Russian oil production has peaked and may never return to 2007 levels, a vice president of Russia's second-biggest oil producer Lukoil, Leonid Fedun, said in a Financial Times interview published Friday.

Fedun said he believed last year's production of about 10 million barrels/day was the highest he would see "in his lifetime".

Fedun likened Russia to the North Sea and Mexico, where oil production is declining sharply, saying that in its main oil-producing region of western Siberia, "the period of intense oil production [growth] is over".

The comments reflect a recent downward trend in the country's crude production, which has market analysts fretting about the possibility of a year-on-year decline in production for the first time since 1998.

Russia produced 491.48 million mt (9.83 million b/d) of crude in 2007, up 2.3% from 2006, according to the country's industry and energy ministry.

But in the first two months of 2008, average crude output fell 0.7% to around 9.75 million b/d, while in March it fell 1.2% to 9.72 million b/d.

A combination of high taxes and rising costs could lead to a further decline as they prevent producers from increasing investments as existing resource bases deplete, analysts said.

Five years ago Russia’s rapidly growing oil exports were seen as the cure for the US and Europe’s addiction to Middle East oil, international oil companies’ most exciting potential source of revenue and the only thing that could quench China’s insatiable new thirst.

But today Russia is bracing itself for its first production decline in 10 years. Last month, it failed to increase output for the third month in a row and closed the first quarter with a 1 per cent production decline, which pushed the total to 9.76m barrels per day. Last year, oil output climbed 2.3 per cent to a post-Soviet high of 9.87m bpd, according to the energy ministry.

Even politicians are having to admit the country’s once double-digit growth has halted and at least one oil executive believes it will not, at least in his lifetime, be able to produce more than it has in the past two years.

Leonid Fedun, vice-president of Lukoil, Russia’s largest independent oil company, said Russia would be able to sustain levels of 8.5m-9m barrels a day over the next 20 years only if oil companies invested billions of dollars in tapping new fields. Huge investments in eastern Siberia, the Caspian Sea and in the Arctic seas would be needed to mitigate the loss from the declining fields in western Siberia.

Mr Fedun estimated companies would need $1,000bn, far more than the $4bn extra a year Lukoil calculates will be available to the industry if Russia cuts its production taxes as is being discussed. Lukoil, Russia’s second largest oil producer, has lobbied hard for tax relief. It would gain $1bn to pump into new investment if the law were passed, he said, adding: “That is not enough.”

The turnround from 1998, when output had sunk as low as 6.2m barrels per day, has been slowing since 2003 because of a mounting tax burden and increasing state takeover of the sector. Russian oil companies see little of the windfall returns generated by high oil prices as the government takes 80 per cent of revenues over $27 per barrel in taxes.

Mr Fedun compared Russia with Mexico and the North Sea, although he acknowledged it was declining more slowly than the two competitors because much of its production was onshore, where decline rates were lower. This gave the country more time.

The International Energy Agency, the consuming countries’ watchdog, sees production growth all but halting this year, but said it was too early to know if the country had reached a peak.

Lawrence Eagles, who heads the agency’s oil and markets division, said: “You have a lot of areas in Russia that are completely under-explored, but in order to find that oil and get it to market, the country needs considerable investment.”

Joseph Stanislaw, a consultant who specialises in Russian oil and gas, said: “Four years ago you couldn’t get a private jet into Russia because of all the congestion caused by the foreign executives looking for the opportunity of a lifetime.” Today, international companies had been relegated to holding minority stakes in big projects. However, the cut in taxes could improve the foreigner’s lot, said Sanford Bernstein.

In a report released on Monday, the financial services group said: “So can the Russian public and politicians stomach the decline of the world’s largest oil producer [by some estimates], and bedrock of the country’s rekindled powerbase and nationalistic pride? We think not, and believe that the talk of tax reductions are real, which could herald a huge U-turn in the foreign investment being employed in the Russian oil industry.”

Nigeria risks losing a third of its oil output by 2015 unless it finds ways to boost investment in joint ventures with foreign energy companies, an internal report by President Umaru Yar’Adua’s energy advisers warns.

The progess report, seen by the Financial Times, highlights the government’s need to find ways to finance the oil industry in the country. It comes after an internal memo from the Shell Petroleum Development Company late last year that said funding problems could put the existence of the company’s joint venture with the Nigerian government at risk. The fresh warning could add to supply fears that have pushed oil prices to fresh records this week and saw prices reach a record $115.45 a barrel on Thursday.

Traders are already worried about Russia’s oil production, considered critical to keep up with Asian demand, after warnings from industry executives that production there has peaked at about 10m barrels a day.

Mr Yar’Adua’s advisers include former Opec secretary-general Rilwanu Lukman, who chairs a committee created to draft proposals for an overhaul of Nigeria’s energy sector. The government hopes the reform process will help double production in Africa’s biggest crude exporter from its current 2.1m b/d.

The report says funding shortfalls “portend a grave danger not just to the reform process, but to the continued well-being of the industry as a whole”, adding that even if funding levels are maintained “total oil and gas production will decline by 30 per cent from its current level by 2015”.

The government’s failure to pay its share of costs of the joint ventures with companies such as Shell, ExxonMobil and Chevron, is one of the biggest obstacles to raising production.

Excitement about the potential of Brazil as a massive new source of oil and gas has intensified after a senior energy ministry official declared the newly-found Carioca field could contain 33bn barrels.

Haroldo Lima, head of Brazil's National Petroleum Agency, said the country was harbouring an oil find that vied with the largest in Saudi Arabia and Kuwait. As a result, the price of shares in BG, the UK exploration company, soared 8% and helped lift the wider London stock market.

Lima told an industry conference that Petrobras, the national oil company partnered by BG, "may have discovered a huge petroleum field that could contain reserves as large as 33bn barrels, amounting to the world's third largest reservoir."

Amid expressions of surprise and scepticism from industry experts, Lima's agency later issued a statement saying his comments were based on a recent report in a world oil magazine. Other ministers said it was better to wait for official estimates from Petrobras itself.

But industry analysts said it was possible Lima was adding together the reserves of nearby fields in the wider Carioca area off Rio Janeiro.

Dieter Helm, professor of energy policy at Oxford University and a British government energy adviser, said: "It does not surprise me that these kind of numbers are out there. Whether it is attributed to Carioca itself or elsewhere, it should not distract from the point that there is plenty of oil around."

BG declined to comment but sources close to the business - formerly a part of state-owned British Gas - said it was too early to make estimates of how much oil or gas was contained within the Carioca reservoir. "More evaluation (by drilling) is needed," said one well-informed source.

Matthew Shaw, the Latin American energy analyst with Edinburgh-based oil consultant Wood Mackenzie, said the 33bn-barrel claim was not credible. "This is an unfortunate slip of the tongue by a senior member of the NPA," he said. "It is likely to be a fairly modest discovery with a few hundred million barrels in place."

But Shaw said the comments were symptomatic of the "oil fever" that was sweeping Brazil in the aftermath of recent - and confirmed - discoveries such as Tupi, another field where BG has a stake and which has got 5bn-8bn barrels of recoverable reserves.

Those figures are 10 to 16 times higher than BG's Buzzard discovery in the North Sea which caused new optimism about the UK's own offshore potential and helped revive drilling interest in the area at a time when local crude prices have been hitting new highs.

Ironically, Brazil is at the centre of the current biofuels revolution because the government encouraged motorists to switch to crop-based fuels such as ethanol before anyone else - at a time when the country was trying to cut its oil import bills because it had no indigenous supplies.

But while corn-based ethanol is now being exported from Brazil all over the world, the country is beginning to believe that it could become one of the world's great crude oil exporters and might join the OPEC oil cartel.

Petrobras has just spent more than $8bn ($4.05bn) signing up new rigs to go and explore in the very deep waters off Brazil.

While the potential of the latest find in Brazil could add significant supplies to a global oil market that has seen prices reach record levels on the basis that supplies are very tight, it would take the best part of a decade before Carioca is ready for production.

BG has increasingly targeted Brazil as an important area, having bought a 51% stake in the downstream gas distribution business, Comgas. It has an estimated 8,000 sq kms of offshore acreage to explore and holds a 25% stake in the Tupi find and a 30% holding in Carioca.

Brazil has traditionally been overlooked as an energy provider because other Latin American producers such as Venezuela and Mexico are much more significant.

The president of Brazil, Luiz Inacio Lula da Silva, was once seen as a left-wing firebrand in the mould of Hugo Chavez, his counterpart in Venezuela. Although he has since proved himself to be more pragmatic he is currently considering whether to toughen up conditions under which foreign oil companies operate in his country.

Is there really an ocean of oil off Brazil?

JUST how much oil is there off the coast of Brazil? Until recently, Brazil’s oil reserves were thought to be relatively modest: about 12 billion barrels at the beginning of 2007, according to BP, or about 1% of the world’s total. But last year, Petrobras, Brazil’s partly state-owned oil firm, announced the world’s biggest oil discovery since 2000: the Tupi field, which it hopes will produce between 5 billion and 8 billion barrels. Now the head of Brazil’s National Petroleum Agency (ANP) says another nearby discovery might hold as much as 33 billion barrels, which would make it the third-largest field ever found. That alone would be enough to raise Brazil to eighth position in the global oil rankings—and there is talk of further big discoveries. But the peculiar way in which the information came to light is casting doubt on its significance.

The ANP, which regulates the oil industry in Brazil, was quick to distance itself from the remarks of its boss, Haroldo Lima. His comments were of a personal nature, it said, and were based on past reports in the media. It helpfully cited an article from a magazine, World Oil, that had mentioned the magic figure of 33 billion barrels in February. Petrobras and its partners in the field, BG of Britain and Repsol-YPF of Spain, said that they had not yet done enough tests to determine exactly how much oil it contained.

But no one dismissed the estimate as preposterous. That, plus the fact that a senior official had given any credence to such a dramatic number, caused the share prices of the three firms to jump, despite the fact that Mr Lima claims he does not even know where the stockmarket is, and certainly did not intend to influence it. At one point Repsol’s was up by 14%. The shares of Hess, an American firm which is part of a consortium looking for oil nearby, posted their biggest gain since 1981.

Both Tupi and the field mentioned by Mr Lima, Carioca-Sugar Loaf, lie far below the seabed, beneath a thick layer of salt that is some 800km long and 200km wide. José Sérgio Gabrielli, Petrobras’s boss, has hinted that there are vast reserves of oil to be found in this “pre-salt” formation. At any rate, Petrobras has struck oil every time it has drilled there. It is currently assessing the reserves of yet another nearby discovery, Jupiter, which appears to be very similar in scale to Tupi. The firm’s head of exploration says “there is practically no exploratory risk” in the area. While this does not necessarily transform Brazil into an oil power on a par with Venezuela or Saudi Arabia, as Dilma Rousseff, the chairman of Petrobras’s board and chief of staff to Brazil’s president, has excitedly proclaimed, it suggests that the volumes of oil involved are very big.

Nonetheless, the immediate impact of the “pre-salt” discoveries will be small. It will be several years at least before any of the new oil comes to market. What is more, it will be expensive to produce. The fields are all far out at sea, deep under ground that is itself far below sea level. Simply drilling the first test well at Tupi cost $240m, and costs are likely to rise, thanks to fierce inflation throughout the oil industry. As if to underscore the point, the oil price hit a new record, of $114.41 a barrel, a couple of days after Mr Lima dropped his bombshell.

Even if there is an ocean of oil off Brazil’s coast, it will not necessarily be of much benefit to big oil firms, which have struggled to gain access to promising territory for exploration of late, thanks to growing nationalism in oil-rich countries. Brazil had been a heartening exception. But after Petrobras announced the discovery at Tupi, the ANP cancelled a planned auction of rights to explore for oil in several adjacent areas. Mr Gabrielli, the boss of Petrobras, says that the state’s relatively low share of the revenues from oil production in Brazil should be increased to reflect the decreasing risks and increasing profitability of exploration.

The discoveries do suggest that the gloomiest pundits are wrong to predict that the world will soon run out of oil. It is not that there are still lots of huge oil fields out there: the number of mammoth discoveries is declining, Tupi (and perhaps Carioca-Sugar Loaf and Jupiter) notwithstanding. But the new finds do illustrate how the technology with which oil firms hunt for, extract and process fossil fuels is constantly improving. Petrobras’s recent success is only possible thanks to recent advancements in seismic surveys, drilling, and offshore platforms. Other technological developments are allowing a greater proportion of the oil found around the world to be recovered and are even expanding the definition of oil, as firms conjure liquid fuel from the solid tar-sands of Canada, for example, or from coal and natural gas. Indeed, among the shares that rose in the wake of Mr Lima’s comments were those of the firms that supply Petrobras with all its clever kit.

Foreign oil companies are poised to enter Iraq later this month after Baghdad signalled it was prepared to sign five oil field services agreements covering its biggest fields.

Five years since the US and Britain toppled Saddam Hussein's dictatorship, there have been few forays by oil's major players into Iraq, even though the country accounts for almost 10pc of world reserves.

A violent insurgency forced most oil companies to keep executives responsible for Iraq outside the country. Most are based in the Gulf.

Despite lack of foreign involvement in oil production, Iraq has returned to pre-war export levels of 2.5m barrels a day.

The two-year service contracts that have been negotiated would see British, American and Australian oil companies supply equipment and expertise that would boost output by hundreds of thousands of barrels at each field.

"I expect the oil companies will get their first deals in Iraq before the end of the month," said a British official. "The Iraqi government has said it's ready to do the deal. For the big oil companies it's not so much security that's the stumbling block now, it's the legal framework. This is the development that starts the ball rolling."

The five deals will cover Kirkuk, Missan, West Qurna, Zubair and Rumaila oil fields and have a face value of £1.5bn, though reimbursement will be satisfied in barrels.

"In this politically sensitive and difficult situation, service contracts are a pragmatic step forward for Iraq," said Steve Peacock, head of exploration and production for BP in the Middle East.

BP's contract, which is substantially negotiated, would involve the British firm providing project management, technical services and parts supplies to the North and South Rumaila fields.

The measures are described as a stopgap until Iraq's parliament ratifies a long-delayed oil law to allow foreign firms an exploration and production role in Iraq for the first time since the industry was nationalised in the 1970s.

While the security situation has prevented the large oil companies establishing a presence in Iraq, Mr Peacock said there had been extensive mapping of its resources. "We've studied the whole of the rest of the country, so we're waiting for what comes next after the service agreements.

"We have an opinion on which bits we'd be more interested in. Whether it gets linked into the contract or not - it's a natural question that's on the table," added Mr Peacock.

"These contracts are valid for a couple of years; how does that link with what comes next?"
Royal Dutch Shell is set to emerge with interests in Kirkuk, Iraq's biggest field, discovered in 1927, and Missan, which it will serve in joint venture with the Australian miner BHP. The remaining contracts will go to Chevron, Exxon Mobil and Total.

Oil experts estimate that Iraq can reach a geologic potential of 10m barrels a day with substantial foreign investment. But its achieved output is likely to rest on security improvements and nationalist resistance to foreign involvement.

Foreign oil firms operating in Venezuela will pay higher taxes on profits made in the country, under laws approved by parliament.

They face a 50% tax when a barrel of crude is priced at $70 or more, rising to 60% when average prices tops $110.

It is President Hugo Chavez's latest attempt to get greater control over his country's oil.

In 2006, he enacted laws making foreign oil firms hand over at least a 60% share in their Venezuelan operations.

The country has also begun nationalising its electricity, telecommunications and natural gas industries as part of President Chavez's drive toward "21st century socialism".

'Diminishing opportunities'

Oil prices are currently around $110 a barrel and income from the new tax could reach $9bn (£4.5bn) a year, according to oil minister Rafael Ramirez.

Analysts said that the move would make foreign firms think carefully before making any further investments in Venezuela, which is one of the world's most oil-rich nations.

"Their opportunities to turn a profit are diminishing," said Juan Carlos Sosa, editor of Venezuelan oil industry magazine PetroleoYV.

The tax comes months after President Chavez's nationalisation drive forced out two of the world's largest energy companies: Exxon Mobil Corp and ConocoPhillips.

Exxon is seeking $12bn in compensation from Venezuela after its oilfields were nationalised last year.

Last week President Chavez announced the immediate nationalisation of Venezuela's entire cement industry.

He said his government could not allow private companies to export cement that was needed to tackle a severe housing shortage.

The president promised they would be paid fair compensation for the forthcoming state takeover of what he described as a strategic industry.

Beijing's share-buying in Britain's largest company, which has so far reached nearly 1pc, is being closely watched by Downing Street.

A Chinese sovereign wealth fund has built up a stake of about £1bn in BP, in a move which has caused a stir within the British Government.

The sovereign fund is understood to have quietly acquired the shares in the market over a period. It has accumulated just under 1pc of BP, which is the UK's largest company with a capitalisation of £104bn.

A BP spokesman said: "We are aware of the Chinese holding and we welcome all shareholders."

The Chinese fund has also built up a stake in France's oil giant Total worth about £1bn.

China has used its deep cash reserves to snap up shares in blue-chip companies in the UK, such as Barclays, as well as in the United States.

However, there has been particular sensitivity about funds controlled by Beijing sinking large amounts of cash into the West's major energy companies.

A bid by China National Offshore Oil Company (Cnooc) for America's Unocal in 2005 caused a political storm and was thwarted by the US administration.

China is dependent on being able to import oil to power its rapid development. To secure supply, its government has struck deals with oil producers the West has spurned in Africa. Buying stakes in European oil companies appears to be another way in which Beijing is seeking to have a seat at the table, sources said.

Banking sources said Downing Street was aware of the stake-building by a Chinese fund in BP. All parties are thought to be monitoring the situation closely.

The UK Government may be more open to a Chinese investor in its largest oil company than was the case in the US over Unocal.

The Chancellor, Alistair Darling, is this week in Beijing to forge greater links with London. He is due to meet Lou Jiwei, the chairman and chief executive of the Chinese Investment Corporation (CIC), and is expected to encourage the fund to consider further investments in the UK.

CIC has $200bn (£100bn) to deploy and has made a $3bn investment in the private equity firm Blackstone.

It also bought just under 10pc in Morgan Stanley for $5bn. The investor in BP is not CIC.

The Prime Minister, Gordon Brown, also extended friendly overtures to Chinese sovereign funds when he visited Beijing in January.

Mr Brown said at the time: " We want Britain to be the number one destination for Chinese business as it chooses to invest in the rest of the world. Tens of thousands of jobs in Britain can be created from co-operation between our two countries."

BP has several other sovereign funds from other countries as shareholders, including the Kuwait Investment Authority.

The KIA, the world's largest sovereign fund, was forced in 1988 to divest some of its 20pc-plus holding in BP by the then prime minister, Margaret Thatcher.

Shares in BP closed up 2 to 549p yesterday. They have jumped from 500p since the start of April.

The rise in crude oil prices in recent weeks has appeared to defy the conventional wisdom that says prices should fall as the world economy – and particularly the US – slows and energy demand decelerates.

This has led to warnings that the oil market could have become the latest asset bubble following the boom in dotcom shares and house prices.

But that is to focus too much on demand. What is arguably driving the market to record highs is supply.

Non-Opec production is growing far less than expected just a few months ago, weighed down by the first fall in Russia output in a decade and a sharp supply drop in other mature areas, including the North Sea and Mexico.

At the same time, Opec, the oil producer’s cartel, has started to cut output, reducing production by about 350,000 barrels a day between January and March, according to the International Energy Agency, the western countries’ oil watchdog.

Traders say Opec’s cuts are likely to deepen in April after the cartel on Tuesday highlighted its concerns about the strength of oil demand during the spring.

The slower growth in non-Opec supply and the cartel cuts have offset the impact of lower demand growth, analysts say, tightening the market and boosting prices.

West Texas Intermediate crude oil on Tuesday jumped to a fresh all-time high above $113 a barrel, up more than $2 on the day.

Paul Horsnell, head of commodities research at Barclays Capital in London, acknowledges that the growth in demand has been fairly slow in the past three years, but he adds that it has risen much faster than the growth in non-Opec supply.

The IEA says global oil demand will grow by 1.3m b/d this year, while non-Opec supply, including a large addition from biofuels, will increase by about 800,000 b/d. Additional Opec output will have to close the gap.

“Global demand growth has outstripped non-Opec supply growth in each of the last five years and 2008 is set to become the sixth year,” Mr Horsnell says. He expects the imbalance to continue.

Long-dated oil futures already reflect the market’s fears that demand growth, led by the industrialisation of emerging countries in Asia, will continue to exceed non-Opec supply, forcing the world to rely more on the cartel.

The five-year forward crude oil future on Tuesday surged above $100 a barrel, having jumped 32.8 per cent in the past six months. Over the same period, spot prices have risen 29.8 per cent to Tuesday’s intraday high of $113.93 a barrel.

The entire forward curve, which extends to December 2016, is trading above $100.

That increase reflects, in part, a structural shift that makes the current boom different to previous ones.

In the late 1970s oil companies were able to expand geographically, oil fields were conventional and production was located close to the main consuming centres. Today, most of the reserves are in countries, such as Saudi Arabia or Mexico, that ban foreign investment, in challenging environments such as east Siberia or in politically inhospitable countries such as Iran.

Otherwise, there are fields producing non-conventional oil such as Canada’s tar sands.

One reason for the long-dated futures price jump is that cost inflation is eating into international oil companies’ extra investment in exploration, according to a recent analysis by the International Monetary Fund.

It found that nominal investment surged in 2006 to about $250bn from about $80bn in the early 1990s. But surging costs “meant that this did not translate into large real investment increases”, the IMF said, pointing out that real investment, adjusted for inflation costs, moved from about $80bn in 1994 to $115bn in 2006.

Adam Sieminski, chief energy economist at Deutsche Bank in Washington, says that the exploration and development costs for US-based international oil companies have risen from a low of $5.4 a barrel in 1995 to about $22.8 a barrel in 2007.

“The pace of the rise in price since the mid-1990s has been a stunning development that mirrored the impressive decline in costs from $20 a barrel in 1980,” he says.

Meanwhile, fears that the world’s biggest oil producers cannot keep up with demand have escalated after the warning from a senior Russian oil executive that the country’s output has peaked.

Leonid Fedun, vice-president of Lukoil, Russia’s largest independent oil company, told the Financial Times that he believed last year’s Russian oil production of about 10m b/d was the highest he would see “in his lifetime”.

If Mr Fedun’s warning proves correct – and analysts say this year’s production declines support his view – medium-term oil supply and demand forecasts that rely on further Russian oil output growth could be wrong.

The IEA’s latest medium-term outlook, published in July, points to Russia as the third largest contributor to an expected 2.6m b/d increase in non-Opec supply, just behind Brazil and biofuels.

It said that Russia would increase its production to 10.5m b/d in 2012, about 600,000 b/d above last year’s level.

But it is not only Russian production that could fall short. Analysts believe that the current rise in food prices raises questions over whether biofuels will contribute as much as expected to fuel needs if acreage devoted to biofuels is reduced. If that is the case, it is all too likely that the world will become more dependent on new supplies from Opec, Brazil, Canada, Kazakhstan and Azerbaijan.

LONDON (Reuters) - World oil demand will rise much less than expected in 2008 because of slower economic growth in the United States and elsewhere, the International Energy Agency (IEA) said on Friday.
The cut to demand growth is the IEA's biggest since 2001 and follows the release of lower economic growth forecasts by the International Monetary Fund (IMF) this week, and the impact of high oil prices above $110 a barrel.

"The latest GDP projections from the IMF suggest less robust oil demand growth in the coming months," the IEA said. "This report projects April and May oil balances tipping towards a supply surplus."

Global oil consumption will rise by 1.27 million barrels per day (bpd) in 2008, 460,000 bpd less than the previous forecast, said the IEA, adviser to 27 industrialized countries, in its monthly Oil Market Report.

Even though demand is expected to be lower, supply is also rising less than forecast, which could help to keep prices high. The agency cut its forecast for supply outside the Organization of the Petroleum Exporting Countries (OPEC).

Oil prices rose after the IEA report was released, but later steadied. U.S. crude, which hit a record high of $112.21 this week, was trading at $110.11 by 8:18 a.m. EDT, unchanged from the previous close.

Lower demand in members of the Organization for Economic Co-operation and Development (OECD) accounted for the bulk of the IEA's reduction. The IEA cut forecast OECD demand this year by 320,000 bpd to 48.9 million bpd.

The IMF trimmed its prediction for 2008 economic growth for top oil consumer the United States to 0.5 percent from 1.5 percent. China, the second largest, was also expected to use less oil than anticipated.

The cut in demand growth brings the IEA's view closer to that of OPEC, which expects an expansion of 1.2 million bpd this year and has rebuffed calls from consumer countries for more oil to lower prices.

PRICE IMPACT

Demand for oil, by contrast with other energy forms, is regarded as inelastic because of a lack of viable alternatives for transport, but high prices have helped to change consumption especially in the United States.

"A bit of demand shift is going on there, which is related to price ... The price has probably a more significant impact on consumers who are feeling the pinch," said Lawrence Eagles, head of the IEA's Oil Industry and Markets division.

This month's cut in demand growth was the largest since the agency lowered 2001 demand growth by 509,000 bpd in July 2001, he said.

The IEA said weaker demand might not translate into lower oil prices given supply risks in countries such as Nigeria and Iraq. Oil rose in the second half of 2007 even though inventories were also climbing, it noted.

"That perhaps explains why, in the face of weakening economic growth, prices continue to remain high: there is concern that projected stockbuilds may not materialize, or may not be high enough."

The IEA trimmed its forecast for oil supply outside OPEC this year and said OECD oil inventories fell by 49 million barrels in February and preliminary figures showed only a small increase in March.

Supply from non-OPEC, which pumps about three in every five barrels of oil, was expected to rise by 815,000 bpd this year, less than world demand growth and down 90,000 bpd from the previous forecast, the IEA said.

Non-OPEC supply has missed expectations in recent years, contributing to rising oil prices.

Oil prices have surged to almost $115 a barrel as China builds up stocks before the Olympics and hedge funds pour money into commodity futures as a way to exploit the collapse of the dollar.

The Opec producers cartel yesterday defied calls from Gordon Brown for a boost in output to help ease the global shortage, sticking to its target of 32m barrels per day (bpd) for the next three months.

There is some evidence that Opec has actually cut output by 350,000 bpd since the start of the year - a hostile move in the current climate. It blames the latest spike on "speculators", claiming that world demand will fall 1.4m bpd to 85.7m this quarter as the US grapples with recession.

Nobody else can step into the breach. Output is falling in the non-Opec trio of Britain, Norway and Mexico. Russia's production slipped 1pc in the first quarter. The cost of developing oil fields worldwide has doubled in three years. The cost of operating an oil rig per day has risen from $200,000 to $600,000 since 2003.

"The system is operating flat out," said Chris Skrebowski, editor of Petroleum Review. "We have been very lucky for the past few years that there has not been any major war or revolution to disrupt supplies. The market is incredibly tight as it is."
Société Générale said the near $30 spike in prices since early February is largely due to money pouring into commodity index funds, now worth some $200bn. Crude has taken on a "safe-haven" role for investors fleeing the dollar, or those betting that central banks will let rip with excess liquidity.

"This is now entirely investor driven," said Dr Frederic Lasserre, the bank's head of commodities research. He added that most of the money is coming from pension funds, insurers and other long-term investors. They view the US recession as a mere hiccup in a powerful upward cycle, convinced that Chinese and Mid-East demand will hold up long enough for America to recover. "They are all convinced by the fundamental tightness of the market," he said.

Hot money funds are also playing a role, trading oil as a sort of "anti-dollar". Crude is moving in reverse lockstep with the greenback, pushing ever higher (with double or triple leverage) as the dollar reaches fresh lows against the euro. Surging oil prices are in turn stoking inflation, causing investors to bet yet more on oil futures as an inflation hedge. "This has entered a vicious spiral," Dr Lasserre said.

Analysts say it is no coincidence that oil punched higher on the same day that the euro reached a record of $1.5979, up 28pc in two years. BNP Paribas says central banks should intervene to stabilise the dollar. Every major country now has an interest in slowing the commodity frenzy.

The G7 group of major powers took a step in that direction over the weekend, warning that sharp currency moves had become a threat to financial stability. The markets have dismissed this as empty bluster, prompting a warning from French finance minister Christine Lagarde that speculators may have "misunderstood" what had been agreed.

It is a contentious point whether investors have now caused the price of crude to become unhinged from economic reality. Commodity prices have jumped 47pc since the credit crunch began in August last year, despite three downgrades in global growth forecasts by the IMF. Oil and metals normally fall hard as growth slows.

The crucial difference this time is that the US, Britain, Germany, Japan and other rich OECD countries are no longer the driving force in the oil market. The US added just 7pc of total demand growth from 2004 to 2007, compared to 34pc for China, 25pc for the Mid-East and 17pc for emerging Asia. The newcomers are oil guzzlers, with a high crude use per unit of GDP created.

Most are still booming. China grew at a blistering 10.6pc in the first quarter, slightly down from 11.9pc last year. The country has been raising its oil use by 500,000 bpd a year. Crude imports jumped 25pc in March, topping 4m bpd for the first time.

"The OECD doesn't matter much any more," said Mr Skrebowski. "We have an Atlantic-centred view, and we are having trouble getting our heads around the idea that the world has changed."

Of course, China's growth may prove more fragile than it looks. Inflation has reached the danger zone of 8.3pc. The central bank tightened credit again yesterday. The Shanghai bourse has lost almost half its value since peaking last autumn. Nariman Behravesh, chief economist at Global Insight, warns that China faces post-Olympics "crunch" as the colossal bad debts of the state banking system exact their toll.

Whatever happens, oil cannot easily fall below $70. That is the break-even cost for biofuels, the new oil substitute. Short of a global depression it is hard to imagine what could depress oil prices for long as the rising nations of Asia embrace the affluent society.

Japan is celebrating a groundbreaking science experiment in the Arctic permafrost that may eventually reshape the country's fragile economy and Tokyo's relationships with the outside world.

For an unprecedented six straight days, a state-backed drilling company has managed to extract industrial quantities of natural gas from underground sources of methane hydrate - a form of gas-rich ice once thought to exist only on the moons of Saturn.

In fact, the seabeds around the Japanese coast turn out to conceal massive deposits of the elusive sorbet-like compound in their depths, and a country that has long assumed it had virtually no fossil fuels could now be sitting on energy reserves containing 100 years' fuel. Critically for Japan, which imports 99.7 per cent of the oil, gas and coal needed to run its vast economy, the lumps of energy-filled ice offer the tantalising promise of a little energy independence.

Environmentalists, though, are horrified by the idea of releasing huge quantities of methane from under the seabeds. Although methane is a cleaner-burning fossil fuel than coal or oil, the as yet untapped methane hydrates represent “captured” greenhouse gasses that some believe should remain locked under the sea. The mining of methane ice could also wreak havoc on marine ecosystems.

Japan is growing ever-more desperate to secure its energy, as once-reliable suppliers - such as Indonesia and Australia - have begun either to cut back exports of natural gas and coal or charge crippling prices.

Its direct interests in vital global energy projects, such as oil drilling in Sakhalin and Iran, have also been whittled away by politics and diplomatic rivalries.

The potential of methane hydrates as a source of natural gas has been known scientifically for some time, though how much was lurking off the Japanese coast has been confirmed only in the past couple of years. Methane hydrates are believed to collect along geological fault lines, and Japan sits atop a nexus of three of the world's largest.

In 2007 the Ministry of Economy, Trade and Industry declared that there were more than 1.1 trillion cubic metres (39 trillion cubic feet) of methane hydrates off the eastern coast - equivalent to 14 years of natural gas use by Japan at current rates. Academic studies suggest total Japanese deposits of 7.4 trillion cubic metres.

Realising how valuable the technology of unlocking the methane hyrdrates could be, Japan has invested frenziedly in the science of exploiting them. The Japan Oil, Gas and Metals National Corporation (Jogmec) has, for more than a year, been experimenting with the methane hydrate reserves under the tundra of northwestern Canada. Its six-day continuous extraction of methane from a deposit more than a kilometre below the Earth's surface has been hailed as the breakthrough Japan had been waiting for: undersea experiments in Japanese waters are to begin early next year. Commercial production, a Jogmec spokesman told The Times, would begin within the decade.

The Japanese Government is so excited at the prospect of even modest relief from its energy problems that it has drawn up a basic policy for ocean-related extractions. It may also licence the technology to allow China, South Korea and other nations thought to have large methane ice deposits off their coasts to unleash the potential of the flammable sorbet.

Russia’s Gazprom took further steps to strengthen its hold on natural gas supplies to Europe on Thursday, signing a joint venture with Libya and saying it was in preliminary talks on a multibillion dollar project to pipe Nigerian gas to Europe across the Sahara.

News of the two projects came as Vladimir Putin, Russian president, became the first Russian leader since 1985 to visit Libya. According to the country’s official news agency, Libyan leader Muammer Gaddafi said during talks with Mr Putin he supported the idea of forming an Opec-style group of gas-exporting countries.

Industry experts say the idea of a gas exporters’ cartel – which has now been backed by several producers – remains a distant prospect. But Thursday’s events showed the extent to which Russia, the world’s biggest gas producer, is building ties with other large gas exporters and increasingly playing a co-ordinating role.

Among a string of commercial deals sealed during Mr Putin’s visit, Gazprom agreed to set up a joint ­venture with the National Oil Corporation of Libya to explore for, produce, transport and sell oil and gas.

The agreement came two weeks after Gazprom and Italy’s Eni said after talks in Moscow they had agreed to work together in “third countries”, later identified by industry officials as Libya – seen as one of the north African oil and gas producers with most potential.

Oil fires warmer ties with the west
Flush with oil and gas money and emerging from sanctions, Libya has been mending relations with the west and attracting executives from all over the world lured by the promise of big projects and big returns, writes Heba Saleh in Cairo.

The north African country earned some $40bn (€25bn, £20bn) from its oil and gas sales in 2007.

“The Libyan economy is attractive precisely because there is a huge amount of liquidity and a vast cash flow,” said Oliver Miles, a former British ambassador to the country.

“Of course liquidity is hard to come by now, so Libya has become something of a honey pot.” Libya shook off United Nations sanctions in 2003 and US sanctions a year later after its leader, Colonel Muammer Gaddafi, gave up his nuclear weapons programme in 2004.

Oil and gas are the main areas of interest. Libya remains a relatively unexplored country.

Eni, the leading foreign operator in Libya, recently agreed to double capacity with an 8bn cubic metres a year pipeline carrying its gas across the Mediterranean to Italy.

Alexei Miller, the Gazprom chief executive who accompanied Mr Putin to Tripoli, reiterated on Thursday that the Russian monopoly was interested in taking part in construction of the second stretch of the pipeline linking Libya and Sicily.

Mr Putin flew from Libya on Thursday night to Sardinia for a meeting with Silvio Berlusconi, newly re-elected prime minister of Italy, which is emerging as one of Russia’s most important business partners, particularly in energy.

Meanwhile, Mr Miller said Gazprom was holding talks with Nigeria about participating in a $13bn (€8bn, £6.6bn) project to build a pipeline 4,000km across the Sahara linking the Niger Delta to an export terminal on Algeria’s Mediterranean coast.

Mr Putin’s visit to Libya highlighted Russia’s determination to strengthen its influence in north Africa and aggressively to pursue deals around the globe for the large, often state-owned, corporations that have emerged during his presidency.

The Russian president agreed to write off $4.5bn of debt from Libya in return for a multibillion dollar contract with Russian companies. “I am satisfied by the way we have solved the debt problem,” Mr Putin said. “I am convinced we found a scheme which will benefit both the Russian and Libyan economies and...people.”

Much of the debt was accrued from Soviet-era arms sales to Libya, when the country was a big buyer of Soviet weapons.

While little information was released Thursday on arms deals, defence officials had been quoted by Russian media before Mr Putin’s visit as saying agreements were in prospect to sell arms to Tripoli valued at up to $3bn.

Some of that was said to relate to new equipment, including anti-aircraft systems, jet fighters, helicopters and submarines, and some to modernisation of Soviet-era weaponry.

The largest single deal announced on Thursday was a €2.2bn ($3.48bn, £1.77bn) contract for the Russian railways monopoly to build a 554km line between the ­cities of Sirte and Benghazi.

Iran’s oil minister on Wednesday warned Royal Dutch Shell, France’s Total and Spain’s Repsol that the June deadline to sign multi-billion dollar natural gas contracts would not be extended.

“It is the last chance,” Gholam-Hossein Nozari said, reiterating he had urged officials to “finalise” the deals around mid-June on three phases of South Pars, the world’s biggest gas field.

Tehran urged the companies in October to finalise their deals by mid-2008 or lose the contracts, after they delayed investment because of soaring costs.

On the sidelines of an annual international oil, gas and petrochemicals exhibition, Mr Nozari said parliament had permitted his ministry to use 3 per cent of oil revenues, which stood at about $70bn (€44bn, £35bn) last year, for development of South Pars.

He told reporters that the phases of South Pars being discussed with Total, Shell and Repsol could be given to domestic contractors instead.

Tensions over the country’s nuclear programme and heightened US pressure on financial institutions and companies to halt business with Tehran have also undermined lucrative energy deals. Most western companies try to execute a delicate balancing act to keep their foothold in Iran while not signing big contracts that jeopardise their interests in the US.

The oil minister admitted to exhibitors that “financing is the most important and the main challenge” ahead in developing the oil sector, which he said would need $500bn of investment over the next 16 years.

Iran has recently signed multi-billion dollar gas contracts with Chinese and Malaysian companies, stressing its options in Asia and threatening westerners that the energy sector could not wait for them to make decisions on investments.

Some Iranian officials suggested Asian and other European companies could replace Total, Shell and Repsol. “We still prefer these three companies to finish their jobs, but if they keep being slow their Swiss and Austrian friends may take over,” Hossein Noghrehkar Shirazi, deputy oil minister for international affairs, told the Financial Times.

A Repsol official at the exhibition said the Spanish company was “still interested” in phases 13 and 14 of South Pars and was “making progress” in its “very productive negotiations” with Iranian authorities.

“We are expecting some progress in a very short period of time,” the official said, asking not to be named. However, he complained that financing was the most difficult part of doing business with Iran and that, as a result of sanctions, the costs of transferring money were too high.

Oil experts say such delays in contracts and financial problems as a result of sanctions have dramatically postponed development of South Pars, which was part of the reason behind a shortage of gas last winter.

Separately, Iran this week extended its one-month supply of unsubsidised petrol outside the rationing system “until later notice”. To curb over-consumption and to fend off the possibility of sanctions on petrol, Iran engineered a rationing scheme last year.

10 billion cubic metres of natural gas are set to flow from Turkmenistan into EU markets as of next year and the EU may clench a deal for Iraqi gas this week, amid growing concerns about the EU's over-dependence on Russian gas.

The Turkmenistan deal, agreed last week between the EU's External Relations Commissioner Benita Ferrero-Waldner and Turkmen President Gurbanguly Berdymukhammedov, is part of a wider EU 'outreach' strategy to Central Asia and the Caspian region, home to some of the world's largest known reserves of natural gas.

With Europe's dependence on (mostly Russian) natural gas imports expected to reach 85% by 2030, the EU has been anxious to diversify its natural gas supply sources.

Turkmenistan's guarantee of 10bn cubic metres annually is "not a vast quantity" compared with the EU's total yearly gas needs of approximately 500bn cubic metres, but it is still a "very important first step," Ferrero-Waldner told the Financial Times.

Details of how the Turkmen gas will be brought to EU markets still remain foggy, however.
The EU hopes to transport the gas across the Caspian via a new mini-pipeline and to feed it into the bloc's flagship Nabucco pipeline, which runs through Turkey directly into the EU, bypassing Russian territory.

But there is opposition to the plans from other Caspian states and from Russia, an influential player in the region, which has secured its own supply contracts with Turkmenistan.

A separate 'political agreement' for Iraqi gas could also be agreed this week as part of an official visit by the country's Prime Minister Nuri al-Maliki. While no supply quantities or specific guarantees are foreseen, the EU is keen to secure a supply of Iraqi gas for Nabucco.

All petrol and diesel which is sold at UK pumps now has to include at least 2.5% biofuels.

These renewable fuels, made from crops such as sugar cane or maize, have been added to fuel sold around the country.

This target will rise to 5% by 2010. The move is aimed at making transport fuels more environmentally friendly and will not change how cars work.

But some scientists and green groups say biofuels contribute more greenhouse gases than they save.

Negative effects

The idea behind the Renewable Transport Fuels Obligation (RTFO) is to reduce climate change emissions from transport - which produced more than a quarter of overall greenhouse gases in the UK - by using renewable fuels instead of fossil fuels.

But some critics say the biofuels' carbon benefits may be outweighed by negative effects from their production.

For example Oxfam said millions of indigenous people faced clearance from their land to make way for biofuel plantations such as palm oil.

The aid agency is also concerned that the switch to energy crops from food production - including a large-scale drive in the US to produce bioethanol from maize - is contributing to rising food prices.

Oxfam joined campaigners from Friends of the Earth and the RSPB for a protest outside Parliament on Monday aimed at urging the government not to go ahead with the new rules.

'Total disarray'

But Transport Minister Jim Fitzpatrick said gradually introducing biofuels could help save millions of tonnes of carbon dioxide in the next few years.

"The UK has done more than any other country to make sure they are produced sustainably," he said.

Mr Fitzpatrick said fuel suppliers would be required to report publicly on the sustainability of the biofuels they provide.

"We will not increase biofuels targets beyond 5% unless we are satisfied this can be done without damaging the environmental impacts," he said.

Shadow Environment Secretary Peter Ainsworth said the government's policy on biofuels was in "total disarray".

"The government has embarked on a course which endangers food security, threatens poverty, damages natural habitats and could increase climate change emissions," he said.

"It is utter madness that without proper sustainability criteria the Renewable Transport Fuel Obligation threatens to destroy vast swaths of rainforest in the name of the environment."

Friends of the Earth has demanded that greenhouse gases from transport, which account for about 28% of overall emissions, be tackled by investing in better public transport and mandatory emissions limits on cars.

Friends of the Earth transport campaigner Tony Bosworth said biofuels would not help the environment.

"The government is introducing these fuels because they think it's going to help cut climate change emissions from transport, but we believe they're a false solution," he said.

"In many cases some of the biofuels which they're using won't cut carbon dioxide emissions and could indeed lead to more carbon dioxide emissions."

A survey for Friends of the Earth suggested almost nine out of 10 people did not know that renewable fuels would be required in their vehicles.

The production of biofuel is devastating huge swathes of the world's environment. So why on earth is the Government forcing us to use more of it?

From today, all petrol and diesel sold on forecourts must contain at least 2.5 per cent biofuel. The Government insists its flagship environmental policy will make Britain's 33 million vehicles greener. But a formidable coalition of campaigners is warning that, far from helping to reverse climate change, the UK's biofuel revolution will speed up global warming and the loss of vital habitat worldwide.

Amid growing evidence that massive investment in biofuels by developed countries is helping to cause a food crisis for the world's poor, the ecological cost of the push to produce billions of litres of petrol and diesel from plant sources will be highlighted today with protests across the country and growing political pressure to impose guarantees that the new technology reduces carbon emissions.

On the day when the Renewable Transport Fuel Obligation (RTFO) comes into force, requiring oil companies to ensure all petrol and diesel they sell in the UK contains a minimum level of biofuel, campaigners condemned as "disastrous" the absence of any standards requiring producers to prove their biofuel is not the product of highly damaging agricultural practices responsible for destroying rainforests, peatlands and wildlife-rich savannahs or grasslands from Indonesia to sub-Saharan Africa to Europe.

A study by the RSPB published today criticises the introduction of the RTFO as "over-hasty" and "utter folly". The conservation body said there is already widespread evidence that biofuel production is destroying vast areas of unspoilt habitat and has made at least one species extinct.

Demonstrators will gather outside Downing Street and other locations including Aberdeen, Bristol, Manchester and Norwich to protest at the "perverse obstinacy" of the Government in going ahead with the RTFO and will call for its abandonment until the impact of biofuel production can be properly assessed.

Graham Wynne, chief executive of the RSPB, said: "The volume of biofuel that can be genuinely described as sustainable is at present very small indeed and is nowhere near enough to warrant the 2.5 per cent obligation. The impacts of biofuel production on forests and wetlands are already being seen worldwide. It is a tragedy that customers' money is going to be spent on driving this destruction."

The World Bank and the UN have, in recent days, expressed concern about the impact of biofuels on world food prices, sparking riots from Haiti to the Philippines. Gordon Brown, who has put the issue on the agenda at the forthcoming G8 summit, has also voiced concerns at EU level about deforestation and loss of habitats caused by biofuel production. And Alistair Darling, the Chancellor, raised the issue at the weekend's G7 meeting in Washington.

But ministers insisted that the RTFO, which will require Britain to produce or import up to 2.5 billion litres of biofuel each year, puts the UK at the forefront of efforts to make the industry sustainable by demanding that suppliers provide reports on where their green petrol and diesel comes from as well as the expected carbon savings.

The Department for Transport estimates 2.5 million tonnes of carbon dioxide will be saved by 2010. The proportion of biofuel will rise to 5 per cent by 2010 in the UK and there is a proposed EU-wide target of 10 per cent by 2020.

Jim Fitzpatrick, the Transport minister, said: "Making it easier for motorists to use greener fuel is an important step towards reducing carbon emissions from transport. It should help save millions of tonnes of carbon dioxide in the coming years."

For motorists, there will be no discernible difference at the petrol pump. Bio-diesel, largely sourced from processed palm oil, soya beans and rape seed, and bio-ethanol for petrol, produced from cereals and sugars, are simply mixed with fossil fuels.

But environmentalists insist the projected carbon dioxide savings are based on a false premise because the clearance of huge areas of Indonesian rainforest and peatland or South American savannahs, the use of fertiliser to grow crops, conversion into biofuel and transportation to petrol stations mean emissions caused by the manufacturing of the fuels can vastly outweigh any CO2 saved once put in a car's tank.

Researchers at the University of Minnesota published a study in February this year which found that growing biofuel crops on converted rainforests, grasslands or peat bogs created up to 420 times more CO2 than it saved.

Campaigners have pointed to palm oil, one of the key biofuel crops, as a particular menace because many plantations across south-east Asia are based on reclaimed forest and peatland, creating carbon emissions that can never be reclaimed by biofuel production. In South America, the Alagoas curassow, a large bird once found in north-eastern Brazil, has become extinct because sugar cane production wiped out its habitat.

The RSPB study, entitled A Cool Approach to Biofuels, points out that legally enforceable standards designed to eliminate such crops from the RTFO will not be imposed until 2011, leaving a three-year gap for non-sustainable biofuel to flood into Britain.

Mr Wynne said: "Proof that biofuels were truly green should have been in place long before the RTFO came into force. The method of production of some biofuel will cause habitat loss, displace food production and emit more greenhouse gases than are being saved."

Campaigners are calling for a legally binding target to ensure all biofuels save at least 60 per cent more carbon than they produce.

In the meantime, they point to a loophole in the RTFO which means that suppliers can answer "don't know" to a question about the previous use of the land that produced the biofuel.

Tesco, which has claimed all its biodiesel comes from rapeseed and soya, was forced to admit palm oil can make up a significant part of its product after a sample analysed was found to contain 30 per cent palm oil.

Norman Baker, the Liberal Democrat transport spokesman, said: "Thanks to flaws in the Government's system, companies selling these fuels will even be allowed to get away with saying that they don't know whether they've been sourced sustainably or not. This makes a mockery of the entire idea of sustainability standards."

How sustainable the production of green energy sources can be is key to the climate debate. Politicians Ruth Kelly and Peter Ainsworth debate the Renewable Transport Fuel Obligation

Ruth Kelly
Our cars and other forms of transport are the third-largest source of carbon dioxide emissions in the UK and the only one likely to have increased by 2020. Any serious attempt to tackle climate change requires us to dramatically step up our efforts to reduce these emissions. So a clean, renewable energy that can be mixed with fossil fuels to power our cars has great attraction.

This is exactly what supporters of biofuels believe they offer. They say they are one of the few existing, feasible ways of slowing the growth of carbon emissions from transport. They point as well to their advantages in reducing dependency on imported fossil fuels at the same time as providing opportunities for developing countries to grow and refine the "green" energy source.

These arguments and the evidence that supports them have convinced many countries to promote their production and led the government to take cautious steps to encourage their use through the Renewable Transport Fuel Obligation. The RTFO, which comes into force tomorrow, requires 2.5% of the fuel sold on garage forecourts to come from renewable sources, a figure set to rise to 5% after two years.

But the government also recognises increasing concern about biofuels. Critics say there is very little "green" about them; in their view, savings of greenhouse gases have been exaggerated, if not invented. They warn that the dash to grow palm oil, sugar cane and other crops from which biofuels are made is leading to widespread destruction of forests and wildlife habitats around the world - and worsening food shortages as farmland is switched to industrial crops. This is something that must be examined closely. As Alistair Darling outlined at the weekend, the government has asked the World Bank to look into food markets and the impact of subsidies in time for the next G7 meeting in June.

These concerns have led to demands for the government to scrap or postpone the introduction of the RTFO. The critics also have in their sights the European commission's proposed target of increasing the use of biofuels across the EU to 10% by 2020. But I am not convinced postponing the RTFO is the way forward. Not because the government dismisses concerns over biofuels, but because we took these concerns into account when drawing up our proposals.

The government has consistently stressed that biofuels are only worth supporting if they deliver genuine environmental benefits. We require suppliers to report on the impact of their biofuels in terms of greenhouse gas emissions and sustainability. The Renewable Fuels Agency (RFA) will collect these reports - shaming poor performers, encouraging best practice and enabling us to monitor the impact of our policy.

I have also asked the RFA to lead a review into the wider indirect impact of biofuels, and to report in the summer. If we need to adjust policy in the light of new evidence, we will. We have kept up our demands internationally to ensure sustainable development of biofuels, and have made clear that we won't agree any increase in the European biofuels target until these demands are satisfied.

The expert consensus is that the best biofuels can deliver significant greenhouse gas savings. We need to encourage this type of biofuel, and discourage those that offer little or no savings and whose production can have a negative social and environmental impact.

Postponing the RFTO would not help this process or prevent other countries pressing ahead with unsustainable biofuels. It would put an end to investment in new clean, low-carbon biofuel production facilities in the UK, and could weaken our influence over the direction of EU policy in this area.

Ruth Kelly is the secretary of state for transport
kellyr@parliament.uk

Peter Ainsworth
Tomorrow sees the introduction of the Renewable Transport Fuel Obligation (RTFO), one of the government's alarmingly few "flagship" environmental policies. When it devised the plan, which requires the addition of a proportion of biofuel to the traditional fossil version we put in our tanks, ministers presumably thought they were on to something both green and popular. How disappointing, then, that instead of a bouquet of organically grown blooms from the environmental movement, all they are getting is a sustained and bellicose raspberry. The RSPB has branded the scheme "utter folly" and demonstrations have been planned outside No 10 and across the UK.

But the government was warned. It could have listened to The Archers, because Ambridge has been playing out many of the local aspects of the biofuels dilemma for weeks. Or it might have listened more carefully last autumn, when Conservatives voted against the obligation on the grounds that the targets coming into force make no distinction between sustainably produced biofuels and those that will hasten climate change, deepen poverty, endanger food security, and threaten habitats and species with extinction.

The idea of destroying vast swaths of rainforest in the name of the environment will strike most people as insane. Yet that is exactly what is happening; institutionalised demand for biofuels is causing major land-use change, damaging biodiversity and undermining the earth's ability to absorb carbon dioxide. In our small, incompetent and well-meaning way, our country is contributing to biofuel madness.

Under the terms of the RTFO, about 2.5bn litres of biofuel will be needed every year to meet the government's target. In the absence of sustainability criteria, the inescapable consequence is that the RTFO will simply suck in imports from plantations that contribute to carbon emissions and the destruction of habitats. There is worrying evidence that existing biofuel programmes are already doing significant harm, especially in Malaysia, Indonesia and Brazil. Indeed, the UN has estimated that virtually all Indonesian and Malaysian rainforests will be destroyed by 2022 as a result of clearances for palm cultivation, which is the world's number one source of biofuel. Voices from within the UN have also expressed concern about "biofuel refugees", highlighting the forced dispersal of indigenous people and the human rights implications of the policy.

It is disturbing that our government appears to be completely in the dark over the source and volume of current imports of biofuels. It confesses to being unaware of whether imports are causing damage. It is this kind of casual ignorance that informs the approach to the rapid expansion of biofuel use. We have heard a lot from this government about evidence-based policy-making; but what we are looking at is ignorance-based policy-making. It could be a first.

There is a case for biofuels. Fuels derived from sustainably grown crops have the potential to make real savings in greenhouse gas emissions while providing farmers with new markets.

We need an ambitious, forward-looking policy to encourage investment in the next generation of biofuels, and a government prepared to drive the market not just for sustainable biofuels, but for green technology across the board.

All that accompanies the RTFO today is a "reporting requirement". The earliest the government hopes to have sustainability standards in place is 2011, by which time over 5bn litres of biofuel will have been sold in the UK. And we will have to live with the knowledge that we played a small but nonetheless shabby part in the extinction of the orang-utan.

Peter Ainsworth is shadow secretary of state for environment, food and rural affairs
ainsworthp@parliament.uk

Rocketing global food prices are causing acute problems of hunger and malnutrition in poor countries and have put back the fight against poverty by seven years, the World Bank said yesterday.

Robert Zoellick, the Bank's president, called on rich countries to commit an extra $500m (£250m) immediately to the World Food Programme, and sign up to what he called a "New Deal for global food policy".

Zoellick said: "In the US and Europe over the last year we have been focusing on the prices of gasoline at the pumps. While many worry about filling their gas tanks, many others around the world are struggling to fill their stomachs. And it's getting more and more difficult every day."

He said the price of wheat had risen by 120% in the past year, more than doubling the cost of a loaf of bread. Rice prices were up by 75% in just two months. On average, the Bank calculates that food prices have risen by 83% in the past three years.

"In Bangladesh a 2kg bag of rice now consumes almost half of the daily income of a poor family. With little margin for survival, rising prices too often means fewer meals," he said. Poor people in Yemen were now spending more than a quarter of their income on bread. "This is not just about meals forgone today, or about increasing social unrest, it is about lost learning potential for children and adults in the future, stunted intellectual and physical growth. Even more, we estimate that the effect of this food crisis on poverty reduction worldwide is in the order of seven lost years."

The Bank's analysis chimes with research from the International Monetary Fund which shows that Africa will be the hardest hit continent from rising food prices. More than 20 African countries will see their trade balance worsen by more than 1% of GDP through having to pay more for food.

Gordon Brown, the prime minister, has written to his Japanese counterpart, Yasuo Fukuda, who is chairman of the G8 industrialised countries, calling for a "fully-co-ordinated response" to the food crisis.

Zoellick welcomed Brown's initiative, and said this weekend's meetings of the World Bank and the IMF had to do more than simply identify the scale of the crisis.

"This is about recognising a growing emergency, acting and seizing opportunity too. The world can do this. We can do this," he said. "We cannot be satisfied with studies, and papers, and talk." As well as the $500m contribution to the World Food Programme, there should be an expansion in safety-net programmes for poor communities. Zoellick also called for a boost to long-term financial support to aid production. "We must make agriculture a priority."

The Bank plans to double its loans to agriculture projects in developing countries in 2008, to $800m.

Riots have broken out in several countries, including Mexico and India, as a response to the rapid rise in the cost of basic foodstuffs over the past 12 months. A number of governments have imposed export bans on commodities, to try to bring prices under control. Zoellick warned against such protectionist responses.

He was also critical of the dash to grow crops for biofuels. The US and EU have encouraged wider use of such fuels to try to tackle climate change and provide an alternative to oil, but the policy has sometimes diverted agricultural land away from food and exacerbated price rises.

Zoellick criticised the subsidies and import tariffs used to promote wider use of the fuels.

Liz Stuart, spokeswoman for Oxfam, said: "Europe and the US must stop adding fuel to fire by increasing crop production for biofuels. These have dubious environment benefits, and by driving up prices, are crippling the lives of the poor."

Rice prices hit the $1,000-a-tonne level for the first time on Thursday as panicking importers scrambled to secure supplies, exacerbating the tightness already provoked by export restrictions in Vietnam, India, Egypt, China and Cambodia.

The jump came as the Philippines, the largest rice importer, failed for the fourth time to secure as much rice as it wanted.

The unsuccessful tender followed Bangladesh’s inability to buy any rice at all this week.

Traders and analysts warned that rice demand was escalating in spite of prices rising to three times the level of a year ago as countries try to build up stocks.

Vichai Sriprasert, president of Riceland International, a leading rice exporter in Bangkok, said several of its customers, including governments, were buying far more than they usually did amid fears about scarcity.

“It is panic,” he said. “My customers are demanding double the usual volume. We would not have enough supplies for all the demand we are facing.”

Michael Whitehead, a rice specialist at Rabobank in New York, added: “The potentially destabilising social effect of rice shortages in most high-consumption countries has strengthened the resolve of governments to build supply.”

Rising rice prices have triggered riots in the past month in countries such as Haiti, Bangladesh and Ivory Coast. Rice is considered the most political agricultural commodity as it is a staple for about 3bn people in poor countries in Asia and Africa.

Ajith Nivard Cabraal, Sri Lanka’s central bank governor, told the Financial Times that the rise in food prices was “definitely” a bigger problem for Asia than the ongoing credit crunch.

“Food is something which without we cannot live,” he said. “Social consequences could be very adverse.”

In an effort to maintain social peace through low local prices, governments have stepped up their purchases.

Manila’s rice tender on Thursday received offers for only 325,000 tonnes, a third below the government’s target. It faced record prices, with the average offer at $1,046 a tonne, up 47 per cent from March. Some of the offers hit $1,220 a tonne.

That strength boosted indicative quotes for Thai medium-quality rice, the global benchmark, to a range of $950-$1,000 a tonne, traders said. In Chicago, US rice futures hit an all-time high of $23.3 per 100 pounds.

But Anthony Lam, of Golden Resources, the largest rice wholesaler in Hong Kong, said prices were near their peak. “There is now no big natural disaster to raise it further.”

World leaders on Sunday called for urgent action to tackle soaring global food prices, while promising to quickly implement measures to strengthen the international financial system and prevent a repeat of the credit crisis.

The call for a global effort to deal with both the immediate food crisis in the developing world and the longer-term challenge of ensuring adequate food supplies came on the final day of the World Bank and International Monetary Fund spring meetings in Washington.

Earlier, the Group of Seven industrialised nations and the IMF governing council made up of global finance ministers and central bank governors endorsed a 65-point plan to reform the global financial market.

The G7 also expressed fresh concern about “sharp fluctuations in major currencies” which it said potentially threatened financial and economic stability.

The plan, drawn up by the Financial Stability Forum, involves raising the amount of capital banks have to hold if they want to invest in complex credit securities, hold these assets in their trading portfolios or support off-balance sheet investment vehicles. It also includes new disclosure requirements for banks, reforms to credit rating agencies, guidance on liquidity management and the creation of a “college of supervisors” from different countries to monitor banks.

Policymakers discussed the crisis and the FSF plan with leading private sector bankers in Washington on Friday. But European officials emphasised that governments were willing, if necessary, to take steps the private sector did not support.

Wall Street bankers rejected the G7 call to raise more capital, saying they were opposed to selling shares at the current depressed prices.

World leaders said they would implement the FSF plan in a co-ordinated manner to a strict timetable. But there was no co-ordinated action plan for tackling the current credit crisis. The G7 made it clear it expected national authorities to take the lead in combating economic risks.

Ministers rejected the IMF’s call for globally co-ordinated public intervention to tackle the problems in the financial system directly as a “third line of defence” against the credit crisis.

However, Angel Gurría, the secretary-general of the Organisation for Economic Co-operation and Development, told the Financial Times he believed public intervention would be necessary to “kick-start” global markets.

The high-level economic meetings ended up putting as much weight on the global food crisis as the credit crisis. Palaniappan Chidambaram, India’s finance minister, told his colleagues rising food prices were causing severe problems.

Leaders agreed on Sunday to support a World Bank “New Deal” for food and called on donors to provide $500m in funding for short-term relief.

Robert Zoellick, president of the World Bank, welcomed calls from Gordon Brown, UK prime minister, and Susilo Yudhoyono, president of Indonesia, to make the “global food crisis” the top priority of the next Group of Eight meeting in Tokyo.

Dominique Strauss-Kahn, IMF managing director, warned of “terrible” consequences if food prices continued to rise.

Mr Zoellick said countries had committed only about half of the $500m in aid called for by the world food programme and that more was needed. Mr Zoellick and Mr Strauss-Kahn said more work should be done on possible links between biofuel crops and food prices.

The Philippines, the world's largest rice importer, is urging China, Japan and other Asian nations to convene an emergency meeting on the region's food crisis to try and reverse export curbs that have driven prices to a record.

"Free trade should be flowing," Agriculture Secretary Arthur Yap said yesterday. "We'd like to take up also the export bans being imposed by several countries."

The meeting may be arranged within two months.

Grain prices including rice, staple food for half the world, have surged this year on shortage concerns, prompting some growers to impose export restrictions. The gains in prices are stoking unrest and fanning inflation, world finance ministers said over the weekend.

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