increase in nuclear power. “If companies want to build new nuclear plants without subsidy they are very welcome to do so, and we are clear that the UK is a very attractive place for new nuclear investment,” Mr Hendry said. “But if you set an aspiration like that, the danger is that the industry will say: ‘If you want that, we have to have a subsidy’.”

Reaction from business to Mr Wicks’ report was mixed, with some companies saying he did not take seriously enough the threat of a decline in oil supplies.

Centrica, owner of British Gas, rejected his suggestion the government should consider backing strategic gas storage capacity, saying it would make investing in commercial gas storage less attractive.

The company, which this year took a 20 per cent stake in the nuclear generator British Energy, also warned that the price of carbon dioxide emissions in the European Union’s trading scheme was “far too low” to support the investment the country needed in nuclear power. It suggested: “We may need some mechanism to provide additional support.”

The UK Industry Taskforce on Peak Oil, which backs the theory that world oil output is about to go into decline and has members including Virgin, Scottish & Southern Energy, Tesco and Yahoo, said the report was “incredibly disappointing” in concluding that “there is no crisis”.

Will Whitehorn of Virgin, chairman of the task force, said: “We see there being big upward pressure on oil prices in the first half of the next decade, and I don’t think this report has understood that.”

The energy regulator told the companies that they must deliver service improvements for 17pc less than the amount that they had asked to spend.

Britain's 14 electricity networks, owned by companies such as E.on, Iberdrola, Scottish & Southern Energy and Warren Buffett's MidAmerican Energy Holdings, will need to cut operating costs by about 10pc.

Householders face above inflation increases in water billsOfgem said that this will prevent "unnecessary price rises in today's difficult economic environment". Currently about £67 per year in household bills is already spent on upkeep of the network.

Part of the price rises will relate to building "smartgrids", enabling consumers to sell electricity generated by solar panels or wind turbines to the national network. The rest of the money will be spent on ensuring that the companies are investing in a low-carbon future. Britain's electricity network was largely built in the 1950s and it is now in need of upgrades.

Alistair Buchanan, Ofgem's chief executive, said: "Our electricity network proposals are tough but fair and will deliver for energy consumers today and in the future. We have accepted the companies' investment plans but told them to deliver them at much lower cost."

Ofgem's proposals come as the Energy Retail Association (ERA) – which represents the major gas and electricity suppliers – called on the Government to turn its commitment to smart meters into "firm policy decisions and clear action".

The ERA's research revealed that almost two-thirds of people had not heard of the devices that measure energy use in the home, despite the Government's recent announcement that the meters would be in every home by the end of the next decade.

Beijing hinted on Wednesday at room for compromise in global climate change talks, as its negotiator left open the possibility China could commit itself to reducing carbon emissions beyond 2012.

Yu Qingtai, Beijing’s special representative for climate talks, indicated that more generous financial and technological support from developed countries could help China reach a peak in its carbon emissions sooner than expected.

Along with other developing nations, China wants developed countries to be legally bound to help pay for curbing emissions in poorer ones. “When China’s emissions will peak depends on our development stage, our GDP per capita, our resources structure and technology level,” he said.

“It will also depend on the dynamics of international co-operation, especially technology transfer.”

Mr Yu’s remarks to journalists appeared to show a new willingness to converge with the western approach, in contrast to previous communications characterised by demands for western countries to do more, rather than an emphasis on what China will do.

China has also sounded a more moderate tone recently on how much developed countries should curb their emissions under a new global agreement to be sealed in December in Copenhagen. While Beijing demanded in May that rich nations must cut greenhouse emissions by 40 per cent by 2020 from 1990 levels, it has lately spoken only of “large reductions”.

Mr Yu said China still considered the 40 per cent target fair, but added that it would be set through negotiations. His moderate tone contrasts markedly with the attitude shown by India.

Last week, Jairam Ramesh, India’s environment minister, said New Delhi would not discuss signing up to legally binding obligations for absolute cuts in greenhouse gas emissions for at least another decade.

Rich countries are not asking for developing states to be obliged to cut their emissions from current levels. Instead, they would like emerging economies such as China and India to commit themselves to curbing future emissions. This would mean that such countries could continue to increase emissions as their economies developed, but that measures should be taken to ensure the increase is less than historical levels.

This could involve national action plans, including energy efficiency schemes, renewable energy generation and investment in new technologies.

China has set targets to increase its proportion of renewables and increase its energy efficiency, and now has one of the most buoyant renewable energy sectors in the world.

The country is on track to meet a target to reduce energy consumption per unit of its gross domestic product by 20 per cent by 2010 over 2005 levels, said Mr Yu.

He rejected the idea of a rift between China and India. The two countries were closely co-ordinating in the multilateral climate talks, and their positions on the principles of the Copenhagen negotiations were “quite identical”, he said.

Mr Ramesh is due to visit Beijing on August 25 for bilateral consultations.

India, too, has a domestic plan for renewable energy, which would probably satisfy Western countries’ demands in the Copenhagen talks. However, Delhi has taken a much tougher stance than Beijing in the negotiations, by insisting that rich nations have a moral obligation to cut their emissions drastically as they have been responsible for historic greenhouse gas emissions.

India has decided to push ahead with a vastly ambitious plan to tap the power of the sun to generate clean electricity, and after a meeting chaired by the prime minister, Manmohan Singh, it wants rich nations to pay the bill.

Although India has virtually no solar power now, the plan envisages the country generating 20GW from sunlight by 2020. Global solar capacity is predicted to be 27GW by then, according to the International Energy Agency, meaning India expects to be producing 75% of this within just 10 years.

Four-hundred million Indians have no electricity and the solar power would help spark the country's development and end the power cuts that plague the nation. It would also, say some analysts, assuage international criticism that India is not doing enough to confront its carbon emissions. It is currently heavily reliant on highly polluting coal for power.

The plan provoked prolonged discussion at a meeting of the national climate change council in New Dehli yesterday, which resulted in major changes from early drafts. The draft document had envisaged a government subsidy of around $20bn (£11bn), and falling production costs, in order to achieve a long-term 2040 target of 200GW of solar power.

But experts pointed out that a large government subsidy contradicted the Indian government's stated position in the negotiations to agree a treaty to fight global warming. India, along with China and others, has demanded that the costs of clean technologies should be carried by developed nations, which have grown rich through their heavy use of fossil fuels.

Under the revised plan, India's solar mission will seek to achieve its targets by demanding technological and financial support from the developed nations. "In order to achieve its renewable energy targets, the Indian government expects international financing as well as technology at an affordable cost," said Leena Srivastava of the TERI energy research institute.

The move suggests New Delhi could use its solar energy plan as a bargaining chip at the forthcoming climate change summit in Copenhagen. The government reaffirmed its hardline position last month when the environment minister, Jairam Ramesh, told the visiting US secretary of state, Hillary Clinton: "There is simply no case for the pressure that we, who have been among the lowest emitters per capita, [have] to actually reduce emissions." If rich nations do fund the solar plan, the aim of both sides – economic growth for developing countries but with low-carbon emissions – will have been met.

Nonetheless, the plan's optimistic cost projections were debunked at the meeting, leaving it unclear how much money the 2020 target would need. "In terms of vision, it's a very good plan," said Kushal Singh Yadav of the Centre for Science and Environment. "But the nuts and bolts will remain uncertain until we get a fix on how much money is needed, and where it will come from."

Yadav pointed out that India has taken significant strides in wind energy production thanks to a shift in government policy.

Spain, for instance, added 3GW of solar power capacity in just one year in 2008.

In another significant policy shift following the meeting, solar thermal power (which heats water) will be given as much importance as photovoltaic (which generates electricity).

The Tamil Nadu government has already asked for New Delhi's assistance for setting up a 100MW solar thermal plant in the southern state.

The Bank of England today drastically stepped up its campaign to combat the slump after securing a green light from Alistair Darling to inject billions more in newly “printed” cash into the economy.

The Bank said that it will immediately begin spending an extra £50 billion on its radical effort to jump-start growth by pumping more money into circulation though huge purchases of government and corporate bonds.

The surprisingly aggressive measures confounded City speculation that the Bank could call a halt to its quantitative easing (QE) scheme.

The moves will take the Bank’s total spending on buying government and corporate IOUs under the controversial strategy to £175 billion. That is up from the £125 billion announced in May — which has already been spent in full — and the £150 billion maximum previously prescribed by the Chancellor.
 
The Bank’s rate-setting Monetary Policy Committee meanwhile fulfilled City predictions as it held official base rates at their existing 315-year low of 0.5 per cent for a fifth month.

Today’s moves end a two-month long pause since the MPC ordered a £50 billion May expansion of QE spending to £125 billion. They come as the Bank prepares to unveil next week its latest quarterly assessment of Britain’s prospects, suggesting that it now sees a considerably worse outlook than it had predicted in May.

The decision to boost the scale of the QE operation still further comes despite a spate of recent signs that economic recovery has begun to emerge.

A key survey yesterday suggested that the services sector, the powerhouse of the economy, enjoyed its third consecutive month of growth during July, and its strongest expansion for 17 months, while the equivalent survey of manufacturing on Monday showed industry returning to growth for the first time in 16 months. Yesterday also saw official figures confirming an industrial fightback, with manufacturing output rising at the fastest pace since October 2007.

Hopes of economic revival have been further boosted by upbeat news from the high street and housing market.

Official retail sales figures revealed a stronger than expected June rise, while the Nationwide Building Society found that house prices rose last month for the fourth time in five months. Yesterday, the Halifax bank reinforced evidence of a housing market revival, reporting that house prices rose by 1.1 per cent in July, while the nation's surveyors said that the housing crash was all but over.

But the MPC will also have been confronted by GDP numbers showing that the economy as a whole suffered another plunge in the second quarter, shrinking by 0.8 per cent, on the heels of the savage 2.4 per cent slump endured in the first three months of the year.

Demands from business leaders for an expansion of QE became more vocal this week after the Bank’s own data revealed a record fall in lending to businesses in the second quarter, emphasising the danger that the corporate credit drought could throttle any recovery.

Despite business groups’ calls for more action, the further expansion of the QE programme will fuel controversy over the policy, with critics warning that its results remain disappointing — a point underlined by the continuing weakness of lending activity.

Some economists argue that much of the extra cash created under QE is simply being hoarded by banks that remain reluctant to boost lending to businesses and consumers, while another large part of the money if flowing abroad as overseas investors dump holdings of gilts.

Professor Charles Goodhart, a leading former MPC member, called in The Times yesterday for the Bank to overhaul its approach and to begin charging interest to banking groups that hoard cash in their reserves, to create an incentive for them to stop this and use the money to bolster lending.

Britain appears to be on the verge of economic recovery amid signs that the worst downturn in decades may be coming to an end.

Manufacturing output and house prices rose and the service sector yesterday reported its strongest spurt of growth for 17 months.

The upbeat data prompted speculation in the City that the Bank of England would give a further sign today that the economy is on the mend and end its policy of quantitative easing, the process of injecting money into the economy to encourage growth, which has so far cost £125 billion.

Business leaders made last-ditch pleas to the Bank to do more to guarantee a decisive economic resurgence, but many City experts were betting that it would show its confidence in an early end to recession by putting the scheme on hold at noon today.

Mervyn King, its Governor, is expected to take a cautious stance when he gives his latest assessment of Britain’s economic outlook next week. He is likely to voice growing faith in a short-term upturn, but warn about dangers that could yet derail recovery.

The positive news on the economy will be welcomed by Gordon Brown, whose hopes of keeping Labour in power at the next election will largely depend on the economic outlook.

Sushil Wadwhani, a former member of the Bank’s rate-setting committee, told The Times that it should halt the policy for the moment. “The short-term economic outlook is strongly positive,” he said.

Dr Wadwhani, who also sits on The Times’s panel of economic experts, is usually noted as an advocate of aggressive moves to boost growth, but he said that printing more money could cause an unwarranted inflation scare.

Official figures showed that Britain’s factories and utilities increased their output by 0.5 per cent in June, turning in their strongest showing since October 2007.

Halifax said that house prices rose by 1.1 per cent last month, the second rise in three months, suggesting that the worst of the housing slump was over. The Nationwide Building Society last week suggested that house prices had risen by 1.3 per cent in a month, their third monthly increase in a row. Figures released yesterday by Taylor Wimpey, Britain’s biggest housebuilder, also indicated that the market was through the worst.

However, the Royal Institution of Chartered Surveyors forecast that an acute shortage of homes for sale would push prices up this year, but it warned that the market had not yet hit the bottom and that prices could start falling again next year as more homes were put on the market.

Confidence in a wider economic rebound was fuelled by the crucial survey of services businesses, which make up two thirds of the economy. The survey, closely tracked by the Bank of England, showed that the services sector grew for a third month in a row, and at its fastest pace since February last year.

The optimism has been emphasised by the steep gains on the stock market over the past month. The FTSE 100 index ended yesterday down by a modest 24.24 points at 4,647.13, but up 1,135 points — or almost 33 per cent — from a low of 3,512 at the start of March. The pound traded at $1.70, its highest level for nine months, before falling back slightly.

China is rapidly accelerating its efforts to internationalise its currency with a series of manoeuvres that could see the renminbi soar to become one of the top three traded monetary units in the world.

By 2012, say analysts in Shanghai, as much as $2 trillion (£1.69 trillion) worth of trade flows may be settled using the “redback” as China stretches its commercial tentacles throughout the commodity-producing world and the emerging economies of Asia, Latin America and the Middle East.

The radical change in attitude may arise from a desire to protect China from the “dollar trap” — the problem that emerges when exporting countries are effectively forced to shovel large chunks of their reserves into the US treasury and suffer the consequences in times of high volatility.

The rising financial power of the renminbi may also prove to be the salvation of Hong Kong in its intensifying rivalry with Shanghai for international relevance.

The former British colony, say economists at Barclays Capital, may be able to secure its status as a premier global financial hub by rebranding itself as China’s offshore renminbi banking centre. Renminbi internationalisation is essential if Hong Kong “is to have any long-term hope of being like London or New York,” according to the bank.

Political analysts believe full international currency status for the renminbi could take some time to become politically acceptable to the full spectrum of views within the Communist Party, warning that there would be significant policy hurdles surrounding the perceived loss of currency control.

However, China’s soaring economic growth and global financial turmoil could be pushing the process ahead faster than the market expects. Recent measures, including currency swap agreements with several central banks and the allowing of renminbi-denominated crossborder trade, have significantly changed the environment, HSBC said in a research note.

If, as some predict, China overtakes Japan to become the world’s second biggest economy next year, the pressure for the renminbi to internationalise will mount faster. Wensheng Peng, chief China economist at Barclays Capital, believes that market turmoil and the Wall Street crisis has changed the terms of a debate on the renminbi that has been brewing for years.

“The global financial crisis, and along with it increased concern from the Chinese perspective on the reliance of the global monetary system on the US dollar has brought to the fore the importance of increasing the use of the renminbi in international trade and finance,” he said.

A consensus among policymakers has grown from the grudging acceptance that one of the fundamental reasons the country has fallen into the dollar trap is that China’s currency is not international and the global crisis has made the dollar less predictable.

Others believe that raw economic growth makes the globalisation of the renminbi inevitable. “If the history of sterling and the dollar’s ascendancies as international currencies are any guide, said Hongbin Qu, HSBC’s chief China economist, the internationalisation of the renminbi is “long overdue” because of China’s rising economic power relative to the limited use of the renminbi overseas.

Most significant are the policy gambits in the past few months as the global financial crisis has given motive and opportunity for Beijing to test out renminbi internationalisation. China has signed bilateral currency swap agreements with Korea, Malaysia, Indonesia, Belarus and Argentina worth 650 billion renminbi (£57 billion). Last month, China selected five mainland cities — accounting for 45 per cent of the country’s foreign trade — that can trade with Hong Kong and Macau in renminbi. The programme, said Mr Qu, could be rolled out to cover all of China’s trade with Asia except Japan.

Equities and commodity markets on both sides of the Atlantic roared to seven-month highs today as good company results and lower than expected US jobless totals raised hopes that the FTSE 100 index could exceed 4700 within days.

But as the steep gains were lifting traders, the Financial Services Authority ordered banks, hedge funds and oil traders to attend a meeting next week on commodity market manipulation.

Shares in London closed 84 points up at 4631.6 – a rise of 1.9% – while oil futures saw gains in excess of 4%. On Wall Street the Dow Jones industrial average rose 0.92% as bellwether stocks General Electric, IBM and Motorola all reported positive results. Analysts said swingeing job cuts across corporate America had improved profitability.

City traders will be keen to see recent gains continue past the 4700 mark – the level shares were at last year before the Lehman Brothers bankruptcy prompted a collapse that sent the FTSE crashing back to 3512 four months ago.

But some of the gloss will be taken off rising markets as regulators in Britain and the US show a willingness to crack down on commodity market speculation. The FSA confirmed it was looking closely at the danger of underhand tactics by speculators as fears grow of a commodity price leap. It will hold an industry-wide meeting on Wednesday that will also be attended by Treasury officials and oil companies.

Earlier this year, oil dropped to just above $34 a barrel. TonightBrent crude closed at $70.21 in London.

An FSA spokeswoman said: "The FSA, HM Treasury and representatives from the oil industry – banks, oil producers, brokers and hedge funds – will be meeting next week to discuss market efficiency and transparency as part of our regular process of engagement with market participants in these markets." Commodity regulators in New York are also holding similar meetings that could result in the imposition of position limits for traders.

Last month, an International Energy Agency (IEA) report said: "The cumulative amount invested by various funds in commodity indices is said to have quadrupled from about $75bn [£45.4bn] in January 2006 to almost $300bn last July, with crude futures taking a large portion of that amount."

This month, G8 leaders called for measures to curb "dangerously volatile" oil markets that "could undermine confidence just as we are pushing for recovery". The G8 ordered the International Monetary Fund and the International Organisation of Securities Commissions (Iosco) to work with the IEA to propose methods of surveillance, and possibly regulation, of the oil market.

Last week, a US Senate investigation into wheat speculation heard evidence from consumer groups and food manufacturers, who voiced concern that investment funds were unfairly holding onto wheat stocks in an effort to push up prices.