Crude oil fell for a third day in New York, extending a two-week slump of 9.8 percent from its record high, on signs global demand for gasoline is slowing and stockpiles are increasing.
U.S. gasoline and diesel inventories last week gained more than expected, the Energy Department said in a report yesterday. India and Malaysia raised fuel prices today, joining Indonesia and Taiwan in moves that may cut Asian demand and slow global oil-consumption growth.

The report "demonstrated that there are weaker conditions in the U.S. and that people are changing their patterns of fuel usage," said Gerard Burg, an energy economist with National Australia Bank Ltd. in Melbourne. "Given that most of the growth that was forecast is in regions that subsidize fuel use, the impact of higher prices is starting to limit demand."

Crude oil for July delivery declined as much as 69 cents, or 0.6 percent, to $121.61 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $122.22 a barrel at 3:12 p.m. Singapore time.

Yesterday, oil dropped $2.01, or 1.6 percent, to settle at $122.30, the lowest close since May 6. Futures, which reached a record $135.09 on May 22, are up 86 percent from a year ago.

U.S. fuel consumption averaged 20.4 million barrels a day in the four weeks ended May 30, down 1.1 percent from a year earlier. Gasoline demand, in terms of the amount supplied by refiners, dropped by 244,000 barrels to 9.1 million barrels a day, the lowest since the week of March 7.

"People were spooked by the gasoline demand numbers," said Antoine Halff, head of energy research at Newedge USA LLC in New York. "The demand fell below the five-year average and people got really concerned about that."

Dollar Gains

Brent crude oil for July settlement fell as much as 78 cents, or 0.6 percent, to $121.32 a barrel on London's ICE Futures Europe exchange. It was at $121.92 a barrel at 3:12 p.m. Singapore time.

The contract declined $2.48, or 2 percent, to $122.10 a barrel yesterday, the lowest settlement price since May 15. Prices reached a record $135.14 on May 22.

Oil also dropped as the dollar climbed to a three-week high against the euro after Federal Reserve Chairman Ben S. Bernanke said inflation was a "significant concern," prompting speculation of a rise in interest rates. Investors previously bought oil and commodities as an inflation hedge as the currency dropped to a record low.

"The appreciation of the dollar has caused people to return to the conventional asset classes like equities," said Hirofumi Kawachi, an energy analyst at Mizuho Investors Securities Co. in Tokyo. "That's taken money out of commodities."

Gasoline Falls

Gasoline for July delivery was at $3.1908 a gallon, down 0.43 cent, in electronic trading on Nymex at 3:05 p.m. Singapore time. The contract declined 4.7 percent to settle at $3.1951 a gallon in New York yesterday, the biggest drop since March 17. Futures touched a record $3.52 on May 29.

Last week's 1.4 percent gasoline-inventory gain to 209.1 million barrels left supplies 3.8 percent higher compared with the year-earlier week. Stockpiles were expected to increase 825,000 barrels, according to the median of 14 estimates in a Bloomberg News survey.

"The bigger-than-expected rise in inventories was a reflection of weaker gasoline demand," said Toby Hassall, a research analyst at Commodity Warrants Australia Ltd. in Sydney. "It will be interesting to see if oil can push down to $120."

Distillate inventories climbed 5.7 percent to 111.7 million barrels in the past four weeks. Supplies were expected to rise 1.68 million barrels, according to the analyst survey.

Refineries operated at 89.7 percent of their capacity last week, up 1.8 percentage points from the week before and the highest since the week ended Jan. 4, the department said. The profit margin , or crack spread, for making three barrels of crude oil into one of heating oil and two of gasoline jumped 46 percent in May.

Crude-oil inventories fell 4.8 million barrels to 306.8 million barrels last week. Analysts were split over whether crude-oil supplies rose or fell in the Bloomberg News survey.

SINGAPORE (Reuters) - Reluctance by China and India to fully eliminate fuel subsidies means it may be years before gradually rising prices begin to seriously erode oil demand in the world's fastest growing major consumers.

While smaller countries are shocking their drivers into conservation by raising prices sharply to ease the burden of subsidies, Asia's first- and third-largest consumers -- which together account for half of the world's demand growth this year -- are set to maintain a far steadier, gentler approach.

India agreed to raise diesel and gasoline prices by 10 percent on Wednesday, at the top end of expectations and the biggest one-off increase in a dozen years.

But that pales next to Indonesia's 29 percent rise last month, and Malaysia's decision to hike gasoline prices by 41 percent and diesel prices by a sharper 63 percent.

"In general, price changes leave oil demand nearly untouched in the short run," say consultants at Vienna-based JBC Energy. "Oil consumers might find it easier to adjust to small price changes."

The issue of demand destruction has come into sharp focus in recent weeks, with oil prices falling from their peaks as traders fear that Asian demand -- one of the catalysts for oil's long rally -- could quickly fall as subsidies are removed.

There is precedent for the case -- Indonesia's demand fell by a fifth in the wake of a doubling in prices in October 2005, and has only recently recovered; India's oil demand growth, however, has accelerated to its fastest pace in eight years, despite domestic fuel prices having risen by up to 65 percent since 2003.

The Chinese and Indian economies are booming, despite U.S. woes, and salaries are rising even more quickly.

"So far fuel prices have been so low that the share of fuel expense was relatively minor compared to total income, which was growing very rapidly," says Yonghun Jung of the Asia Pacific Energy Research Centre, which studies demand trends.

If drivers in Beijing or Delhi feel their governments will continue to keep prices from rising swiftly, analysts say they may see little reason to hold back from spending some of their growing wealth on the ultimate status symbol -- a private car -- and fuelling it may take precedence over other expenses.

"We have no choice but to pay up. We have to cut down on other expenses such as eating out and things for yourself because it's not in your budget anymore," said Bina Chadha, a government officer in Mumbai, in response to India's fuel price hike.

SLOW RESPONSE

Even in the United States, whose prices are relatively cheap by world standards, a trebling in gasoline pump prices since 2004 to $4 a gallon has seen evidence of weakening demand only appearing now, highlighting the challenge in prying drivers away from the steering wheel.

By contrast, Chinese and Indian prices have not even doubled since 2003, when both began controlling prices more rigidly. Officials said India would have had to raise petrol prices by 50 percent and diesel by 100 percent to match global rates.

There is little doubt that cheap prices have artificially encouraged consumption growth in the two giants, where oil demand has risen by a third since 2003, adding another 2.78 million barrels a day to world demand -- more than Germany's entire use.

Countries that have recently raised prices by more than 10 percent or are poised to do so -- Taiwan, Indonesia, Malaysia and Sri Lanka -- consume only about 2.7 million barrels per day (bpd), only one-third as much as China alone.

And there's little reason to think that the two economic giants have the stomach or need for quicker or bolder action.

China has made taming inflation its top priority and is reluctant to risk public discontent by raising prices ahead of the Olympics, but is widely expected to begin allowing them to increase after August if the inflation threat subsides.

India's Congress-led government faces elections next year, and is also desperate to contain inflation.

"We believe that to promote an equilibrium between supply and demand growth, price increases need to be not only more widespread, but also longer lasting, as we believe demand growth responds to price inflation rather price levels," Goldman Sachs said in a report issued a day before India's decision.

OTHER FACTORS

Even when consumption does begin to moderate, it may have more to do with alternative transport -- or with the West's economic health -- than a reaction to prices, analysts say.

Jung says that ambitious plans to build at least 13 subway systems in China and expand bus networks in major metropolises could help temper growth in the future, as it will prevent an auto addiction from taking hold too strongly.

"The initial ownership investment is high, and the variable cost is marginal. Ownership is the key -- once they own it, they'll drive it, no matter what," says Jung.

Whether that trend is already emerging remains to be seen, although April data showed new car sales in China rose by only 11 percent from a year ago, an unusually lackluster pace.

Trever Houser, Director, Energy & Climate at the Rhodium Group, a China-focused consultancy, says that even a 25 percent increase in Chinese prices -- enough to restore profitability to refiners like Sinopec would only shave about 1 percent off demand growth, since commercial users would simply pass on the increase to customers.

"What would have a larger impact on Chinese oil demand is if high oil prices cause a fall in consumer spending and purchase of Chinese products elsewhere in the world," Houser said.

The North Sea could be set for a second boom as companies search for new sources of oil and gas to take advantage of record prices.

The popular view is that the UK's share of the North Sea is in decline, with energy reserves diminishing rapidly about 35 years after the oilfields were first exploited.

However, there is a growing body of opinion that suggests that proven oil reserves have been underestimated consistently.

Since the discovery of oil in the North Sea, the equivalent of 37billion barrels of oil have been extracted from the UK Continental Shelf, leaving up to 25.5billion barrels still to be recovered. However, industry experts believe that the remaining reserves exceed current estimates by as much as a fifth,

New technology and the rising price of oil mean that it is now economically viable to drill fields once considered too difficult or too remote.

Richard Pike, chief executive of the Royal Society of Chemistry, argued in Petroleum Review this month that true proven reserves for the world may be nearly twice the conventional figure. Mr Pike said that the current industry practice of reporting proven reserves alone was purely an historic convention that bore little relevance to what was actually produced.

There are many reasons why companies like to be conservative in reporting oil reserves, not least because it helps to maintain a high oil price. When Shell had to cut estimates by one fifth in 2004, it had a devastating impact on the company's share price and cost the members of the senior management team their jobs.

There are also concerns that if reserves are played up, politicians immediately set about calculating how much money they can get out of the oil companies.

But there is growing evidence to show that the proven reserves in the North Sea's oldest fields are, in fact, rising. Professor Peter Odell, of Erasmus University in the Netherlands, believes that supplies of oil will flow for decades to come and that there will be new finds in parts of the UK Continental Shelf that have never been examined in any depth.

This view would appear to be supported by the announcement last month that Dana Petroleum, a British independent company, found a new oilfield in the North Sea at West Rinnes. The suggestion that the North Sea could harbour more oil than was previously forecast will cheer the Government, which made a surprise change last week to North Sea taxes, designed to boost falling investment levels in the UK Continental Shelf.

Investment in the shelf dropped by about £1billion in real terms to £4.9billion last year but much of the investment is coming from new entrants that are smaller and more dynamic than the behemoths of Shell and BP. Smaller companies with lower overheads are prepared to go after smaller pockets of oil, knowing that they can still make a decent profit.

Five years ago BP sold the Forties field to Apache Corporation, a Texas-based oil exploration and production company. Since then Apache has spent $2billion (£1.02billion) on the field and has fundamentally re-evaluated how much oil still exists.

At the time it was sold, the Forties Field was showing its age and had pre-developed reserves of about 150million barrels. Last year Apache reported pre-developed reserves of 200million barrels.

New technology, including better drilling techniques, means that fields that were considered exhausted previously are now worth a second look.

Talisman Energy, which also operates in the North Sea, says it is now drilling wells that it could not five to ten years ago.

Oilexco, the Canadian oil exploration company, drilled 39 out of 140 exploration and appraisal wells in the North Sea last year, despite the rising costs of drilling rigs and equipment.

Oil & Gas UK, the industry lobby, is typically reluctant to shout about this possibility. Mike Tholen, its economics director, says: “Oil & Gas UK currently estimates that up to 26billion barrels of oil and gas remain to be recovered from the North Sea but none of these volumes will be easy to recover. Securing investment to develop and extract them relies on international investors perceiving the UK as a competitive place to do business.”

While the debate about the level of reserves continues, the fact is that oil and gas output from the North Sea has been falling by about 3 per cent a year since 2006 to 2.8million barrels per day last year.

However much higher the price of oil climbs, the North Sea must still compete for investment with many other cheaper locations in the world.

The North Sea has almost as much oil left as has already been extracted, a BBC Scotland investigation has been told.

Experts believe between 25 and 30 billion barrels could still be recovered over the next 40 years.

Calculating oil reserves is not an exact science and this fact has made it difficult over the years to weigh up the true wealth of oil beneath the North Sea.

Oil producers have tended to play down their oil reserves. The markets do not cope well with shocks, so companies take the view that it is better to pleasantly surprise than disappoint them.

In 2004, Shell stunned shareholders when it revised its proven oil and gas reserves, slimming the figure by 20%. The revelation had an instant impact on the company's share price and has served as a lesson to the industry ever since.

The first minister and former oil economist Alex Salmond told me that there was another motivation for oil companies' reticence.

He said: "If oil companies said 'look we've got lots of reserves in the future', the immediate response of government would be to stick taxation up. So there was a kind of incentive for the big companies to underplay the significance of the province."

That is hardly surprising - since the late 1960s, the oil companies have paid £140bn in taxation to the Treasury.

That is a pretty big disincentive. No wonder there is such divergence over how much oil is left in the North Sea.

Sir Bernard Ingham, who was press secretary in the Department of Energy when North Sea oil came ashore, admitted that government negotiations with the oil companies always boiled down to the same thing - taxation.

As he put it: "The whole political calculation is how much brass can you get out of North Sea oil without driving the oil companies away."

The one thing that I did not expect to find in my investigation was that the proven reserves on some of the region's oldest fields are in fact rising.

The Forties Field, one of the biggest and most iconic, is still producing oil 33 years after the first oil was pumped ashore.

Higher costs

Five years ago, BP sold it to the Texas-based oil exploration and production company Apache. Since then Apache has invested $2bn in the field's sub sea network, its platforms and in re-evaluating how much oil is in the field.

According to Jim House, CEO of Apache, flow rates from the Forties field have increased and the amount of recoverable oil has also increased.

He said: "Forties was definitely showing her age when Apache took it. At the time when it was sold, pre-developed reserved were in the region of 150 million barrels. We ended last year with 200 million barrels on our books."

Preview of the BBC Scotland investigation

The downside to operating off the coast of Scotland has always been the relatively higher cost and, as the region matures, that cost factor is becoming more fundamental for the oil majors.

Shell has also been selling off some of its core assets in the North Sea to newer and more aggressive companies like Fairfield Energy.

Through shooting new seismic surveys and drilling new wells these new players are extending the life of North Sea oil fields.

John Gallagher, from Shell in Aberdeen, said his company was still committed to the area.

He said: "We're bringing on four new fields this year. We're talking hundreds of millions of pounds.

"The plant rejuvenation work that we're doing is hundreds of millions of pounds and the work we're doing cross-border - linking up Norway and the UK, which is a growing trend in our industry - is again hundreds of millions of pounds."

Huge gamble

The same high oil price that makes it harder for you and me to drive to the shops on a whim is making it easier for companies to take a gamble on previously undeveloped parts of the North Sea.

With a simple oil well costing $22m to drill, exploration companies are taking a huge gamble.

Canadian oil exploration company Oilexco last year drilled 39 out of 140 exploration and appraisal wells in the North Sea, despite rising costs.

Its chief executive officer, Arthur Millholland, said "In 2004 we were paying approximately $55,000 a day for a drilling rig.

"Today we're paying $350,000 a day. So even though the price of oil today is higher than it was in 2004, our costs of doing business here have increased just as dramatically."

It still seems to be worth their while staying in the North Sea, despite the high costs.

What I have seen in my investigation is an industry that is better placed to shoulder these costs. Smaller companies with lower overheads can go after smaller pockets of oil and still make a decent profit.

How long will North Sea oil last? The answer to that depends on many things, including market conditions, future government initiatives and constant technological improvements.

Technology alone is playing its part in extending the activity in the North Sea. John Forrest, Talisman Energy's general manager for the Flotta Catchment Area, said the company was now drilling wells that they were unable to drill five to 10 years ago.

World-class

He said: "We're bringing on fields that we've known were there for quite a long time but they just weren't economic or we didn't have the technologies. We recently brought on a field without drilling any more wells. We just had better technology."

The Talisman-owned Claymore platform is expected to keep pumping oil for another 30 years.

Mr Forrest said: "We foresee an economic life at that installation until the late 2030s and that's with the ideas we currently have. We think other innovations will come along that will almost certainly extend that."

The North Sea has many things in its favour. It has world-class geology which makes it attractive to those wanting to harvest its rich reservoirs.

Compared with many of the world's oil producing regions, it is governed by a relatively stable political and economic regime.

The market price of oil is a much more volatile factor, but at current prices the oil that still lies beneath the North Sea is becoming more and more valuable every day.

BBC Scotland's journalists are focusing on the high price of oil, and what this means for the industry in the North Sea, this week.

Hayley Miller will present a special hour-long documentary - Truth, Lies, Scotland and Oil - at 2240 BST on Wednesday on BBC One Scotland.

John Bartelson, who smokes Marlboro Lights through fingers blackened with tractor grease, may look like an average wheat farmer. He isn't. He's one of North Dakota's new oil barons.
Every month, he gets a check for tens of thousands of dollars from a company in Houston called EOG Resources Inc., which drilled two oil wells on his land last year. He says the day his first royalty check arrived was one to remember.

"I smiled to beat hell, and I went to town and had a beer," Bartelson, 65, says.

His new wealth springs from the Bakken formation, a sprawling deposit of high-quality crude beneath the durum wheat fields of North Dakota, Montana and southern Saskatchewan and Manitoba. The Bakken may give the U.S. -- the world's biggest importer of oil -- a new domestic energy source at a time when demand from China and India is ratcheting up the global competition for supplies and propelling average U.S. gasoline prices to almost $4 a gallon.

And unlike the tar from Canada's oil sands, Bakken crude needs little refining. Swirl some of it in a Mason jar and it leaves a thin, honey-colored film along the sides. It's light - -almost like gasoline -- and sweet, meaning it's low in sulfur.

Best of all, the Bakken could be huge. The U.S. Geological Surbey's Leigh Price, a Denver geochemist who died of a heart attack in 2000, estimated that the Bakken might hold a whopping 413 billion barrels. If so, it would dwarf Saudi Arabia's Ghawar, the world's biggest field, which has produced about 55 billion barrels.

Thin Deposit

The challenge is getting the oil out. Bakken crude is locked 2 miles (3.2 kilometers) underground in a layer of dolomite, a dense mineral that doesn't surrender oil the way more-porous limestone does. The dolomite band is narrow, too, averaging just 22 feet (7 meters) in North Dakota.

The USGS said April that the Bakken holds as much as 4.3 billion barrels that can be recovered using today's engineering techniques. That's a fraction of the oil that Price said should be there, but it's still the largest accumulation of crude in the 48 contiguous U.S. states. North Dakota, where Bakken exploration is most intense now, won't become Saudi Arabia unless technology improves.

"The Bakken is the biggest thing in oil in the lower 48 right now," says Jim Jarrell, president of Ross Smith Energy Group Ltd., a research firm in Calgary. "And among the least understood."

Delaying the Peak

Some oil, like the 10.4 billion barrels estimated to be recoverable in Alaska's Arctic National Wildlife Refuge, remains off limits -- as a nature conservation measure -- even as President George W. Bush renews his calls for drilling there. North Dakota, already crisscrossed by farm roads, is open for business.

As traditional oil fields become scarce, exploration companies must tackle trickier ones to stay in business. Their success will determine when the world reaches peak oil -- the high point in production after which new supply will no longer be there to slake new demand. It's a gloomy concept. Peak oil theorists predict the mother of all oil shocks, complete with famine and wars for energy.

These days, big new oil deposits often come with caveats. Brazil's Petroleo Brasileiro SA says its offshore Tupi field contains as much as 8 billion barrels of oil, which the company hopes to start pumping next year. But the field is under more than four miles of water and rock, where pressure can crush drilling equipment.

Hedge Bus

The Bakken dolomite is hardly an obstacle, by comparison. And even if Price was too optimistic, the Bakken is big enough to make investors rich. Some have made fortunes already.

In April, a busload of hedge fund managers drove by Bartelson's land, ogling the metronomic pump jacks and the devilish orange flares of excess natural gas that are making parts of North Dakota look more like west Texas.

"There's nothing that can stop this play," says Mike Reger, chief executive officer of Norther Oil & Gas Inc., a five-person company near Minneapolis that has leased the mineral rights under 32,000 acres (13,000 hectares) in the North Dakota Bakken.

Reger, 32, brought the hedge fund managers up to see the oil field. Some, like Ryan Zorn of Houston-based investment management firm Saracen Energy Advisors LP, are investors in Northern already. Northern shares have risen 61 percent since being listed on the American Stock Exchange on March 26.

Fool's Gold

For decades, the Bakken was the fool's gold of the oil industry. The name describes a geological formation that looks like an Oreo cookie: two layers of black shale that bleed oil into the middle layer of dolomite. It's named after Henry O. Bakken, the North Dakota farmer who owned the land where the first drilling rig revealed the shale layers in the 1950s.

All of the layers are thin -- about 150 feet altogether -- and none of them give up oil easily. In older, vertical wells, oil would often flow for a month and then fizzle.

Now, companies like Austin, Texas-based Brigham Exploration Brigham Co.; Denver-based Whiting Petroleum Corp.; and EOG are drilling horizontally. They go straight down 10,000 feet and then put a slight angle in the mud motor, a 30-foot piece of tubing that drives the bit, so they hit the Bakken sideways, making a horizontal tunnel 4,500 feet long through the dolomite.

That exposes more of the oil-bearing rock. Then they pump pressurized water and sand into the hole to fracture the dolomite, making cracks for oil to seep through.

It eventually winds up in a pipeline that runs east to Clearbrook, Minnesota, and then south to Chicago.

Where Billionaires Roam

Several billionaires are at work in the Bakken. Harold Hamm's Enid, Oklahoma-based Continental Resources Inc. has leases on 487,000 acres in Montana and North Dakota. Hamm, who started out driving a truck, owns 73 percent of Continental, worth $7.9 billion. Philip Anschutz , 68, founder of Qwest Communications International Inc. and Regal Entertainment Group, is there, too.

So are two sons of billionaire H.L. Hunt, the 1930s wildcatter. Petro-Hunt LLC is owned by the trust estate of William Herbert Hunt, who was convicted in a civil trial with his brothers Lamar and Nelson Bunker of trying to corner the silver market in 1979. Hunt Oil Co., another Bakken operator, is owned by their half brother, Ray L. Hunt.

The big winner so far has been EOG, formerly a subsidiary of bankrupt energy trader Enron Corp. It drilled a horizontal well in western North Dakota just north of Parshall -- population 1,028 -- in April 2006. The well came online a month later and kicked out 1,883 barrels in the first seven days. Unlike the older vertical wells, it's still going. In March, it produced 2,305 barrels, according to the North Dakota Industrial Commission.

No Slam Dunk

EOG has eight rigs running on 320,000 acres of mineral leases in the North Dakota Bakken. The company said in its 2007 annual report that the area has the highest return of all the places in which it operates -- including Texas's Barnett Shale, the Gulf of Mexico coast and the Permian Basin of New Mexico.

The Bakken isn't foolproof. Far from it. Drilling there is expensive -- about $5 million a well, according to EOG -- and takes experience. Dallas-based Petro-Hunt's first well in the North Dakota Bakken didn't make money, company geologist Steve Bressler says. Brigham's Bergstrom Family Trust well came online at 277 barrels a day -- viable at today's high oil prices but not a gusher.

"There will be variances," says John Gerdes , an oil and gas analyst at SunTrust Robinson Humphrey Inc. in Houston. "The rock matters. The people matter."

Oil Rush

The success of EOG's Parshall well set off a land grab in North Dakota's Mountrail County. Land men -- the experts who move from boom to boom leasing mineral rights -- swarmed, paying ever higher prices for ground that for decades grew crops and concealed Cold War missile silos.

On private acreage, land men negotiate with mineral owners like Bartelson. They offer a bonus upfront to hold the mineral rights for three to five years, and they agree to pay a fraction of the revenue from any oil produced each month -- often from 1/8 to 3/16. On land with a producing well, the mineral lease lasts as long as the well does. On government land, the bonus is set at auction.

Bartelson in 2004 granted a five-year lease on 1,400 acres, under which he owns half the mineral rights. He got a bonus of $25 per mineral acre, or $17,500, plus one-sixth of any oil revenue. Times have changed since then. In November, Sinclair Oil Corp. of Salt Lake City paid $16,500 an acre at auction for half the mineral rights on 320 acres of government- owned land in the Parshall Field, according to the U.S. Bureau of Land Management.

`No Acreage'

"That's a record for Montana and North Dakota," BLM spokesman Greg Albright says.

Among the biggest companies punching holes in the North Dakota Bakken are Houston-based Marathon Oil Corp., the fourth- largest U.S. oil company, and Herss Corp. of New York, which is No. 5. No. 1 Exxon Mobil Corp. isn't active in the Bakken. John Freeman, an analyst at investment bank Raymond James & Associates Inc. in Houston, says Exxon is looking for bigger deposits overseas.

"Now, there's no acreage left," he says.

The truest believer in the Bakken might be Reger, the CEO of Northern Oil. He's certainly the loudest promoter.

Reger is a fourth-generation oilman. His great-grandfather managed operations for Mobil Oil, now part of Exxon Mobil, in the Williston Basin , the 110,000-square-mile (285,000-square- kilometer) geological formation in the northern plains that holds the Bakken and other deposits. Reger's grandfather leased land atop all of them. His father, uncle and brother are in the business, too.

"It's our basin," Reger says.

Bakken Hunters

If it works out the way Reger says, he and his partner, a former derivatives trader named Ryan Gilbertson, will be the Sergey Brin and Larry Page of the Bakken. Like the Google Inc. founders, Reger and Gilbertson are young -- Gilbertson is also 32 -- and they aren't afraid to roll the dice.

The lanky, blue-eyed Reger wears cowboy boots and a saucer-sized belt buckle emblazoned with an "R." He vacationed this year in the Maldives in the Indian Ocean and insisted on a stopover to see Dubai's building boom. Gilbertson, meantime, shot a 10-foot-tall brown bear at eight paces in Alaska in 2007. He has a picture of him and the dead bear on the wall in his office.

`Son o' Bitches'

The future partners met while boating on Lake Minnetonka, outside Minneapolis. Gilbertson is from the area and traded derivatives for Piper Jaffray Cos. and a hedge fund firm named Telluride Asset Management LLC in nearby Wayzata, where Northern is based. Reger moved from Montana to St. Paul to attend the University of St. Thomas.

"We're both cowboy-boot-wearing, country-music-listening, gun-toting sons o' bitches," Gilbertson says. These days, they both drive black Cadillac Escalade SUVs and wear designer jeans.

Gilbertson says he knows more about interest-only mortgage bonds than he does about oil. But he says Northern will succeed because he and Reger weren't in business during the busts of earlier decades, so they aren't gun-shy today.

When EOG hit oil, they leased as many mineral rights in Mountrail County as they could, even as prices rose.

"The fear of these busts has clouded the judgment of so many players," Gilbertson says. "We just grabbed everything with both hands."

Turning Over Leases

Northern makes money without actually drilling or operating wells. Its strategy is like the game of Monopoly: lease in promising areas and get paid when someone else uses the land to drill.

The strategy is possible because of the way land is assembled for drilling. Reger's grandfather, uncle and father had made their money as lease brokers: They'd lease the land themselves or buy leases already granted and then sell them at higher prices to exploration companies.

Reger and Gilbertson intend to keep their leases, pay a share of the drilling costs and keep a portion of the oil revenue. Gilbertson says it was his idea. "I saw the family's model as flawed," he says.

Leasing mineral rights means finding mineral owners. That's not always easy, because the farmer who owns the surface may not own the "minerals," as they're known. Farmers can sell land and retain the minerals. When a mineral owner dies, the rights are often passed in equal portions to his or her children, Reger says, making them hard to track down.

Hauling County Records

To find mineral owners in Mountrail County, land men spend months in the courthouse, poring over photo-album-sized books that show who owns mineral rights and whether they've been leased.

One day in April, there were 50 people lugging books around. They line up well before the courthouse opens to get a spot on the first floor so they don't have to haul volumes up the stairs to an old law library that's been filled with folding tables to accommodate the horde.

Reger started leasing land for oil and gas exploration in Montana at age 15. He carried a portable typewriter to bang out contracts on landowners' kitchen tables.

It takes more than mineral rights to drill. Most western states are divided into neat little squares called sections. Each is one square mile, or 640 acres. If you want to drill an oil well in a section, you lease the mineral rights inside it. You don't need all of them, but you have to find all of the rights owners in that section and offer to let them participate.

This is where Northern makes its money.

Watching Permits

Reger's favorite time of day is 4 p.m., when the North Dakota Industrial Commission posts the names of companies that have gotten permits to drill. Very often, a rig is heading to a section in which Northern has mineral rights. He knows then that it will be a matter of time before he gets a letter from the company asking if he wants to share the cost -- and the revenue -- based on the percentage of mineral rights Northern controls in that section. He almost always says yes.

Reger makes it look easy because the Bakken is hot, says Summerfield "Sam" Baldridge, a partner at Montana Oil & Gas Properties Inc., founded by Reger's uncle, Steve, in Billings, Montana. Bigger companies are eager to drill, their wells are producing and oil prices are high.

"If it goes bad, you can go broke really quick," Baldridge says. "You have to have guts and capital."

Booms and Busts

Baldridge, 51, knows from experience. He was leasing mineral rights for Mobil in Montana in February 1986 when he heard on the radio that oil prices had plunged. In two days, a barrel of West Texas Intermediate crude fell to $15 from $20.

"We knew it was history," Baldridge says. "From Calgary to Houston, everything went south."

North Dakota has seen booms and busts from an array of oil deposits. The Bakken began forming 360 million years ago from dead algae that sank to the bottom of an ancient sea, where they were buried by successive layers of rock. Heat and pressure turned the algae into oil-saturated shale. Now it lies like a buried blanket under much of the Williston Basin.

Amerada Petroleum Corp. roughnecks started drilling what would become the first well in North Dakota on Sept. 3, 1950. They went through the Bakken before producing oil from deeper Silurian dolomite on April 4, 1951. A year later, Amerada (now Hess) finished the Henry O. Bakken well. Cuttings from the hole showed the shale layers that are now known by the same name.

Finding Porosity

Exploration in the Williston Basin grew for a few decades after that, ebbing and flowing with the price of oil. Mostly, drillers pursued deposits deeper than the Bakken. Those who tried to exploit it usually failed. The oil wouldn't keep flowing. "Bakken was a four-letter word," says Dick Findley, a geologist in Billings.

In 1996, Findley, now 56, had a revelation. The consultant-turned-oilman went out to his rig in eastern Montana one night to check on things. At 2 a.m., it hit the Bakken dolomite and produced an unexpected rush of oil. Oil expands as it forms, and the pressure drives it into rock fractures. In the past, the dolomite hadn't seemed porous enough or fractured enough to release it.

"We got porosity that I didn't know existed," Findley says.

Findley and his partner, a land man named Bob Robinson, thought they could re-enter old wells and blast the middle dolomite layer with pressurized water to make cracks for crude to flow. They produced oil but not enough. So they turned to horizontal drilling. The technique had been around for decades.

500 Wells

Some had tried horizontal drilling in the Bakken in the early 1990s. They had aimed for the upper shale layer, though. Findley thought they could produce more by staying in the middle dolomite, even though the best, most porous rock was just 10 feet thick.

They drilled their first horizontal well in May 2000, blasted it with water, and the oil flowed. The field is called Elm Coulee, and today there are more than 500 wells there. Findley sold much of his interest to investors who could afford the drilling, though he still has an override -- a small percentage of any production.

Findley's success got others thinking about the Bakken. One was Michael Johnson, an independent geologist in Denver. Montana and North Dakota require companies to make public the information they collect when drilling, including gamma ray logs, which register the location of oil-bearing shale. Johnson examined logs from hundreds of wells east of Elm Coulee. He zeroed in on a dry one in Mountrail County that had similarities.

Word of Mouth

Johnson and two partners, land man Henry Gordon and geologist Robert Berry, leased about 38,000 acres in the area and shopped the mineral rights around. EOG bought 75 percent across all of the acres. In April 2006, EOG started drilling near a stream called Shell Creek. Workers drilled down some 9,000 feet and then started angling into the Bakken. They hit natural gas and crude.

Oil companies try to keep discoveries quiet so they can snap up more leases around them. Information travels fast in the Williston, though, where all of the roughnecks and rig operators know one another. Reger and Gilbertson had just formed Northern Oil when they got word from a lawyer in Montana that EOG had hit a big one. Reger sent his brother J.R. to lease as much land as he could, as close as he could, to EOG.

Pathfinder

In April, Reger took his busload of hedge fund managers to a well called Pathfinder being drilled by Slawson Exploration Co. out of Wichita, Kansas. Northern owns only 3 percent of Pathfinder but has land all around it. Success here would almost certainly mean more drilling in adjacent sections.

"From this location, we are literally masters of all we survey," Reger says.

The drill had hit the Bakken layer two weeks earlier, on Easter Sunday, producing a burst of natural gas. Where there's gas, there's often oil. As the rig clanks and groans like a motorized Godzilla, the hedge fund managers gather inside the trailer and crowd around the desk of Jon Starkweather, a "mud logger" who analyzes the rock chips coming up the hole. His window is covered with long charts that look like electrocardiograms.

"We landed this one just right," the bearded Starkweather says. Recent gas ventings, called kicks, confirm it.

Even if Reger and Gilbertson stopped gathering more mineral leases, they would make a fortune on what they have already, Reger says.

"I could take a nap for two years under my desk and wake up a hero," he says.

Millionaires

Reger's 14 percent stake in Northern is worth about $49 million. Gilbertson has shares worth $24 million. Whiting Petroleum's shares have more than doubled in the past 12 months, triple the 34 percent gain for a group of 96 energy companies in the Russell 2000 Index.

The other people doing well in the Bakken are the mineral owners under the oil wells -- folks like John Bartelson. Whiting paid them $56 million in 2007. EOG declines to say what it paid, though it's certainly more because it operates more wells. Whiting gets much of its Bakken revenue from shares of EOG wells it owns. It acquired them by buying Robert Berry's remaining stake in the Parshall acreage after EOG struck oil.

Bartelson's checks are about to get bigger. One more EOG well just came online, he says, and another is about to be fractured with water. Still another has been permitted for drilling. For now, he's farming. The oil market is fickle, he says. Previous crashes drove the rigs out of North Dakota for years, leaving only the wheat.

"It'll crash again," Bartelson says, sipping on a late- afternoon cup of coffee beside his tractor.

Maybe so. But with crude trading above $125 a barrel, it'll be a long time before the rigs leave again, and John Bartelson is likely to be a wealthy man before they do.

Shell’s rocky relationship with Nigeria suffered a fresh blow last night when the Nigerian President said that oilfields abandoned by the group in the Niger Delta would be given to another company.

President Yar’Adua said that there had been a total loss of confidence between the oil major and the local population. Shell closed operations in the Ogoniland area 15 years ago after protests over pollution and a lack of development led by the Movement for the Survival of Ogoni People.

Mr Yar’Adua said that another operator “acceptable to the Ogonis” would take over the oilfields this year. “Nobody is to gain from the conflict and stalemate so this is the best solution,” he said. Shell had hoped to return to the area. A spokesman said that the company had not yet received any formal notification from the Nigerian Government and that he was unable to comment further.

— Robert Dudley, the chief executive of TNK-BP, the Anglo-Russian oil giant jointly owned by BP and a group of Russian billionaires, was summoned for questioning by the Russian interior ministry yesterday about alleged tax evasion, it was claimed last night.

The move raises new fears over Kremlin pressure on foreign investors, and follows demands from TNK-BP’s Russian shareholders for Mr Dudley to be removed as chief executive.

America's leading commodities regulator has launched an unprecedented investigation into possible market manipulation in the US crude oil market amid record prices which continue to cripple various parts of the global economy.

The Commodities Future Trading Commission (CFTC), working closely with other international regulators including the Financial Services Authority in the UK, has begun a series of detailed inquiries over concerns that energy speculators are behind the rising oil price.

In a detailed statement, the CFTC admitted for the first time that it began its investigation in December, taking what it called the "extraordinary step" of disclosing the probe "because of today's unprecedented market conditions".

The CFTC declined to discuss the specifics of the investigation, but stressed that all of its enforcement inquiries were focused on "ensuring that the markets are properly policed for manipulation and abusive practices".

Walt Lukken, acting chairman of the CFTC, admitted: "In addition to the CFTC's ongoing examination of the role of fundamental economic forces and new investors in the recent commodity market price increases, the agency continues to pursue one of its primary missions - to deter, detect and punish futures market manipulation."

The development adds fuel to the view that the recent surge in oil prices - which hit record highs of $135.14 a barrel last week - has been largely the work of speculators in the energy markets rather than any actual increase in demand.

The CFTC is believed to be focusing particularly on speculators working in energy-related hedge funds and other investment houses who have been making complex bets that the price of oil will increase over the coming months.

The FSA yesterday signed an agreement with the CFTC, and with ICE Futures Europe - which runs the leading European energy exchange from London - to agree to share surveillance information for crude oil trading, including data on contracts based on West Texas Intermediate (WTI) oil that are traded in London.

The pact extends a pre-existing arrangement with the CFTC, and will allow the two regulators to monitor suspicious trades on both sides of the Atlantic, something that is vital due to the increasingly global nature of energy trading.

The FSA admitted that the British regulator regularly shares information with the CFTC under the terms of their 2006 pact "to assist in the detection of the potential abuses or manipulative trading practices that involve trading in related contracts on UK and US derivative exchanges".

Oil prices fell yesterday after the US Energy Information Administration revealed that demand for petrol had eased slightly. The cost of a barrel of crude oil in New York ended down $4.41 at $126.62, its lowest level in almost a fortnight.

The demand for waste oil, which can be used to produce cheap fuel for cars, has become so great that rival collectors are being drawn into "turf wars".

At the same time, restaurant owners are demanding ever higher prices for the fat from their fryers, which they once simply discarded.

Competition has become so intense that some racketeers are stealing oil and equipment from opponents in what have been dubbed "cooking oil wars".

Quenton Kelley, 49, of Green Miles Fuels, operates in London and Hertfordshire, leaving his own barrels in restaurant yards and returning when the chefs have filled them with used oil.

He then sells what he collects to biodiesel producers. Some local authorities even promote his services to help improve their recycling figures.

He said: "I find about two premises a week with their oil stolen - about one in 20 from my round of 40 places.

"One thief got caught on a restaurant's CCTV. I recognised him as another collector, who had decided to stop me entering his patch. He didn't just take the oil, he took my £20 barrel too. I threatened him with the police."

With diesel at the pump now averaging about £1.29 a litre, demand for vegetable oil has soared because biodiesel attracts less duty and is therefore 10p?15p a litre cheaper.

After motorway protests last week over the proposed 2p fuel duty increase, the scramble for used oil may become even more frantic.

Restaurateurs say they are amazed at the demand for used cooking oil. Once upon a time they had to pay to have it taken away. Now vegetable oil for biodiesel production fetches 40p a litre, having recently doubled in price.

Annemarie Do, 42, of the Khoai Café in Crouch End, north London, was caught in a collectors' price war on Friday. She said: "A well-spoken man came in offering 15p per litre, or £18 a barrel. My original collector immediately matched the offer. A few years ago we were desperate to get rid of this stuff. Now people chase us for it."

Price wars are breaking out throughout the supply chain. Legitimate biodiesel producers say brokers are now offering collectors up to 60p a litre.

Tom Lasica, the managing director of Pure Fuels, London's largest refiner of vegetable oil, said anyone offering that much was probably keeping costs low by dodging fuel duty and VAT.

Black-market deals were made much easier, he said, by laws allowing individuals to make up to 2,500 litres of biodiesel a year without paying duty.

British buildings equipped with solar, wind and other micro power equipment could generate as much electricity in a year as five nuclear power stations, a government-backed industry report showed today.

Commissioned by the Department for Business, Energy and Regulatory Reform (DBERR), the report says that if government chose to be as ambitious as some other countries, a combination of loans, grants and incentives could lead to nearly 10m microgeneration systems being installed by 2020.

Such a large scale switch to microrenewable energy could save 30m tonnes of CO2 – the equivalent of nearly 5% of all UK electricity.

The report estimates that there are nearly 100,000 microgeneration units already installed in Britain. Nearly 90,000 of these are solar water heaters, with limited numbers of biomass boilers, photovoltaic panels, heat pumps, fuel cells, and small-scale hydroelectric and windpower schemes.

If no action is taken, says the report, Britain can expect about 500,000 microunits to be installed by 2015 and 2-3m by 2020. But, with the right incentives, nearly one in five buildings in Britain would effectively become mini power stations, feeding electricity into the grid, or generating enough to be largely self-sufficient. Some of the greatest gains would be in combined heat and power units which are suitable for large blocks of flats, estates and businesses.

Britain has been widely criticised for not doing as much as other countries to encourage a mass market for small-scale renewables. The few existing schemes have failed to kick-start the industry. But the report says this could be swiftly changed: Germany has invested nearly £10bn in photovoltaic technology and Sweden has made it very attractive for consumers to install heat pumps.

The small-scale energy revolution will depend on the government stimulating the market with a range of consumer-friendly financial incentives schemes. "For widespread uptake of microgeneration to occur in the UK, sustained policy support will be required," says the report.

Top of the proposed incentive list is a "feed-in" tariff scheme which would reward people who invest in making their own electricity for feeding excess power into the national gird. This has been introduced in most European countries and is now a part of the Conservative party's energy policy.

Other possible incentives include 50% grants to help people meet the high initial cost of equipment and installation. If the government subsidised 50% of the cost of the some of the technologies, Britain would save 14m tonnes of CO2 a year, or 3% of all emissions for a cost rising to £2.2bn a year by 2030.

A third option would be to provide mortgage-style discounted low-interest "soft loans" payable over 25 years. This, suggests the report, would lead to a massive 8m units being installed by 2020. But it cautions that the life of the loan would probably exceed the life of most power units.

It also proposes a scheme where consumers put up some of the cost of a new electricity generating boiler in return for a long-term guaranteed cut in their power bills.

The report comes at a critical point, with the government's energy strategy due to be published soon and microgeneration targets due to be decided later in the year. The outlook it thought to be favourable because energy prices are expected to continue rising steeply as oil and gas prices soar.

The energy minister, Malcolm Wicks, welcomed the report: "Microgeneration has the potential to make a significant contribution to overall energy use in the UK and, combined with energy efficiency measures, will help towards reducing our carbon emissions. The concerned individual can take an active role in the battle against climate change."

The industry has called for binding targets which it said would lead to greater certainty for investors and lower costs for consumers. "This shows that with the right policies in place, citizens can save money and make make a marked difference to tackling UK emissions and future-proof their homes," said Dave Sowden, chief executive of the Micropower Council.

One problem was not considered by the report, however. Conservative leader David Cameron, Gordon Brown and Malcolm Wicks have all had applications to erect wind turbines on their roofs turned down by planning officers.

Eleven zones around Britain's coastline were named yesterday as the best places to build the next generation of offshore wind farms.

The zones identified by the Crown Estate are expected to play a key role in enabling Britain to meet its 2020 renewables targets.

The CBI has calculated that energy companies must invest £60 billion over the next 12 years to build enough offshore wind farms to boost generating capacity by 25 gigawatts. Less than half a gigawatt capacity is already in place and only 8gw is operational or in the planning and construction stage.

Britain has been set a target of providing 15 per cent of its energy needs from renewable sources by 2020 and ministers regard wind as one of the key areas for development. At present only 3 per cent of energy is generated from renewable sources. To meet the target at least 30 per cent of the nation's electricity, and perhaps more than 40 per cent, will need to be generated from wind farms and other renewable installations.

Environmental groups were delighted by the Government's commitment to increasing renewable energy radically. Some continue to harbour doubts, however, especially about the impact on wildlife. The Ministry of Defence is likely to have more concerns because of the effect that wind turbines have on radar capabilities. The Crown Estate and leading members of the wind-power industry said that they recognised the defence concerns and promised to do all they could to solve the problem.

Rob Hastings, of the Crown Estate, announced the 11 likely locations for new offshore wind farms at the British Wind Energy Association conference in London yesterday. He said that construction would have to start at least by the end of 2014 if they were to be generating enough electricity by 2020. Consent for the installations will need to be completed by the end of 2013 and he announced that for the first time the Crown Estate would meet up to half of the pre-construction development costs.

Work would begin immediately, he said, to begin the process of deciding which companies should lead the development of the 11 zones. The scale of the operation has been judged to be so big and expensive that each zone is likely to be awarded to a consortium rather than an individual company. Contracts are expected to be awarded by early summer next year.

Mr Hastings told the conference that the challenge of meeting the renewable target and Britain's demand for electricity was huge. “The challenge is to get an additional 25 gigawatts installed and operating in UK waters by 2020. If we don't achieve that it's unlikely we will reach our 2020 target of 15 per cent renewable energy,” he said.

The announcement came six months after the decision by John Hutton, the Business Secretary, to order a strategic environmental assessment to examine how and where 25gw worth of turbines could be positioned in the seas as the third phase of establishing a network of marine wind farms.

Adam Bruce, chairman of the British Wind Energy Association, said that the third round would mean “an environmental revolution in the way we generate our electricity in this country”. He added: “This year the UK will become the world's largest generator of offshore wind energy. We are the global number one.”

Mr Bruce called on other users of the seas to make compromises to facilitate wind farm developments but said that he hoped to work with the MoD over problems in using radar to detect aircraft near turbines.

A spokeswoman for the MoD said: “The MoD is fully committed to government targets for renewable energy and whenever possible we seek to find a mutually acceptable solution on a case-by-case basis. The effects of wind turbines on radar are complex and the MoD has to ensure that national defence interests are not compromised.”

Wind, from land and sea, is expected to overtake the nuclear industry as a source of electricity within a decade and to have increased capacity by 2013 but Mr Bruce said that the two industries would need to work side by side to maintain steady electricity generation. Britain is forecast to overtake Denmark this summer and become the world's biggest generator of electricity from offshore wind.

Richard Lambert, of the CBI, said that the industry would need to invest £60 billion in offshore wind farms alone. He said that it would be difficult for companies to find the money and it would place “a heavy burden on the economy” but he was confident that the industry would rise to the challenge.

Industry leaders welcomed the commitment to expanding offshore wind. Captain Peter Hodgetts, director of SeaRoc, said: “I'm certain that today is going to be a real watershed for our industry. I think we have an extraordinary future.”

Robin Oakley, of Greenpeace, said: “Offshore wind is a 21st-century, frontier technology that can deliver clean electricity to every home in Britain and secure our energy supplies for years to come. Our country could be the Saudi Arabia of offshore wind — and John Hutton knows it.”

The German engineering group Bosch is to buy a solar energy company for €1.1bn (£864m) in a move likely to lead to further consolidation in the world's biggest solar power market.

Bosch said yesterday that it paid €101 a share, a premium of more than 60%, for a controlling stake in Ersol and would offer the same price to all other shareholders. It has already secured acceptances from investors holding another 3.3%.

Shares in leading German solar companies rose substantially on expectations that other big players, including oil groups, are on the prowl in a market that grew to €6.6bn last year and is forecast to top €18bn by 2020.

Germany is by far the world's biggest solar energy market thanks to its "feed-in" tariffs, which pay a government-guaranteed premium of up to €0.47 a kilowatt hour for power produced by photovoltaic panels. It is expected to continue to grow despite government plans to cut subsidies by 8% or 9% in 2009 and 2010.

The German industry employs 57,600, according to its main trade group, which sees those numbers swelling to more than 200,000 by 2020, with exports worth €20bn by then.

Bosch indicated last month that it planned to use its substantial cash reserves on acquisitions. Franz Fehrenbach, chief executive, said the credit crunch had significantly reduced prices. But some analysts said the price it was paying private equity firm Ventizz for the 50.45% stake in Ersol was extremely high.

Fehrenbach said Bosch planned to expand its renewable energies business, with a sales target of €750m this year.

The Stuttgart-based group said Ersol, based in Erfurt in eastern Germany, had global sales of €160m last year and expected to turn over €300m this year, after doubling sales in the first quarter to €52.4m with operating earnings of €7.7m.

ROME - It was supposed to be an emergency conference on food shortages, climate change, and energy. At the opening ceremony Tuesday, the United Nations secretary general, Ban Ki-moon, noted that there were nearly one billion people short of food and called upon countries gathered here to act with "a sense of purpose and mission."

"Only by acting together, in partnership, can we overcome this crisis," he said.

But when the microphone was opened to the powerful politicians who had flown in from all over the world, they spoke mostly about economics and politics.

The US secretary of agriculture, Ed Schafer, talked about the benefits of biofuels and how genetically modified crops could ease world hunger. President Luiz Inácio Lula da Silva of Brazil spoke for half an hour about how Brazilian biofuels were superior to the US offerings. The president of Zimbabwe, Robert Mugabe, talked about how colonialism had created the food crisis. And President Mahmoud Ahmadinejad of Iran spoke of the need to inject religion into food politics.

Everyone complained about protectionism, though not their own.

Yesterday, food specialists as well as many representatives from poor countries wondered whether these divided forces could unite for a solution to a global conundrum: how to feed one billion hungry people.

"What is the common denominator here? It is a food crisis," said President Denis Sassou-Nguesso of the Republic of Congo. "That is the immediate problem for us."

At the three-day conference held by the UN Food and Agriculture Organization, there was a lot of argument about whether the high food prices were caused by the rush to biofuels, protective tariffs, the soaring price of oil, or the distortion of subsidies.

There has been much less talk about donors developing a new kind of aid program that most experts agree is needed: one that invests in developing agriculture in poor countries and that spends less to ship food halfway around the world to feed hungry people.

"The era of food aid is over; there is no more sending food from America to Africa," Kofi Annan, the former UN secretary general, said in an interview.

Annan was in Rome to discuss his latest project, the Alliance for a Green Revolution in Africa, a program with several UN agencies to assist African farmers in increasing their output. Donors, he said, need to do more to improve agricultural practice in Africa and Asia by providing tools, fertilizers, seeds, silos, and knowledge.

"Away from the cameras, I am starting to hear the right things," he said, noting that African agricultural productivity has dropped for the past two decades. "I'm hoping they will go home and adopt policies to ensure global food production, on the ground, in Africa, Africa and Asia. It's much more effective."

Indeed, officials from many major donor countries said they had been rethinking food aid policies, if only because food prices are now so high and transport is so expensive, with oil costing more than $120 a barrel.

Also, "there are no more surpluses" for food aid, since crops are also used for fuel, Annan said.

Henrietta Fore, head of the US Agency for International Development, said that transport costs were now soaking up 50 percent of the agency's food aid money and that rising prices of essential commodities such as oil were "eating away at our purchasing power."

In the past, the US program was heavily weighted toward sending food abroad and required that its aid be purchased in the United States and transported on American vessels.

"This crisis has made people think again," she said. "We have a new landscape for food and food needs."

Fore said that in a bill before Congress, 25 percent of food in a new $350 million aid package could be purchased overseas. But that has not been approved yet.

In the meantime, many representatives from less developed countries expressed frustration at the tenor of the meeting.

"We believe the problem is much more political than everything else," said Walter Poveda Ricaurte, the Ecuadorean agriculture minister. "We have to differentiate between the countries who are really affected by the food crisis and those who are seeing it as an economic opportunity."

Crucial talks between BP and its Russian partners in TNK-BP, the Russian oil venture, broke down as the Russian billionaire shareholders failed to attend a scheduled board meeting in Cyprus, two people familiar with the situation said.

Tony Hayward, BP’s chief executive, flew to Cyprus for talks with TNK-BP’s Russian shareholders, Mikhail Fridman, Viktor Vekselberg and Len Blavatnik, on the sidelines of the planned TNK-BP board meeting.

TNK-BP accounts for a quarter of BP’s production and 13 per cent of its profits.

BP had sought to reconcile differences as tension mounts over control of the company ahead of an expected sale by TNK-BP’s Russian shareholders of their 50 per cent stake to a state-controlled energy company, which could be either Rosneft or Gazprom. A potential broader tie-up between BP and Gazprom is also being considered.

But informal talks broke down on Thursday after the Russian shareholders raised the issue of removing Robert Dudley, the venture’s BP-backed chief executive.

After that proposal was made, the board meeting did not take place, a person familiar with the situation said.

BP declined to comment on details of the talks with the billionaires, who form the AlfaAccessRenova consortium. But this week BP threw its public backing behind Mr Dudley after AAR censured him for speaking out publicly about the dispute.

The company said: “BP and AAR shareholders met today to discuss future strategy and direction of the company and these talks will continue. However, today’s TNK-BP board meeting did not convene because ... the AAR directors chose not to attend.” None of the representatives of AAR could be reached for comment.

The friction became public this week as the two sides traded public barbs about investment strategy and the role of foreign specialists.

Several people familiar with the situation believe the stand-off was sparked by one Russian shareholder seeking to ensure he was in the driving seat for negotiations on a TNK-BP stake sale. “This is all about control and money,” one of the people said.

BP’s role in TNK-BP has come under scrutiny after its Moscow offices were raided twice in two months, while foreign specialists from BP have been barred from working at TNK-BP.

A Siberian court issued a temporary injunction against them appearing for work after a minority shareholder filed suit. The executives of Tetlis, the minority shareholder, were previously employed by Mr Fridman’s Alfa Group, which has denied any links with the lawsuit.

The role of TNK-BP senior managers from BP, including Mr Dudley, could also be in jeopardy after a Russian senior manager filed for fewer work permits.

In the Vedomosti newspaper this week, Mr Dudley accused the manager of an erroneous filing and acting in the interests of one Russian shareholder. He did not name the shareholder or manager.

Roland Nash, chief strategist at Moscow’s Renaissance Capital investment bank, said: “There is a huge amount of value at stake if [Mr Fridman’s] Alfa Group can position itself as a powerbroker between the state and BP.”

Toronto: Trade liberalisation and technology may have flattened the world, but rising transport prices will once again make it rounder, says a report by a major Canadian bank.

In its study - "Will Soaring Transport Costs Reverse Globalisation?" the Canadian Imperial Bank of Commerce (CIBC) says soaring oil prices are driving transport costs to such levels that businesses will be forced to seek supplies locally, rather than importing at huge costs from China and India.

"Globalisation is reversible. Higher energy prices are impacting transport costs at an unprecedented rate so much so, that the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today," CIBC chief economist Jeff Rubin and co-author Benjamin Tal say in their report.

In fact, soaring global transport costs have already offset all the trade liberalisation efforts of the past three decades, the report points out.
If major cuts in tariffs and non-tariff barriers led to explosion of world trade, including the rapid industrialisation of India and China, during the past three decades, it says now "triple-digit oil prices, soaring transport costs, not tariff barriers, pose the greatest challenge to trade."

Outlining how rising energy prices are set to roll back globalisation, the report says: "Back in 2000, when oil prices were $20 per barrel, transport costs were the equivalent of a 3 per cent US tariff rate. Currently, transport costs are equivalent to an average tariff rate of more than 9 per cent."

"At $150 per barrel, the tariff-equivalent rate is 11 per cent, going back to the average tariff rates of the 1970s. And at $200 per barrel, we are back at tariff rates not seen since prior to the Kennedy Round GATT negotiations of the mid-1960s."

Giving an example, the report says that while it cost only $3,000 to ship a normal (40-foot) container from China to the US in 2000, today its costs $8,000. And at $200 per barrel, it will cost $15,000.

Referring to two past oil shocks which led the US to cut imports from Europe and Asia and raise regional trade with Caribbean and Latin American nations, the report says the current oil crisis also points to similar trends as China's freight-intensive steel exports to the US are falling by more than 20 per cent on a year-over-year basis, while US domestic steel production has risen by almost 10 per cent during the same period.

The high transport costs have also hit exports of low-value Chinese goods - such as furniture, apparel, footwear, metal manufacturing, and industrial machinery - to the US, the report points out.

It predicts that rising oil prices - and thus transport costs - will spell less Chinese and Indian competition for North American manufacturers, and more regional trade, benefiting Mexico because of its abundant cheap labour and proximity to the US and Canada.

"In a world where oil will soon cost over $200 per barrel, Mexico's proximity to the rest of North America gives its costs a huge advantage. It seems that American importers are starting to do the math and already shifting some business from China to Mexico," the report says.

The car company is to close four plants and may sell the gas-guzzling Hummer as it says high fuel prices are here to stay

They are a lane and a half wide, can wade through 24 inches of rainfall, weigh more than eight tonnes and get about 13 miles to the gallon. They were, for a while, a hulking, smoking embodiment of the American Dream. They may also about to become obsolete.

Yesterday, Rick Wagoner, the chief executive of General Motors, said that the car manufacturer was considering whether to sell the Hummer brand, the giant four-wheel drives that typically fill the car parks at American gun conventions.

While it is the surging gas price that finally is threatening the future of the Hummer, the sports utility vehicle has long been an object of contempt among many Americans. Hummer-haters detest it for the pollution it belches into the atmosphere, for the fact that it does not need to meet US fuel efficiency standards, for its bullying size and also for the kind of owners — typically men — who choose to drive them.

Within hours of Mr Wagoner’s statement to shareholders indicating that the GM board had launched a strategic review about the future of the Hummer business, a website dedicated to deriding the vehicle declared victory. “The Hummer-haters . . . will get their wish faster than they’d ever hoped,” it said. “It seems the death knell of the Hummer H2 has been sounded.”

The move to reconsider the future of the Hummer comes as the price of petrol reached a record $3.98 a gallon in the United States this week. Yesterday both Ford and General Motors (GM) admitted that car sales had slumped in May across the United States. Ford sales fell by 16 per cent and GM dropped 28 per cent.

Mr Wagoner said he believed that higher fuel prices were likely to be “permanent” and outlined plans to cut car production overall by 500,000 to 3.7 million vehicles a year, arguing that rising oil prices had triggered a “structural shift” in the market and had drawn Americans away from buying large vehicles.

Mr Wagoner said: “These \ prices are changing consumer behaviour and changing it rapidly. We don’t believe it’s a spike or a temporary shift. We believe it is, by and large, permanent.” He also said that he was closing four factories in Wisconsin, Ohio, Ontario and Mexico in the next two years as the Michigan-based company concentrates on making smaller, fuel-efficient cars. The production cuts are expected to reduce costs by around $1 billion. The company is trying to strip out $5 billion worth of costs in the next three years.

The American car industry has been forced to cope with sliding demand and surging costs. Manufacturers have been trying to reduce their operating costs so that they can compete with their more successful East Asian rivals such as Toyota, of Japan.

Mr Wagoner said: “We really would not foresee the likely prospect of new products in the plants that we’re announcing today that we’ll cease production in.”

GM shares closed up 14 cents at $17.58 in New York.

The sky-high cost of aviation fuel is prompting United Airlines to scrap more than a fifth of its fleet of aircraft as the industry grapples with soaring costs, amid new forecasts that the sector faces a $60bn (£30.7bn) funding gap.

United, which is the second-biggest US airline, announced yesterday that it was retiring 100 of its 455 planes - 94 short-haul Boeing 737s and six jumbo jets.

The cuts are an increase from previous plans to ground 30 aircraft. The number of job losses at the carrier will rise from 500 to between 1,400 and 1,600. The airline's budget brand, Ted, is to be discontinued.

United's chief executive, Glenn Tilton. said: "This environment demands that we and the industry act decisively and responsibly. We continue to do the right work to reduce costs and increase revenue to respond to record fuel costs and the challenging economic environment."

The Chicago-based carrier is trimming the number of seats available on its network by between 9% and 10%. Most of the reductions will be on its domestic services, with United's 11 daily flights to London likely to be unaffected.

United's move follows the failure of merger talks with its rival US Airways last month. Its cutbacks come hot on the heels of a decision by the market leader, American Airlines, to scrap 75 planes and cut services by 11% to 12%.

Michael Boyd, an aviation consultant at the Colorado-based Boyd Group, said the planes being removed were older aircraft that could be axed without any liability to leasing agencies: "They're being parked because they're paid for, not because they're fuel guzzlers."

He said United was likely to trim the frequency on routes rather than abandoning destinations altogether, although he added: "Their management track record has been so clumsy; I don't know how successfully they're going to do this.

"They've not been running an airline - they've been running a merger partner," he said.

As the price of oil teeters around $130 a barrel, airlines around the world are feeling the pinch. While environmentalists cheer the downturn in aviation, smaller cities are concerned about losing services.

Holiday destinations, where lucrative business-class demand is limited, are suffering the most. An analysis by USA Today found that Orlando and Las Vegas are losing scores of flights, while Hawaii, where local carrier Aloha Airlines has gone bust, is expected to have 25% fewer flights once October timetables begin.

United announced the move as a respected aviation industry analyst warned that an average jet fuel price of $130 a barrel this year could create a budget shortfall of $60bn in the industry, equivalent to a fare increase of £24 per return trip.

Chris Tarry, chairman of the CTAIRA consultancy, said airlines faced the difficult choice of raising fares, and risking a decline in sales, or cutting costs.

"There is a huge risk to this business from high oil prices because fuel is a cash cost and this is a business where cash is king. Balance sheets will come under severe pressure, more debt will be required and the cost of borrowing will rise because at present airlines are seen as being at risk."

Tarry also warned that cost cutting may not provide a quick or effective solution: "That sort of action is neither costless nor instant."

The global airline industry has downgraded its forecast for this year for the third time and now is predicting losses in 2008 of $2.3 billion (£1.1 billion) because of sustained high oil prices.

The International Air Transport Association (IATA), which represents airlines, also said that if oil prices stayed at $135 a barrel, the losses could worsen to more than $6 billion.

Giovanni Bisignani, the director-general of IATA, also criticised the Civil Aviation Authority (CAA) and BAA, the airports operator, for being a “national embarrassment” to Britain.

At the IATA annual conference in Turkey yesterday, the CAA was dubbed “worst regulator of the year” after permitting BAA to increase landing charges by 86 per cent over the next five years.

Mr Bisignani said: “Look at Heathrow: service levels are a national embarrassment, but still the CAA increased charges by 50 per cent over the last five years and plan 86 per cent for the next five. Could anyone in this room ask for a fare increase of 86 per cent? Nobody. That only happens in Monopolyland.”

The Competition Commission is investigating whether to break up BAA's monopoly control of London's airports - Heathrow, Gatwick and Stansted - and the Government has also announced a review of the CAA's regulation of UK airports.

Meanwhile, easyJet, the low-cost operator, has begun a High Court action to stop BAA imposing the landing charge increases.

IATA's prediction that there will be heavy losses in the airline sector this year comes as carriers struggle with rapidly rising fuel costs. Last year the association initially predicted that worldwide profits would be $7.8 billion in 2008, but it reduced this forecast to $5 billion in November and cut it again to $4.5 billion in March.

The global airline industry reported a collective profit of $5.6 billion last year, its first year in the black since 2000. However, rising costs are driving carriers into bankruptcy and Silverjet, the business-class-only carrier that operated from Luton, became the latest to suspend operations last Friday.

More than a dozen carriers have filed for bankruptcy protection or entered administration so far this year, with losses driven primarily in the United States. Carriers in America are more vulnerable because they operate older, less fuel-efficient fleets and are exposed to a slowing domestic economy.

Mr Bisignani said that the aviation industry's health would depend on what happened to oil prices during the remainder of this year. Every $1 rise in the oil price added $1.6 billion to the global industry's fuel bill, he said.

Ryanair, the budget carrier, will give an indication of how severe the industry's problems are in Europe when it reports results for its year to the end of March. Although the airline, Europe's largest by passenger numbers, is expected to report net profits of about €480 million (£379 million), up from €401 million last year, analysts expect Michael O'Leary, its chief executive, to halve the 2008-09 profit forecast.

Andrew Fitchie, analyst for Collins Stewart, has said that Ryanair may have to cut its guidance to €219 million because of the high oil price. He also said that the carrier could ground up to 17 per cent of flights during winter in order to reduce fuel consumption.

Airlines are responding to higher oil prices by increasing fares. Last week British Airways raised its fuel surcharge for the second time in a month - to £218 return for its longest flights.

BA is expected to ground flights this year if the fuel price stays high. Willie Walsh, BA's chief executive, said at the IATA conference: “We will take capacity out during the winter, so I think for the current year we'll probably be looking at flat capacity versus last year. There is no question that airlines will have to increase their prices to offset some of the increase in the fuel cost that we are seeing."