Big Funds Are Culprit for High Commodity Prices

Big pension and other institutional money help drive up commodities prices.

Next time you face sticker shock at the gas pump over a $4 gallon of gas, check out your pension fund's investments. They may explain much about the surge in oil prices. Institutional investors such as pension funds, university endowments and sovereign wealth funds have ramped up investing in commodities as a hedge against inflation and to seek out higher returns versus stocks and bonds.

The strategy has worked -- if you gauge success solely by the rising returns that come from a market where oil prices have doubled in the last year to levels above $130 a barrel and other commodities are also sharply higher.

But this story has an ironic twist: The money put into commodities is boosting the inflation investors have been trying to offset. This isn't meant to lay blame for the rise in oil prices entirely on these investors' shoulders. They are part of the problem, along with soaring demand for oil in developing nations like China and India while global supply remains tight.

In recent weeks, however, more attention has been drawn to the big money these investors are putting into commodity-index funds. They don't actually own any of the commodities. Instead, they trade futures contracts, which are agreements that oblige the investor to buy or sell an asset at a predetermined price. Futures are considered a benchmark for prices in the market.

Critics allege that the continual inflow of institutional money is hijacking the market because the indices are permitted to bypass traditional speculative position limits imposed by the Commodity Futures Trading Commission.

"The rise in price of oil has weakened demand for the physical commodity, but it has boosted demand for the financial commodity since more investors are chasing returns," said Jeffrey Kleintop, chief market strategist at LPL Financial.

In the last five years, investment in index funds tied to commodities has grown from $13 billion to $260 billion, and the price of the 25 commodities that compose those indices have jumped 183 percent, according to congressional testimony from Michael Masters, managing member of the Virgin Islands-based hedge fund Masters Capital Management.

Masters dubs the pension and other investors as "index speculators." He estimates that in the first 52 trading days of this year, they flooded the market with $55 billion -- in a self-fulfilling prophecy of sorts since the more money they put in, the more prices rise.

Research from Lehman Brothers supports that view. Performance of commodity indices can strongly predict inflows to those indices, which suggests there is a "significant amount of momentum chasing" going on, Lehman's chief energy economist Edward Morse said. Inflows are also higher when traditional asset classes like equities underperform or the dollar is weak.

Masters cites data showing annual Chinese demand for petroleum, based on government figures, has increased over the last five years by 920 million barrels; over the same time frame, the increase in demand for petroleum futures almost equals that at 848 million barrels.

"Individually, these participants are not acting with malicious intent," Masters said in his May 20 testimony. "Collectively, however, their impact reaches into the wallets of every American consumer."

Not everyone sees things Masters' way. Jeffrey Harris, chief economist at the CFTC, which regulates commodity markets, countered Masters' attack by telling lawmakers that "fundamental economic forces and the laws of supply and demand" are pushing prices higher, not fund positions.

Yet on Thursday, the CFTC announced it was six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation. It also announced a push to increase transparency of U.S. and international energy futures markets.

For instance, the CFTC said it will immediately require monthly reports from institutional investors who manage funds, which will help regulators identify the amount of such index trading and to "ensure that this type of trading activity is not adversely impacting the price discovery process."

The California Public Employees' Retirement System, the nation's largest public pension fund, is among those investors moving into commodities. It increased exposure to commodities beginning early last year as a way to diversify its portfolio. Such investments are now valued at $1.1 billion of its nearly $247 billion in total investments.

"In our book, it is not what we call speculation," said CalPERS spokesman Clark McKinley. "We took a long time to get into this market and we have a long time frame in our investment window left," which McKinley says runs 10 to 12 years.

There are, however, some unintended consequences from this investment strategy; it's driving prices up. That puts further strain on an already weak economy, as consumers and businesses face higher costs for gas and food.

The effect is already being felt by corporate America and that's bad for the stock market -- where most of these investors put most of their money. Drives up prices. Weakens the economy. Puts pressure on stocks. Not much of a hedge, is it?

FAO and OECD Expect High Food Prices to Sustain

High Global Food Prices Are Expected to Sustain: Report.

High global food prices are a new fact of life, a major report warned on Thursday as 22 countries, mostly in Africa, were listed as being at severe risk from record food and fuel costs. At the same time, there were calls for an end to restrictions on the export of food, with open trade said to be vital in any solution to the record prices which have sparked protests in many countries.

The cost of feeding the family will remain far higher than in the past decade, even though prices should ease in coming years, the Organisation for Economic Cooperation and Development and the UN Food and Agriculture Organisation said in a report on the global agriculture outlook for the next 10 years.

The study was published against a background of protests in countries in Asia, Africa and the Caribbean in response to soaring food prices. The jump in prices has added to the number of people in extreme hunger and some humanitarian aid is "urgently required," said the OECD and FAO joint report. "Current high prices will hit the poor and hungry people hardest," it said.

OECD chief economist Angel Gurria added: "The way to address rising food prices is not through protectionism but to open up agricultural markets." The director general of the FAO, Jacques Diouf, told a press conference that "coherent action is urgently needed by the international community to deal with the impact of higher prices on the hungry and poor."

And in Yokohama, Japan, the head of the UN World Food Progamme, Josette Sheeran, urged "all nations to allow us to purchase food, even if they have controls for humanitarian purposes. This is very critical." "Many nations have imposed export controls. Today we buy 80 percent of our humanitarian food in the developing world," Sheeran noted. In Rome, the FAO listed 22 countries, most of them in Africa, which had high levels of "chronic hunger" and were "especially vulnerable" to rising food and fuel prices.

The OECD-FAO report said hundreds of millions of people were already going hungry before the price increases but that "the numbers of people suffering from extreme hunger have (now) increased even further. "In the short term, humanitarian aid for the populations in countries most severely affected is urgently required," the report said.

Several factors had coincided to drive the "exceptional increases in prices" and some of the pressure would ease in the next few years. But the two bodies warned that food subsidies and trade protection were not the answer, saying that high prices might even be part of the solution by stimulating neglected investment in agriculture in poor countries.

Raising food supplies in poor countries also depended on improved government, infrastructure and property rights, the OECD and the FAO said. The report warned that rising prices had endangered the UN Millennium Development Goal of eradicating hunger and it was strongly sceptical about the benefits of agriculture-based biofuels, which have contributed to higher costs.

However, the "transitory nature" of some of the factors behind the recent trend meant that prices would fall in due course from record peaks. The report pointed to "adverse weather conditions in major grain-producing regions of the world, with spillover effects on crops and livestock that compete for the same land.

"These conditions are not new. They have happened in the past and prices have come down once more normal conditions prevail and supply responds over time." There was "no reason to believe that this will not recur over the next few years," it said, while adding that commodity prices will continue "substantially above" the levels of the past 10 years.

Comparing average prices for 2008 to 2017 with 1998 to 2007, it said beef and pork could be 20 percent higher; wheat, maize and skim milk powder 40-60 percent; butter and oilseeds more than 60 percent, and vegetable oils more than 80 percent.

The report cited changing diets, urbanisation, rising populations and economic growth as underpinning demand in developing countries. The most-threatened countries listed by the FAO are Eritrea, Niger, the Comoros, Botswana, Haiti and Liberia.

They are followed in order of severity by Burundi, Tajikistan, Sierra Leone, Zimbabwe, Ethiopia, Zambia, the Central African Republic, Mozambique, Tanzania, Guinea-Bissau, Madagascar, Malawi, Cambodia, North Korea, Rwanda and Kenya.

British PM Brown Warned of World Oil 'Shock'

British PM Brown Warned Wednesday of World Oil 'Shock' Amid Rising Protests Over Soaring Fuel Prices.

British Prime Minister Gordon Brown warned Wednesday that the world faced an era-defining oil "shock" that required urgent action, as European leaders argued how best to contain protests over soaring fuel prices. "It is now understood that a global shock on this scale requires global solutions," Brown wrote in The Guardian newspaper.

Record oil prices of around 135 dollars a barrel have contributed to protests worldwide over the rise in fuel and food costs, with fishermen and truck drivers taking the lead in Europe, blocking ports and road access to oil depots.

"However much we might wish otherwise, there is no easy answer to the global oil problem without a comprehensive international strategy," Brown said, adding that the problem should be made a "top priority" at the EU summit next month and the gathering of G8 leaders in July. "The way we confront these issues will define our era," he said.

Brown's warning came a day after French President Nicolas Sarkozy urged a Europe-wide cut in consumer taxes on fuel. French consumers pay about 19.6 percent VAT on the price of fuel and Sarkozy renewed his reduction proposal on Wednesday during a visit to Warsaw.

"Should we really apply the same tax rate when the price of a barrel of oil has doubled in one year and tripled in three years? I don't think this is a crazy question to be asking," Sarkozy told reporters in the Polish capital.

But Austrian Finance Minister Wilhelm Molterer gave the idea short shrift. "What will you do when prices fall again, reintroduce the tax? I'd like to hear the political discussions then," said Molterer.

Portugal's economy minister Manuel Pinho called on Slovenia, as current head of the European Union, to hold an emergency debate on the crisis, but Slovenian Prime Minister Janez Jansa said it would have to wait for the scheduled EU summit next month. "There's no sense in calling an urgent meeting since we'll discuss the issue at our regular June session," Jansa said, while adding that the issue would be placed high on the agenda.

While fishermen called off strikes in key French ports on Wednesday, lifting a week-long blockade of the country's largest oil refinery, truckers and farmers stepped up their own protests over soaring fuel prices.

A group of 300 farmers used their cars to block the entry to a Total fuel depot near Toulouse, while around 40 protesting truck drivers slowed traffic to a near-halt on Bordeaux's main ring road. And a policeman and a protestor were slightly injured when riot police using tear gas battled farmers blocking an oil depot near Sete on France's Mediterranean coast.

In Bulgaria, where annual monthly salaries are among the lowest in the EU and inflation rates among the highest, around 150 trucks drove slowly along capital Sofia's ring road, disrupting traffic. Bulgarian bus companies were preparing to launch a nationwide one-hour strike on Friday. In Spain, the main trucking union has called for an indefinite strike beginning June 8.

At a meeting Tuesday of EU agriculture ministers in Slovenia, France and Spain led the call for direct EU economic assistance to the fishing industry. EU member states can currently give their fishermen a subsidy of up to 30,000 euros (47,167 dollars) over a three-year period without seeking the European Commission's approval.

But French and Spanish fishermen consider this too low and have demanded additional help from their governments to be able to cope with the sharp increase of diesel prices. Italian, Greek and Portuguese fishermen have threatened to strike later this week.

The Netherlands and Portugal however expressed scepticism, arguing for a long-term solution for the fishermen, including modernising their fleets and increasing competitiveness. "Short-term solutions are the most popular in political terms, but they have no lasting effect," said Portuguese Agriculture Minister Jaime Silva.

ECB Celebrates Its 10th Anniversary

After 10 years, ECB stands vigilant over world's second largest economic area.

Ten years into the job, the European Central Bank can celebrate its success at making the euro zone's economy and currency one of the strongest in the world. The fiercely independent bank opened a decade ago Sunday and will mark the anniversary with celebrations Monday.

The ECB has slowly become a global heavyweight, not least by keeping a cool head during the recent financial market crisis when it steered a different course from the U.S. Federal Reserve and the Bank of England by refusing to slash interest rates.

It has also skirted political rows between major euro nations Germany and France, insisting that it must make decisions without kowtowing to national finance ministries -- a radical change for many European economies where central banks were traditionally under the thumb of politicians.

But the ECB now faces some of its biggest challenges as the euro economy faces an uncertain outlook this year. A recent boom is trickling away and inflation has surged recently, to 3.6 percent in March and again in May -- well above the stated goal of 2 percent.

Keeping inflation low is the ECB's main priority. "Stable prices are essential," ECB President Jean-Claude Trichet wrote in the foreword of a special 10th anniversary edition of the ECB's monthly bulletin, released this week.

The goal, he added, was to "protect the value of the incomes of all, and particularly of the most vulnerable and the poorest of our fellow citizens." And, he said, price stability would stimulate sustainable economic growth and job creation.

The launch of euro cash in 2002 has seen the slow rollout of a euro economy that now stretches across 15 nations, with several others lining up to join. Once euro-sceptic Denmark is now hinting it may change its mind and join up, although Britain and Sweden -- which voted against the euro in a 2003 referendum -- are still holding out. All other EU newcomers in eastern Europe plan to switch to the euro in the future.

Although EU officials criticize persisting differences across the bloc, trade and travel across the region has become far easier, helping to add 15 million new jobs in the last six years. The euro is used by 323 million people with a gross domestic product of more than 4 trillion euros ($6.2 trillion).

The ECB was founded with 11 members: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Since then, Greece, Slovenia, Cyprus and Malta have joined, with Slovakia expected to enter next year.

"After 500 years of fighting (wars), the creation of the euro and the ECB was a remarkable political achievement, requiring these fiercely independent and proud countries to surrender a huge amount of political autonomy," said William Dunkelberg, the chair of the Global Interdependence Center and a professor of economics, at Temple University in Philadelphia.

He said the trade-off was clear to European nations because doing business without changing currencies at the border or risking exchange rate fluctuations would boost growth and incomes. Still, the ECB -- as all central banks -- has its work cut out for it.

A slew of economic reports pointing to a recession in the U.S. have seen the dollar slump against the euro, making European exports more costly for American customers. But the strong euro cannot keep back the full brunt of soaring oil prices. Energy and food prices are starting to hurt consumers' wallets.

EU Inflation Hits 3.6% Again

Euro inflation bounces back to 3.6 percent in May on surging food and energy prices.

Euro-zone inflation bounced back to a peak of 3.6 percent in May, the EU statistical agency Eurostat said Friday in its first estimate for the month. Surging energy and food prices saw the yearly inflation rate accelerate at the same pace in March, reaching a record high before it cooled to 3.3 percent in April.

High inflation in the 15 nations that use the euro currency is now Europe's biggest economic challenge as the European Central Bank stays away from pushing the main lever of economic growth -- changing interest rates -- and urges governments and employers to prevent an inflation spiral.

The ECB faces a dilemma because slashing interest rates -- as the U.S. Federal Reserve and Bank of England have done -- would likely fuel inflation. Inflation is now far above the ECB's recommended guideline of just under 2 percent.

But an ECB move to hike borrowing costs in order to cool high prices could hurt a slowing economy as the European Commission warns that countries using the euro face an "unusually uncertain" economic outlook this year in the wake of a global financial crisis, a possible U.S. recession and increasing energy costs.

The EU executive says the euro economy may only grow by 1.7 percent this year, well below last year's strong 2.6 percent as Europe reaped export orders from a booming world economy and saw sluggish household spending start to pick up.

ECB President Jean-Claude Trichet says keeping prices stable is his priority and this would not risk growth or jobs. So far unemployment in the euro-zone isn't budging from an all-time low. It was 7.1 percent in April, the same level it has stayed at since December 2007.

But economic confidence in the region is at its lowest level in nearly three years as consumers and businesses are downbeat about future prospects. People are paying more at the grocery store and at the gas pump -- while Trichet and euro governments urge employers not to grant large pay hikes that could drive prices higher.

French President Nicolas Sarkozy this week urged euro governments to consider slashing sales tax on fuel to ease the burden on consumers -- something EU officials were cool on, warning this risked distorting competition across the economy. Inflation in the euro-zone is now running at the highest since Eurostat started keeping records for each nation in 1996.

Buffett and Soros Talk About Recession and Oil Boom

Warren Buffett sees US already in recession, says it will last long. George Soros: Oil boom is increasingly speculative

Warren Buffett, whose business and investment acumen has made him one of the world's wealthiest men, was quoted in an interview published Sunday as saying the U.S. economy is already in a recession.

Asked by Germany's Der Spiegel weekly whether he thinks the U.S. could still avoid a recession, he said that as far as the average person is concerned, it is already here. "I believe that we are already in a recession," Buffet was quoted as saying. "Perhaps not in the sense as defined by economists. ... But people are already feeling the effects of a recession. It will be deeper and longer than what many think," he added.

The 77-year-old chairman and chief executive of Berkshire Hathaway Inc. gave the interview while he was in Europe for what he called a "deferred shopping tour," looking for possible acquisitions.

Omaha-based Berkshire has about $35 billion in cash and is looking to invest. Berkshire's subsidiaries include insurance, clothing, furniture, natural gas, corporate jet and candy companies. Berkshire also has major investments in such companies as Coca-Cola Co. and Anheuser-Busch Cos.

In the meanwhile, soaring oil prices are increasingly the result of speculation, financier George Soros said in an interview published Monday.

The billionaire investor said the money pouring into the oil market increasingly had the look of a bubble, but that it would not burst until both the United States and Britain were knocked into a recession. "Speculation ... is increasingly affecting the price," Soros was quoted as saying by The Daily Telegraph. "The price has this parabolic shape that is characteristic of bubbles."

But the cost of oil -- which briefly reached new record highs of more than $135 a barrel in trading Thursday -- was unlikely to fall dramatically until the U.S. and Britain economies began contracting, the paper quoted Soros as saying.

Soros has frequently been a voice of gloom and doom as the U.S. economy slows amid a wrenching housing crisis and tightening credit. But the pessimism hasn't stopped his fund from making money. According to Institutional Investor's Alpha Magazine, the Quantum Endowment Fund -- which Soros no longer manages -- made $2.9 billion last year with returns of over 30 percent.

Soros has been promoting a new book, "The New Paradigm for Financial Markets: The Credit Crisis and What It Means." He has urged regulators to move more aggressively to improve market oversight to curb risks from excessive reliance on debt for financial speculation.

Fed Signals a Break of Interest Rate Cuts

Fed officials abandon Fedspeak to make clear interest rate unlikely to move lower.

Sounding a gong couldn't have made it clearer. Federal Reserve officials are putting out the word that further interest rate cuts are unlikely.

Fed Governor Kevin Warsh ditched the central bank's cryptic word tangles and actually waxed poetic. "Even if the economy were to weaken somewhat further, we should be inclined to resist expected, reflexive calls to trot out the hammer again," Warsh said, referring to the Fed's key interest rate.

Speaking more central-bankerly, the Fed's No. 2 official, Vice Chairman Donald Kohn, said the current stance of interest-rate policy "appears to be appropriately calibrated for now." Janet Yellen, president of the Federal Reserve Bank of San Francisco, called the current level of rates "appropriate."

They are amplifying a signal sent by Chairman Ben Bernanke and his colleagues last month that the Fed's most aggressive rate-cutting campaign in two decades may be winding down -- finally. The cuts started in September and take months to work their way through the economy.

That does not mean the economy, badly bruised by housing, credit and financial woes, is out of the woods. The Fed, though, is hoping its powerful doses of cuts, along with the government's relief plan of tax rebates and breaks will help lift the economy in the second half of this year.

Zooming prices for energy and food and other commodity prices are raising some concerns that inflation could take off and spread through the economy. Further reductions in interest rates would aggravate the situation.

In fact, the Fed's last rate reduction in late April was "a close call," according to recently released documents of those private deliberations. At that time, two Fed members favored no cut at all, given the concerns about inflation.

Many economists believe the Fed will hold its key rate steady at 2 percent, a four-year-low, at its next meeting on June 24-25 and probably through much, if not all, of 2008. Holding rates at this level should help foster better economic and employment conditions and moderate inflation, Kohn said. "The Fed's advertised reluctance to cut again is a wise one," said Terry Connelly, dean of Golden Gate University's Ageno School of Business.

Here's what Fed policymakers are up against: Cut rates and bolster a weak economy where employers are eliminating jobs and consumers are pulling back; raise rates and fend off inflation. With the housing market still flailing and foreclosures at record highs, policymakers probably would shy from pushing up rates -- even with the specter of inflation -- as the country prepares to vote for a new president, some analysts said.

"The Fed has spent the last eight months ushering homeowners with adjustable-rate mortgages to safety by repeatedly cutting interest rates. They won't want to throw them back under the bus by raising interest rates too much, too soon," said Greg McBride, senior financial analyst at Bankrate.com. "Candidates would have a field day," he said.

Bernanke has said the election would not color the Fed's decisions. "Political considerations will play no role. We will be objective. We will be analytical, and we will do what is right for the economy," he said.

The Fed's political independence is crucial to its ability to maintain credibility with investors on Wall Street and around the globe. The combination of slow growth and rising inflation has raised fears the country may be headed for a bout of stagflation for the first time since the 1970s. Bernanke and other Fed officials, however, say that is not the case.

Oil prices are marching past $130 a barrel, gasoline prices are closing in on $4 a gallon nationally and food prices are skyrocketing. Given all that, Fed officials cannot afford to let inflation take hold. Once that happens, it can be difficult and painful to break inflation. It could force the Fed to raise rates, which would puts the brakes on spending. Inflation eats into paychecks, whittles away the value of investments and cuts into corporate profits.

"Inflation has been elevated for some time and prices of commodities are surging," Warsh said. "I find these trends particularly vexing at a time when global demand growth, most likely, has slowed," he said.

The Fed's rate reductions since last year have contributed to the drop in value of the dollar. The diminished greenback has been a factor pushing up prices for oil and other commodities. Kohn, however, believed the sagging dollar's role in rising commodity prices "probably has been a small one."

For now, the Fed is forecasting slower economic growth, higher unemployment and a bigger pickup in inflation for this year than it thought just a few months ago. But Fed officials acknowledge the uncertain environment makes them less confident in their projections.

And conditions can change quickly. In October the Fed signaled it was going to hit the pause button on rate-cutting campaign. At the time, Fed officials believed additional cuts might not be needed to help the economy survive housing and credit stresses. Then conditions deteriorated, forcing the Fed to do an about-face and lower rates again in December.

Wall Street Returns Still With Fears

Amid oil price anxiety, investors parse housing, spending, manufacturing data this week.

The three-day weekend probably didn't bring much relaxation to investors if they stopped at a gas station on the way to the beach or a barbeque. With the average roadside price of gasoline pushing $3.88 a gallon -- and going for well over $4 at filling stations in some parts of the country -- energy prices have become a prime worry in the stock market.

That's not to say other concerns have dissipated. As Wall Street heads into this shortened week, it remains anxious about the still-slumping housing market, not to mention the ailing financial services sector. But so much of the economy's performance later in the year will depend on energy costs, so the focus will be on crude until investors see a substantial price retreat.

What's particularly troubling about oil's rise is that everyone knows it will affect the economy, but no one is sure exactly how. Experts are split over whether it will cause broad-based inflation, further economic weakness, or both at the same time.

None of these scenarios are good ones. And the fact that the Federal Reserve says its monetary policy will likely remain on hold until it's clear which situation plays out was a big reason the stock market did so poorly last week. The Dow Jones industrial average dropped 3.91 percent, while the Standard & Poor's 500 index fell 3.47 percent and the Nasdaq composite index declined 3.33 percent.

To be sure, expensive oil isn't necessarily destructive in the long term. If the economy holds up, U.S. consumers may be able to gradually adapt their behavior and spending -- a trend that could end up actually controlling inflation.

"There are definitely signs that the high price of crude is destroying demand bit by bit," said Craig Peckham, market strategist at Jefferies & Co. "At this point, we're seeing an economy that is experiencing a headwind from the high price of crude, which at the end of the day could act as a natural regulator of the economy."

But among stock investors right now, "inflation fears have been trumping relatively benign growth numbers," he said. This four-day week will bring a variety of economic readings on the housing market, consumer spending, business spending, and manufacturing.

On Tuesday, the Commerce Department releases its April data on new home sales, expected to show a decline from March sales, according to economists surveyed Friday by Thomson Financial/IFR. Also Tuesday, the Conference Board's consumer confidence index for May is anticipated to edge lower, too.

Wednesday, the Commerce Department reports on orders for durable goods, which are essentially big-ticket items ranging from cars to refrigerators to computers. April's durable goods orders are expected to have dipped by 1.1 percent after rising by 0.1 percent in March.

Then Friday, on top of data from Chicago purchasing managers on manufacturing and from the University of Michigan on consumer sentiment, the Commerce Department will report on personal spending. Economists predict spending rose 0.2 percent in April, compared with a 0.4 percent increase the previous month.

That report will include the closely watched personal consumption expenditures deflator, which is a measure of inflation at the personal level. Economists, on average, expect that it was steady in April at an annual rate of 2.2 percent.

Investors should get an additional sense of how consumers are spending their money in earnings reports this week from Borders Group Inc., Costco Wholesale Corp., Dell Inc., Sears Holdings Corp. and Tiffany & Co.

US and Japan Called to Commit Deep Emission Cuts

European, developing nations call on US, Japan to commit to deep emission cuts for 2020.

European and developing countries urged the United States and Japan on Sunday to commit to deep cuts in greenhouse gas emissions by 2020 -- a step they say is needed to defuse a coming ecological disaster caused by global warming.

The calls at a meeting of environment ministers from the Group of Eight industrialized nations in Japan coincided with rising concern that momentum is draining from U.N.-led efforts to force a new climate change agreement by a December 2009 deadline.

The G8 nations -- the United States, Britain, Japan, Germany, Italy, Canada, Russia and France -- are largely on board with a proposal to attempt to reduce emissions of carbon dioxide and other gases responsible for global warming by 50 percent by 2050.

But a major focus of the meeting in Kobe is midterm targets for 2020, which scientists say are needed to avoid a potentially disastrous rise in world temperatures of more than 3.6 degrees Fahrenheit over levels prior to the industrial age. "A long-term goal is not a substitute for midterm, mandatory targets," said Matthias Machnig, Germany's environment minister.

The European Union has pledged a 20 percent emissions reduction by 2020, and has offered to raise it to 30 percent if other nations sign on. A U.N.-brokered agreement last December included a footnote referencing the need for cuts of between 25 percent and 40 percent.

The United States, however, has not committed to a midterm goal, demanding that top developing countries like China also commit to reductions. Japan has called for emissions by industrialized countries to begin to fall in the next one or two decades, but it too has stopped short of setting a 2020 target.

U.N.-led talks are racing to meet a 2009 deadline to strike an accord to take over from the Kyoto Protocol, whose first phase will expire in 2012. The head of those talks, U.N. climate chief Yvo de Boer, has said he fears enthusiasm for the effort was waning, and he called for G8 countries to send a stronger signal they were serious.

Japanese Environment Minister Ichiro Kamoshita, the host of the Kobe meeting, called for the world's richest countries Sunday to take the first steps in battling climate change, urging them to together reduce their emissions by more than 50 percent by mid-century.

"Developed countries should take the lead in emissions reductions and identify fair and equitable quantified national targets so that the global greenhouse gas emissions peak within the next 10-20 years," he said in an address, without specifying a reduction target.

Proponents say deep midterm cuts would force governments to take action quickly, spurring progress against warming. Goals for 2050 are important, they say, but give the world too much time to take steps that ought to be taken more urgently.

"Otherwise we are going to have a very nice long-term goal but no policy implication, (which is) what we really need, given the urgency of climate change," said Jos Delbeke, head delegate from European Commission.

Developing nations also have been pushing richer countries to make reduction commitments, arguing that global warming is a problem caused by industrialization that fueled the rise to affluence in North America, Europe and Japan.

Masnellyarti Hilman, Indonesia's head delegate, said her country aims to reduce emissions by 17 percent by 2020 and 22 percent by 2025. Indonesia is one of the leading carbon dioxide emitters in the world because of widespread deforestation. But she said Indonesia and other developing countries were looking for strong signals from G8 countries that they are serious about reducing their own emissions quickly.

"For the long-term, I think the majority (have) already stated their target, but for the midterm target, they need to discuss," she said. "I think Japan (has) also not set a midterm target. We hope that they will take the lead."

Weekend's Featured: Renewed Manipulation in Commodities

Commodities Are Being Manipulated Again Like in the Past?

In 1980, the Hunt brothers cornered the silver market, causing an epic price spike and then a bust. Crude oil is close to $130 a barrel. Is something similar at work? The US Congress suspects as much and held a hearing on market manipulation in Washington on Tuesday.

Long-term investors in the sector believe that the big institutions that have entered in recent years are "accidental Hunt brothers". Investment in indices based on commodity futures have risen from $13bn five years ago to $260bn now, according to Michael Masters, an investor who testified. The rise in investors' demand for oil futures is almost equal to the increase in demand from China.

Historically, futures markets are naturally short (betting on a fall) as producers tend to buy futures to guard against falls in prices. In 1990, only 13 per cent of open interest in crude oil futures was long. That is now up to 58 per cent - probably thanks to new investors.

Changes to indices have dramatic effects on prices. Crude oil briefly dipped below $50 early last year after a cut in the weighting towards energy in the GSCI index. And there is no shortage of commodities in the US - although many fear there are constraints elsewhere in the supply chain.

There are arguments against this. Big economic factors are at work, notably the weakness of the dollar. Federal Reserve officials note that there is no sign of big increases in inventories of commodities. This would be expected if speculators were betting on prices to rise. Thinly traded metals such as cobalt have also enjoyed sharp run-ups.

These cannot be attributed to speculators. Speculation appears to be changing the way commodity markets work. A debate is needed and changes to regulations may be justified. But speculators cannot take all the blame for the price spike.

Weekend's Featured: Carbon Trading Could Reach 2 Trillion Euros by 2020

Global Market in CO2 Emission Rights Could Be Worth 2 Trillion Euros by 2020.

The global market in CO2 emission rights could be worth two trillion euros (3.14 trillion dollars) by 2020 if the United States joins the scheme, analysis group Point Carbon said on Thursday.

The United States, which has not ratified the Kyoto Protocol that calls for the mechanism, could in 2020 account for 67 percent, or 1.25 trillion euros, of emissions rights if it decided to introduce a US emissions trading system, the Point Carbon study said.

Carbon dioxide (CO2) is one of the main greenhouse gases blamed for climate change. The carbon market is aimed at encouraging industries to invest in clean technology and buy emissions rights from others that have a surplus.

The second-biggest market would be the European Union -- so far the only one in existence -- and would account for 23 percent of emissions rights, the study showed. The total transaction volume forecast would be 38 billion tonnes of carbon dioxide equivalent for the United States and nine billion tonnes for the EU.

The calculations are based on an assumed carbon price in 2020 of 50 euros per tonne, twice the current price in Europe. They also assume that a so-called cap-and-trade scheme will have been introduced in the United States by 2020 and that the EU will have introduced a 25 percent reduction target for emissions, including those from aviation.

The calculations assume that trading schemes will have become operational in Australia, New Zealand, Canada, Japan, Korea, Mexico and Turkey.

Weekend's Featured: Tech Stocks Overtake Financials in S&P 500

Tech overtakes financials as largest sector in S&P 500; energy gaining as oil prices rise.

For the first time since the bubble burst earlier this decade, information technology stocks have overtaken financials as the largest sector by market value in the Standard & Poor's 500 index. But that alignment might not last for long -- soaring oil prices have helped lift the energy sector to a close third.

For the last 10 years, tech and financials have gone back and forth as the leading sector in the index. Tech grabbed about 32 percent of the S&P by early 2000, but quickly gave up that lead as the sector lost its luster amid the dot-com crash.

A little over a year later, financial stocks had become Wall Street's favorites, and kept the top spot in the S&P until this past Tuesday. While they never reached the heights tech did during the boom years, financials did account for more than 22 percent of the S&P by late 2006.

Now, both sectors hover just above 16 percent, with tech ahead marginally. And energy companies, led by oil producers like Exxon Mobil Corp. and Chevron Corp., could be in position to soon take the lead.

Much of the switch can be attributed to the devastation of the financial sector in the last six months, as the credit crisis and housing recession took their toll. Melissa Roberts, senior vice president of quantitative research at Keefe, Bruyette & Woods, noted that 16 of the 92 financial stocks in the S&P have fallen 30 percent or more since the index peaked in October, with diversified financial companies like Citigroup Inc. and JPMorgan & Co. among the hardest hit.

Some tech stalwarts like IBM Corp. have gained in recent months. But Howard Silverblatt, S&P's senior index analyst, noted that while IT performed slightly better than the S&P overall, most of the sector didn't "earn" its way to the top. "It's not that tech did so much better, it's that the financials did so bad," he said. "The financials gave it to them."

That might reflect some lingering wounds from tech's downfall. "There's still a specter of the bubble that is hovering over tech, even though the sector is much different from it was eight years ago, let alone four years ago," said Brian Belski, an analyst with Merrill Lynch. "People learned their lesson in tech because they got burned, and it's taken them years to want to invest in them again."

He suggests tech could gain more strength and more firmly establish itself as the leading sector again. "We haven't seen the big shift in leadership, but fundamentally we think it can very much happen," Belski said. "Not because tech looks attractive on a valuation basis, but fundamentally it is a much different sector than it was four years ago."

For instance, in 1999, players like Cisco Systems Inc. or Hewlett-Packard Co. would see their shares routinely rise or dive by 10 percent. These companies now trade much more conservatively, while the financials are the ones with the big swings.

Still, the dark horse may turn out to be energy, which has leaped in the past year as oil prices have doubled. "You see a lot of what's leaving the financials going into energy," Roberts said. "That's the No. 1 performer."

And the sector is gaining momentum. Silverblatt said that when the S&P hit its all-time high in October, energy made up about 11.6 percent of the index. It reached 14.9 percent on Thursday, the highest percentage the sector has occupied since the index's current configuration was developed in 1989. "That's an enormous gain in a short period of time," he said. "Their stocks during that time period were up 13.2 percent."

One factor that's hard to gauge is whether politics will enter the picture. Big oil executives were called to testify this past week before both houses of Congress, and oil's march past $135 a gallon may prompt politicians to try to apply new taxes that could limit energy company profits, or take other measures which could potentially hurt energy stocks.

Also, energy's rise has hit other sectors of the S&P, like consumer discretionary stocks, as companies have tried to pass on higher costs to customers, Silverblatt noted. If oil reaches the $150 a barrel some predict, those additional costs will spread throughout the economy, he said, and could hurt both corporate spending for things like IT and consumer spending for both staples and discretionary items. "The race right now between milk and gas -- which hits $4 a gallon first -- is neck and neck," he said.

Market Forces Can Cause Tough Times

When the going gets tough, politicians very quickly lose faith in markets.

This is especially true when the cost of basic necessities for the people who keep politicians in power, things such as food and energy, keep going up and up in price with no end in sight.

This is especially true when there is more than a notion that market participants themselves have something significant to do with that price spiral that goes beyond real-world fundamentals.

This is when the worst word in the politician's lexicon becomes speculation, usually used alongside the word rampant. This is especially true now. So witness the talk among government types in various parts of the world about restricting or ending trading in various commodities.

Witness the spectacle in the U.S. of energy company chief executives hauled up to Capitol Hill to take a public flogging about high gasoline prices at the pump and their sizable compensation packages. It's easy to be cynical about this often reprised drama. Now these elected officials can go to their home districts and say we're as angry as you are and didn't you see us hold those executives accountable.

Everyone loves markets when values are going up and inflation is staying down. Then there are plenty of political speeches about the wisdom of the marketplace to best allocate capital to where it's most productive. There's even then some faint praise for speculators for their ability to add liquidity to markets, greasing the wheels of buying and selling, and for their willingness to take on risk that producing entities would like to fob off.

No one in government loves a speculator now and that is a dangerous thing. As imperfect and as in need of smart regulation as markets always are, they also, to paraphrase the line about democracy, represent the least bad system yet devised. And political decisions made in these circumstances stick around to retard the ability of markets to do the things officials like to crow about in good times.

Even in oil, where major producers work together to alter the pure give and take of supply and demand, one can see basic benefits in leaving prices to find their own level. Without minimizing the pain skyrocketing energy costs mean for individual families and whole nations, it is also worth recognizing that people won't in large numbers give up comfortable lifestyles without a compelling economic kick in the pants.

Given that fossil fuels are a finite entity and the general rise in incomes for a larger percentage of the world will inexorably increase demand for those finite supplies, something at some point has to give. The rocketing up of energy prices, even if not justified by today's fundamentals, will accelerate that necessary shift. The impetus to find, invent and use alternative fuels, alternative means of transportation, even alternative societal structures, has been kicked into high gear.

The decision announced Thursday by Ford Motor Co. to cut back on pickup truck and sports utility vehicle production because of increased demand for smaller, more fuel-efficient vehicles is just one small example. There will be so much more, especially if the perception globally sticks that high energy prices are here to stay.

Markets will help push along the "creative destruction" that will cripple some industries, and launch new ones. There will be real pain, but also real change. Markets can make that happen. Governments can try by fiat to change people's behavior, but it never has the same hold as decisions made en masse by people confronting new market realities.

US Must Fight to Retain Competitive Edge

Business leaders at Chicago summit say US must fight to maintain global competitive edge.

As the nation's economy flirts with a recession, corporate executives, politicians and academics meeting in Chicago on Thursday said America's businesses must be prepared for a fight if they're to retain their global competitive edge.

"We're very competitive today in most industries," said Jim McNerney, chairman and chief executive of Chicago-based Boeing Co. "But there is a huge threat to that position in the next five to 10 years. And we better respond."

The U.S. Department of Commerce sponsored Thursday's meeting, which is part of a series of summits sponsored by the Bush Administration being held around the country. Commerce Secretary Carlos Gutierrez said he hopes business owners at the meeting get a better understanding of free trade agreements -- which have grown in number under Bush's tenure -- that may allow companies to enter overseas markets.

And he said U.S. companies need to become more agile so they can quickly respond to economic shifts. "We know today that every major country in the world is getting in the game," he said. "It's harder to compete ... and we are no longer on our own."

A report released last week in Switzerland shows the U.S. topped a global competitiveness ranking for the 15th consecutive year. But some officials worry the faltering economy means America could soon lose its top spot to other nations. "I think we should be very worried," said Louis Gerstner, the retired chairman and chief executive of IBM Corp.

Panel members said a focus on education -- particularly in skilled technical areas as well as math and science instruction -- will be vital to competitive growth growing forward, especially as the U.S. tries to expand its track record of fostering entrepreneurialism.

"The competition needs to be looked at as something to be embraced," said Jim Owens, the chairman and chief executive of Peoria-based Caterpillar Inc. "Competition can be fun. It doesn't mean it's easy, but we need to take it on."

Oil Pushes Past $135 While Dollar Weakens

Oil climbs to record above $135 a barrel on supply worries, weak dollar.

Oil prices rose above $135 a barrel for the first time Thursday, with supply worries, global demand and an ever weakening U.S dollar driving crude futures up. The world's top energy watchdog is preparing a sharp downward revision of its oil-supply forecast, according to a report in The Wall Street Journal.

Light, sweet crude for July delivery rose as high as $135.09 before falling back slightly. By midday in Europe, the contract stood at $134.37 a barrel in electronic trade on the New York Mercantile Exchange, up $1.20 on Wednesday's close of $133.17. That settlement price, up $4.19 on Tuesday's close, marked NYMEX crude's largest one-day price advance since March 26. "Simply put, this is a market you cannot afford to be short in," said U.S. analyst and trader Stephen Schork about Brent futures in his Schork Report.

With gas and oil prices setting new records nearly every day, analysts have begun to wonder what might stop prices from rising. There are technical signals in the futures market, including price differences between near-term and longer-term contracts, that crude may soon fall. But with demand for oil growing in the developing world, and little end in sight to supply problems in producing countries such as Nigeria, few analysts are willing to call an end to crude's rally.

"The sentiment in the market is very bullish at the moment," said David Moore, commodity strategist with the Commonwealth Bank of Australia in Sydney. "The U.S. dollar was weaker last night, and also the U.S. EIA report showed an unexpected decline in U.S. commercial crude oil inventories, so there's a combination of factors pushing the oil prices higher."

Crude prices breezed past $130 early Wednesday, then accelerated when the U.S. Energy Department's Energy Information Administration said U.S. crude inventories fell by more than 5 million barrels last week. Analysts had expected a modest increase.

Investment bank Goldman Sachs last week revised its oil price forecast for the second half of 2008 from $107 to $141 a barrel. But some analysts saw the new target becoming a reality much sooner. "Futures are moving so fast that under the current volatility that goal could already be reached within the end of the week," said a report by Olivier Jakob of Petromatrix in Switzerland.

Some analysts say crude has been boosted in recent days by especially strong demand for diesel in China, where power plants in some areas are running desperately short of coal. The Wall Street Journal reported Thursday that the Paris-based International Energy Agency is in the middle of its first attempt to comprehensively assess the condition of the world's top 400 oil fields.

For years the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently.

The agency is now concerned that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day in production over the next two decades, the paper reported.

That view has been echoed by many analysts. "The market is really structurally tight ... oil demand is not growing that fast but supply is constrained," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

In the U.S. Energy Information Administration report, gasoline inventories also fell, which took the market by surprise. Inventories of distillates, which include heating oil and diesel fuel, rose less than analysts surveyed by Platts had expected.

While the dollar gained slightly against the euro and the Japanese yen from overnight levels, it fell against the British pound and showed a new downward momentum. The 15-nation euro bought $1.5750 in morning New York trading, down from $1.5780 in late New York trading Wednesday.

Investors see hard commodities such as oil as a hedge against inflation and a weak dollar and pour into the crude futures market when the greenback falls. A weak dollar also makes oil less expensive to buyers dealing in other currencies. Many investors believe the dollar's protracted decline over the past year has been the most significant factor behind oil's rise from about $66 a barrel a year ago.

China Thanks Foreign Companies for Quake Help

China tries to dispel criticism of foreign companies, issues public thank you for quake help.

China's commerce minister took the unusual step of thanking foreign companies on national television Thursday for donating earthquake aid, dismissing accusations spread on Chinese Web sites that they were doing too little.

"We have seen the greatest amount of donations from the international community ever in history," Chen Deming said at a news conference. He rejected as "totally unfounded" complaints posted on Chinese Web sites that foreign companies were "international misers."

As of Thursday, foreign companies had given 1.7 billion yuan ($245 million) in cash and 200 million yuan ($29 million) in supplies, including food, tents and bottled water, Chen said. "I would like to take this opportunity to thank relevant international agencies, multinational companies and foreign-invested enterprises for the support they have given," Chen said.

Companies including Nokia Corp., McDonald's Corp., Wal-Mart Stores Inc. and Samsung Electronics Corp. began pledging money and supplies less than 24 hours after the May 12 quake hit Sichuan province.

Still, nationalistic Chinese Web surfers accused foreign companies of failing to provide enough help. Some postings called for boycotts of individual companies or a broader rejection of American or South Korean brands.

"Wake up, everyone. Support Chinese companies instead," said a posting on myspace.com's Chinese service, myspace.cn. "Money should stay in Chinese hands!" Chen, the commerce minister, said his ministry might be to blame for the criticism. "Maybe we haven't done sufficient publicity for these entities to thank them for their contributions," he said.

Companies say they have felt no effect from boycott calls. "We feel very proud of what we've done. We've done a lot," said Thomas Jonsson, a spokesman for Nokia, which gave food, tents and mobile phones for rescuers. On Wednesday, it added a 35 million yuan ($5 million) pledge for reconstruction.

McDonald's Corp. said it has served more than 40,000 meals to quake survivors and rescue workers and pledged 10 million yuan ($1.5 million) on Wednesday to build new schools in quake areas. "We've been involved in helping and responding since day one," said McDonald's spokeswoman Lisa Howard. Comments posted on online bulletin boards also criticized Coca-Cola Cos., Yum Brands Inc.'s KFC restaurants, Toyota Motor Corp. and French retailer Carrefour SA.

Last week, McDonald's initially pledged 1 million yuan ($145,000) after the quake. Samsung said it was giving 30 million yuan ($4.3 million) in cash, plus 5,000 emergency aid kits and 15,000 blankets. Coca-Cola gave 10,000 cases of bottled water and promised another 5 million yuan ($720,000) in cash and supplies. Carrefour pledged 2 million yuan ($150,000) and sent truckloads of food, water and tents to the disaster area.

Chinese nationalists often have conflicted feelings toward foreign companies, which have helped to fuel the country's economic boom but are seen as rivals to local companies. Carrefour stores in several Chinese cities were the target of small protests on May 1 as critics vented anger public efforts in Paris to disrupt the Olympic torch relay.

Among other companies, Wal-Mart said it has given food, some 3,000 tents and other aid worth 3 million yuan ($430,000) and used its distribution network to move supplies to survivors. "We are reacting very quickly in support," said Wal-Mart spokesman Jonathan Dong. Dong noted that after China's devastating winter snowstorms, Wal-Mart also donated $1 million to the Chinese Red Cross for food and other aid in disaster areas.

Last week, Nokia gave 5,000 mobile phones to quake rescuers and sent employees into the disaster area to maintain them, Jonsson said. "For us initially the most important thing was to get our relief effort going and once we had it going we could communicate about it, but some people were quick to think we weren't doing anything," he said. "We've seen these criticisms going away and our efforts being better understood as the days go along."

Oil Tops $130 Amid Supply Concerns

Oil prices rise to record above $130 a barrel on supply concerns, weaker dollar.

Oil prices rose above $130 a barrel Wednesday for the first time, as supply concerns mounted and the dollar weakened. Light, sweet crude for July delivery hit a record $130.47 a barrel in electronic trade on the New York Mercantile Exchange after closing at $128.98 in the floor session. By afternoon in Europe, it had retreated to $129.77 a barrel, up 79 cents.

The dollar had become less of a factor as attention turned to supply and demand concerns, but that seems to have changed this week. "We've seen an about-face turn on the dollar in the last couple of days," said Mark Pervan, senior commodity strategist at Australia & New Zealand Bank in Melbourne. "It looked like it was starting to recover, but I think there's a less certain outlook at the minute and ... enough reason to be buying commodities as a currency hedge again."

On Wednesday, the dollar was trading at 103.26 yen, down from the 104-105 range last week, and the euro has started to climb again against the dollar, rising to $1.5755 by the early afternoon in Europe, up from $1.5669 late Tuesday in New York.

Investors see hard commodities such as oil as a hedge against inflation and a weak dollar and pour into the crude futures market when the greenback falls. A weak dollar also makes oil less expensive to buyers dealing in other currencies. The performance Wednesday was the 11th time in the last 13 sessions that crude prices have hit trading or closing records, if not both.

Oil futures are now selling for about twice what they were just a year ago. Prices have been propelled by a number of factors, including worries about insufficient supply, soaring global demand and a sliding dollar that has made oil cheaper for some buyers overseas. Speculative buying has also helped push prices higher, analysts say.

Industry observers in recent days have also pointed to especially strong demand for diesel in China, where power plants in some areas are running desperately short of coal and certain earthquake-hit regions are relying on diesel generators for power. The country is also ramping up diesel imports ahead of the Olympics, analysts say, driving up prices.

Besides that, "major Chinese petrochemical companies are really struggling to keep up with demand. The trend is that we're going to continue to see pretty strong crude imports (from China) going forward," Pervan said. "That's what the market is really getting on board."

For the second time this week, a high-ranking official in the Organization of Petroleum Exporting Countries suggested oil output would not increase any time soon. Venezuela's state-run news agency quoted OPEC chief Abdalla Salem el-Badri as saying Tuesday that "there's no scarcity of oil in the market" because international oil supplies were very high.

The statement from El-Badri, who met in Caracas with Venezuelan President Hugo Chavez, echoed a comment by Algerian Energy Minister Chakib Khelil, OPEC's current president, who said Monday that the group would not boost output before the September meeting.

That added to worries about gasoline and diesel supplies at the start of the summer driving season in the U.S., where retail prices for the motor fuels are already at record levels. Many analysts expect prices for both fuels will continue to rise.

US Urges China to Join IEA

US calls on China to join global energy group, help stabilize oil markets.

A U.S. official urged China on Tuesday to join the International Energy Agency -- a group of major oil consumers that includes the United States and European governments -- and aid its efforts to keep petroleum markets stable in times of crisis.

"China's participation in the IEA's collective emergency response system would make the system stronger," Daniel S. Sullivan, an assistant U.S. secretary of state, said in a speech at a business conference.

China is the world's second-largest oil consumer after the United States. Its surging demand for energy to fuel its booming economy has stirred unease abroad about the possible impact on global prices, as well as over China's intentions as state-owned companies pursue access to supplies in Africa, Central Asia and elsewhere.

A key function of the 27-nation IEA is to coordinate the release of petroleum from national stockpiles to stabilize prices if crises threaten to disrupt supplies, Sullivan said. He said that was last done in 2005 in response to Hurricane Katrina in the United States.

"This helped calm oil markets, which clearly benefited the United States but also other major oil consumers like China," he said. "I believe it is important for China and other key economies in the world, such as India, to prepare to eventually join the IEA as full members." The conference was organized by the Institute for 21st Century Energy, a Washington think tank created by the U.S. Chamber of Commerce.

Sullivan, who is the American envoy to the Paris-based IEA, said the group has invited Beijing to take part in an exercise next month to practice responding to a possible emergency, and he urged the Chinese government to accept.

"China's involvement would benefit China and it would benefit the IEA," he said. "China might also consider a declaration that it plans to pursue membership in the IEA. This could help the anxiety expressed in some quarters over China's intentions as it pursues greater energy security."

The Chinese Foreign Ministry referred questions about whether Beijing might join the IEA to the Cabinet's National Development and Reform Commission, which oversees energy policy. The NDRC did not immediately respond to requests by phone and fax for comment.

China long met its energy needs from domestic oil fields but became a net importer in the 1990s. China is building a strategic oil reserve meant to help insulate it from possible disruption in foreign supplies. The United States maintains a similar stockpile. Beijing and Washington agreed in December as part of their long-range Strategic Economic Dialogue to cooperate in constructing and managing oil stockpiles.

Sullivan noted that a precondition for joining the IEA is membership in the Organization of Economic Cooperation and Development, a group of major economies, a status that China lacks. But he said the United States doesn't think that has to be mandatory for Beijing, given its importance in global energy issues. The IEA also includes Japan, Australia and South Korea.

Sovereign Wealth Funds Support US Economy

Backers say sovereign wealth funds have supported US financial system, critics remain wary.

Mideast bankers say sovereign wealth funds -- the vast government-directed pools of investment money that have raised controversy in the West -- have helped save the U.S. financial system from collapse.

But World Bank President Robert Zoellick cautioned that the funds will continue to raise international concern as countries question whether their investments are driven by the search for profit or by political interests that could threaten national security.

The United States and the European Union have pushed sovereign funds to provide greater disclosure about their investment strategies and are backing an initiative by the International Monetary Fund and the Paris-based Organization for Economic Cooperation and Development to develop a voluntary set of best practices for the investment vehicles.

But many bankers and investment managers say the concerns are overblown and point out that the funds swooped in to provide much-needed capital to the U.S. financial system when it was recently reeling from the mortgage crisis. They maintain the funds are passive investors with no political agenda.

"There is no need to be alarmed," former Pakistani Prime Minister and Citigroup Inc. executive Shaukat Aziz said Monday at the World Economic Forum on the Middle East, an offshoot of the annual gathering of political and business leaders in Davos, Switzerland.

"In fact, I should say we should give a vote of thanks to all the sovereign funds ... who came in and saved the global financial system," added Aziz on the second day of the three-day summit held in the Egyptian Red Sea resort town of Sharm el-Sheik.

Sovereign funds from China, Singapore and the Middle East have invested more than $40 billion in Citigroup Inc., Merrill Lynch & Co. Inc., and Swiss bank UBS since late last year. Analysts estimate that approximately 40 sovereign funds worldwide control about $2.5 trillion in assets, a total that could reach $12 trillion by 2015. Sovereign funds in the Mideast and Russia have surged in recent years from soaring oil prices, while China has benefited from a growing trade surplus with the rest of the world.

Cyrus Ardalan, vice-chairman of London-based Barclays Capital and Board member of the Dubai International Financial Centre, said the size of sovereign wealth funds should be kept in perspective relative to other financial assets. He said the top 300 pension funds in the world have $10 trillion in assets, and U.S. consumers have $45 trillion. "Even if they (sovereign funds) were to grow by a factor of two to three times, they are modest in comparison to the total pool of assets managed by institutional investors," said Ardalan.

Many finance professionals say sovereign funds should be treated no differently than private pools of capital. Otherwise, countries risk losing out on a key source of investment. "I think yes, more disclosure is important, but I would say that even on this point I think we have to be cautious not to ask from the sovereign wealth funds something that we don't ask from other large institutional investors," said Ardalan.

But Zoellick pointed out that Western concerns about sovereign funds could not be dismissed given the history of governments using investment for political purposes. "I do think however we need to be fair in analyzing one of the reasons for the concern here is that the history of government allocation of capital has not been such a good one over time," said Zoellick. "So people are legitimately asking ... what are the purposes, what are the return objectives?"

Many Europeans have been wary of Russian energy investment in recent years in eastern Europe and the leverage over oil and gas supplies it gives the Russian government.

Ibrahim Dabdoub, head of the National Bank of Kuwait, said sovereign funds managed by U.S. allies in the Middle East should not be analyzed in the same light as those run by much larger countries with more international influence. "And the problem that we have here is they bundle us with China and Russia," said Dabdoub. "Most of these sovereign wealth funds are owned by countries that are so small."

The size of tiny oil-rich Gulf countries has not stopped the U.S. government from worrying about the impact of their investments. Lawmakers effectively torpedoed an effort by an Emirati company to manage six of the largest ports in the U.S. in 2006, contending the Bush administration and the agency responsible for reviewing security issues had not fully considered all of the security concerns that had been raised.

Earlier this year, officials from the Emirati capital of Abu Dhabi, home to the world's largest wealth fund, sent a letter to the Bush administration and other Western governments spelling out the principles that guide its investment procedures. The White House later announced that it had reached agreements with both Abu Dhabi and Singapore that they would not use their sovereign wealth funds to further their political goals.

Zoellick said he disagreed with the Congressional response to the Dubai ports deal, but added that politicians in a democracy could not ignore public concerns about national security. "It may turn out that government ownership is fine," said Zoellick. "But it could be a problem if you have a certain country that wants to buy a certain company to get the technology or something else."

Japan Leaves Interest Rates Unchanged

Bank of Japan keeps interest rates steady amid worries about global slowdown.

Japan's central bank kept interest rates steady Tuesday as widely expected amid lingering worries about a global slowdown. The seven-member policy board was unanimous in keeping the benchmark overnight call rate unchanged at 0.5 percent at the end of a two-day meeting, according to the Bank of Japan.

Soaring gas prices, rising material costs and signs of slower global growth are weighing on the world's second-largest economy, which depends heavily on exports. Economists predict that the Bank of Japan is likely to do nothing for about a year unless economic signs change dramatically.

Much of last year, market watchers had expected the BOJ would raise its key interest rate as Japan's economy gained steam. But the global economic turmoil set off at midyear by the U.S. subprime mortgage crisis scotched that view, and a jittery market began to expect a move in the opposite direction -- a rate cut.

The Japanese economy has proved remarkably solid recently. Last week, the government said the economy grew at a stronger-than-expected 3.3 percent annual pace in the first quarter, racking up its third consecutive quarter of growth. Still, economists warn that export growth could stumble if overseas economies falter, and domestic spending will probably stay weak if paychecks aren't growing.

Bank of Japan Gov. Masaaki Shirakawa, who took office last month, acknowledged energy and raw material costs are expected to stay high for some time. "We are looking closely at downside risks to the economy," Shirakawa told reporters, indicating that a rate hike was unlikely for some time.

The Bank of Japan echoed such sentiments in its economic report issued Tuesday, warning that the pace of the nation's growth was slowing because of the high prices of energy and raw materials. The language was similar to what the bank said the previous month.

Since 1999, Japan had kept interest rates generally at about zero to jump start a lagging economy. It ended its zero interest policy in July 2006 when it raised its key rate to 0.25 percent, the first hike in six years.

In a recent report, Lehman Brothers said expectations for an interest rate cut had also dwindled. The global economy was unlikely to worsen so much that pressure for a rate cut would rise, the investment bank said. A rate increase was unlikely until the latter half of next year, it said.

Japanese Finance Minister Fukushiro Nukaga said higher material and oil costs remain a challenge for the world economy. "The worst appears to be over for the global financial market, but recently rising oil and food prices are making economic policy management difficult," he said at a symposium in Tokyo.

Wall Street Watches Higher Oil And Housing

This week, Wall Street faces more readings on inflation and housing market.

The rising price of oil isn't just swelling Americans' energy bills -- it's also holding back their stock portfolios. Wall Street got some seemingly auspicious signs last week about home construction and consumer level inflation. But with oil climbing to new records, and more reports expected this week on rising prices and the housing market, investors are holding on to a conservative stance.

Oil's stubborn trek to record highs is a major reason why investors have yet to push the major indexes into positive territory for the year. Just this month, crude has so far tacked on about $13 to breach $127 a barrel, while the price of a gallon of gasoline for the average U.S. driver has soared 17 cents to nearly $3.79.

Those price surges cast an air of skepticism over last week's report from the Labor Department showing a modest 0.2 percent uptick in consumer prices in April. Meanwhile, the Commerce Department's upbeat report on housing starts also met with some doubt among investors, particularly because the huge rise was due mostly to apartment construction, which can vary widely from month to month.

"So are we at an inflection point in housing right now? Very possibly. But let's be clear here. Nothing in the data suggests we're about to see a sharp rebound," wrote Bernard Baumohl of the Economic Outlook Group LLC in a research note.

Still the market, betting that better times are not that far off, finished the week with a solid advance. The Dow Jones industrial average rose 1.89 percent, while the Standard & Poor's 500 index gained 2.67 percent and the Nasdaq composite index picked up 3.41 percent.

The existing home sales report will be key this week. The National Association of Realtors is expected to report on Friday that sales of existing home fell again in April, according to the median estimate of economists polled by Thomson/IFR. Another important piece of data will be the Labor Department's Tuesday report on producer prices, is expected to show a 0.5 percent rise.

The information could help Wall Street determine whether it is consumers or businesses who are paying more of the rising costs of energy, food and other commodities. Neither prospect is positive for Wall Street; businesses need to hold down costs to pull in healthy profits, while consumer spending accounts for more than two-thirds of gross domestic product.

"There may be some factors that are helping to control inflation," Strauss said, noting that many businesses are holding back wage increases. "That's a shock absorber to inflation." But he added, "consumers are feeling the pinch here. What they have to spend on nondiscretionary items is going up. At the same time, real income growth is being challenged."

Investors will get more information on how strapped consumers are in earnings reports next week from retailers including Home Depot Inc., Hewlett-Packard Co., Staples Inc., Target Corp., BJ's Wholesale Club Inc., Barnes and Noble Inc. and Gap Inc.

As data pile up, they will give not only investors but also the Federal Reserve a better idea of where the economy is headed in the second half of the year. On Wednesday, the Fed releases minutes from its April 29-30 meeting, when it lowered key interest rates by a quarter percentage point and flagged inflation as a growing concern. Many investors expect the central bank to keep rates on hold at its next meeting in late June to keep inflationary pressures in check.

Inflation Threatens Ex-Soviet Countries

European reconstruction bank says inflation most pressing problem in post-Soviet countries.

Rising inflation is severely hurting Ukraine and other Eastern European nations, while the global credit crunch will slow growth in those countries dramatically in coming months, the European Bank for Reconstruction and Development said Sunday.

"Inflation, now in double digits in many countries, is the region's most pressing current problem. If left unaddressed, inflation could risk price-wage spirals, exchange rate realignments, or could force a belated and sharp response by monetary policy," the bank said in a statement.

Gathering in Kiev for their two-day annual meeting, bank officials were scheduled to discuss the impact of global economic turmoil and soaring food prices, among other topics. The worldwide credit crunch could sharply pinch markets in ex-Soviet bloc nations, and as a result, the bank said it had downgraded gross domestic product growth projections for Ukraine and other countries.

Overall growth of 6 percent is expected in Eastern Europe this year, compared with 7.3 percent in 2007, the bank said. Real GDP growth in Ukraine is expected to slow to 5.5 percent in 2008, the bank said. The government had earlier projected a 6.8 percent pace.

The bank also attributed the slowdown to rapid increases in consumer prices, which will affect household incomes and consumption. Neighboring Russia, meanwhile, will continue its rapid oil- and gas-fueled economic expansion, with growth expected to reach 7 percent this year, the bank said.

The EBRD is the largest financial investor in Ukraine, investing up to $1.6 billion annually into projects ranging from banking to infrastructure. Governors of the EBRD -- which is meeting in Kiev for only the second time -- were also expected to appoint German Deputy Finance Minister Thomas Mirow as a successor to President Jean Lemierre.

Weekend's Featured: Biofuels Must Not Threaten World Supply of Food

EU Official: Biofuels Must Not Deprive the World's Poor of Food, More Environmentally Friendly Biofuels Are Needed.

Biofuels must not deprive the world's poor of food, a senior European official said, as he proposed a greater focus on second-generation biofuels that would be more environmentally friendly.

Guenter Verheugen, a vice president of the European Commission, was speaking against a background of growing doubts about whether the European Union should continue a policy of elevating biofuels to an environmental priority.

"It makes no sense to make car fuel from plants that ought to provide human and animal food," said Verheugen in the Bild am Sonntag newspaper, extracts of which were made available Saturday.

The accent should be instead on research into second-generation biofuels, "for example technology using hydrogen," added Verheugen, who is the EU commissioner responsible for enterprise and industry.

The biofuel industry fears the controversy could inhibit research into second-generation biofuels which are environmentally more friendly since they would be made from non-edible agricultural waste such as straw. "What matters to the commission is sustainable development," Verheugen said. "It will not work if production of basic foodstaffs is hindered or tropical forest is cut down" for biofuels.

The 27-nation European Union wants biofuels to make up 10 percent of all EU vehicle fuel by 2020, but the target has come under fire in the face of soaring global food prices that have hit poor countries particularly hard. Biofuel development is part of a wider package to reduced EU greenhouse gas emissions by 20 percent by 2020 and to reduce dependence on fossil fuels.

Japan Giving Loans Up to $4.8 Billion

Japan plans to extend up to 500 billion yen (4.8 billion dollars) worth of low-interest loans to developing countries over the next five years to help them fight global warming, a report said Thursday.

The first batch of the new loans would go to Indonesia and total some 20-30 billion yen, the Nikkei economic daily said, adding Nigeria and Guyana are also candidates of aid recipients in the future.

Japan's government plans to provide the loans for alternative energy projects such as wind and solar power generation, the installation of energy-saving equipment at power plants and forestation projects, it said.

The new yen loans would carry annual interest rates of 0.4-0.5 percent, substantially lower than the already low interest rates of some 1.0-1.2 percent now charged on 40-year loans provided by Japan, the Nikkei said.

Japan is hoping to shape the course of negotiations on a new climate treaty, which would cover the period after the Kyoto Protocol's obligations expire in 2012, when it hosts July's summit of the Group of Eight rich nations.

The Nikkei said Tokyo hoped to win support for its plan from nations receiving the yen loans. In talks on a post-Kyoto treaty, Japan has pushed hard for a "sectoral" approach to global warming, in which each industry would have its own efficiency targets.

Weekend's Featured: Biodiversity Loss Wipes Out 6% World GNP, Reducing Wildlife Populations

Biodiversity Loss is Costing the World $3.1 Trillion a Year or 6% of Its GNP.

The destruction of flora and fauna is costing the world two trillion euros (3.1 trillion dollars) a year, or six percent of its overall gross national product, according to a report trailed by German news weekly Der Spiegel.

The European Union and German environment ministry-led research, entitled "The Economics of Ecosystems and Biodiversity," will be presented on Monday at the ninth conference of the UN Convention on Biological Diversity in Bonn.

In its edition out Monday, Der Spiegel will present extracts from the paper, with the study's lead author, Pavan Sukhdev, a senior figure with Deutsche Bank in India, writing that "the world's poor bear the brunt of the cost."

Der Spiegel also says that German Chancellor Angela Merkel will announce a sharp increase in German funding to combat deforestation in line with Norway, which ploughs 500 million dollars annually into forest retention.

Deforestation -- a huge factor in species loss and global carbon emissions contributing to climate change -- is a central theme of this year's conference in Bonn, formerly the capital of West German.

One in four mammal species, one in eight among birds, a third of amphibian creatures and 70 percent of all plant life made the most recent endangered list issued by another UN agency, the World Conservation Union (WCU).

Wildlife Populations Fall Globally

In the meanwhile, the world's wildlife populations have reduced by around a quarter since the 1970s, according to a major report published Friday by the WWF conservation organization. Marine species have been particularly hard hit as the human population booms, while numbers of birds and, fish and animals have also gone down, said the WWF in a report.

The study comes ahead of next week's UN convention on biological diversity in the former West German capital Bonn, which will discuss aims to achieve a "significant reduction" in the current rate of biodiversity loss by 2010.

The WWF, the world's largest independent conservation body, said it was "very unlikely" that the UN would meet its targets, despite the decline appearing to flatten off in recent years. The WWF's Living Planet Index, which tracks the fortunes of nearly 4,000 populations of 1,477 vertebrate species from 1970 to 2005, showed an overall decline of 27 percent.

Over-fishing and hunting, along with farming, pollution and urban expansion, were blamed. WWF director general James Leape warned: "Reduced biodiversity means millions of people face a future where food supplies are more vulnerable to pests and disease and where water is in irregular or short supply.

"No one can escape the impact of biodiversity loss because reduced global diversity translates quite clearly into fewer new medicines, greater vulnerability to natural disasters and greater effects from global warming."

The marine LPI showed a 28-percent decline with a dramatic drop between 1995 and 2005. The overall freshwater LPI fell by 29 percent between 1970 and 2003. Swordfish numbers plummeted by 28 percent in the decade from 1995, while ocean birds suffered a 30 percent decline since the mid 1990s.

"Biodiversity underpins the health of the planet and has a direct impact on all our lives so it is alarming that despite an increased awareness of environmental issues we continue to see a downward trend," said Colin Butfield, head of campaigns at WWF-UK.

The British-based conservation charity also warned that a failure to halt biodiversity loss would have negative impacts for humans. In the next 30 years, climate change is expected to become a significant threat to species, said the WWF. The declines come at a time when humans are consuming ever more natural resources, and are now using 25 percent more than the planet can replace, it said.

The WWF urged governments to take urgent action to reduce the rate of biodiversity loss by 2010, calling for cross-ministry protection plans. They should also set up financial incentives to support the establishment and maintenance of protection zones, it said.

"The fact that human activities have caused more rapid changes in biodiversity in the last 50 years than at any other time in human history should concern us all," said Britain's Biodiversity Minister Joan Ruddock.

"Supporting wildlife is critical to all our futures and the UK will continue to give strong support to international action. The rate of wildlife loss needs to be slowed both in the UK and internationally. International action is needed to tackle the worldwide decline in wildlife, with all countries working together," he said.

Wall Street Appears to Be Recovering This Summer

Wall Street may get best indicators yet about recession or economic recovery as summer begins.

After nine months of turmoil that started with the collapse of the subprime mortgage market, Wall Street appears to be at a turning point of sorts.

The data of the past few weeks have given investors some hope that the worst of the credit crisis has passed, that the economy isn't losing jobs at a dangerous rate and that inflation isn't out of control. The result has been relative calm in the financial markets, enabling the major indexes to reach levels they hadn't seen since early in the year -- including the Dow Jones industrials' brief return earlier this month to the 13,000 mark.

Analysts say data to be released in June and July will determine whether Wall Street extends its recovery or backtracks. If it moves higher, it will break an old habit of pulling back during the summer doldrums -- and some analysts believe this may indeed come to pass. "There's a bullish momentum that overrides the typical seasonal factors that would tell you to sell stocks in the summer," said David Kotok, chairman and chief investment officer of New Jersey-based Cumberland Advisors.

The market will also have its eye on the rising price of oil as it reviews each report. And if oil continues to press higher, it could temper the market's enthusiasm should the economic numbers are upbeat. For now, the big bet is that economic reports and other key data will show the U.S. was in a mild recession, and that a recovery is already in play. If investors get the confirmation they are looking for, cash could stream into the stock market.

The next two weeks have important numbers including April wholesale inflation and existing home sales, as well as another reading on first-quarter gross domestic product. And two critical reports on consumer confidence and spending -- which may show whether increasingly expensive gasoline is making households cut back on discretionary purchases.

When reports start coming out in early June, they should be able to show among other things whether the string of interest rate cuts since last summer have had the desired effect of getting a hobbled economy growing again. In the first week of June, the Institute for Supply Management issues its assessments of the manufacturing and service economies during May and the government releases its report on whether jobs were created or lost during the month.

"We're going to find out if the stock market is right, and that this will be one of the shallowest recessions on record," said Dan Seiver, a finance professor at San Diego State University. "Or, that the economy is going to be sicker longer, and when the market realizes that it will have a nasty down-leg."

In the second week of June, one of the key reports will be the Fed's own evaluation of the economy, its Beige Book survey of how the regions of the U.S. are faring in the current economic climate. Nine of the 12 Fed districts surveyed in March said that economic growth slowed because of anemic real estate markets and a slowdown in consumer spending. It showed the economy was certainly troubled, but not plunging.

Of course, Wall Street always pays close attention to economic reports, and was doing so long before the credit crisis. But the data takes on greater significance when many investors have put their cash on the sidelines and are deciding to put it back into the market -- or to leave it there and take even more money out of stocks if the numbers point to a continuing slump or if they're inconclusive.

Along with Wall Street, the Fed will be parsing the data. But the central bank itself will be one of the most crucial economic indicators when it meets again June 24-25 -- Wall Street wants the Fed to provide a stronger sign that it feels April's quarter-point cut of the fed funds rate will be the last, and that the economy is back on track for growth.

And analysts like Kotok are betting that the Fed's efforts to energize the economy have worked -- and that will give the market permission to charge ahead. "Our view is the Fed will succeed because it has the power to do so, and it has now caught on to the fact that this is serious," he said. "The stock market is anticipating it, and confirmation of this might not be that far off."

US Treasury Paulson Sees Calmer Markets

Treasury secretary describes financial markets as 'considerably calmer' than in March.

Treasury Secretary Henry Paulson said Friday that financial markets are "considerably calmer" now than they were two months ago. He predicted the economy will be rebounding by the second half of this year.

In a speech to business executives in Washington, Paulson said the drag from housing, which he characterized as still the biggest risk to the economy, will soon be lessened by nearly $100 billion in economic stimulus payments to U.S. households.

"The fiscal stimulus will provide support to the economy as we weather the housing correction, capital markets turmoil and higher energy and food prices," Paulson said in his prepared remarks.

The economy has been pushed to the brink of a recession by a prolonged housing slump, a credit crisis, soaring energy prices and more than a quarter-million job layoffs over the past four months. In his remarks, Paulson never used the word recession, although many private economists believe the country is in one.

But he did forecast that the stimulus checks going to 130 million households would help spur growth in the second half of the year. He said that those checks along with business tax breaks in the $168 billion stimulus package would add 500,000 jobs by the end of the year over what would have been created without the stimulus boost.

"Although we are still working through housing and capital markets issues, and expect to be doing so for some time, we also expect to see a faster pace of economic growth before the end of the year," he said.

Paulson said that both the ability to obtain loans and investor confidence are gradually improving, raising hopes that the financial market crisis which hit last August was beginning to recede. "We are seeing signs of progress as capital markets and credit markets stabilize," Paulson said. "The markets are considerably calmer now than they were in March."

In March, the credit crisis claimed its biggest victim with the near-collapse of Bear Stearns, the country's fifth largest investment bank. Paulson said "some bumps in the road ahead" are to be expected, but that he believes significant progress in dealing with the credit crisis has been made.

"In my judgment, we are closer to the end of the market turmoil than the beginning," he said. "Looking forward, I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions and, specifically, by the recovery of the housing sector."

UN Expects World Economy to Grow by 1.8%

UN: World economy on brink of severe downturn; will only grow by 1.8 percent this year.

The world economy is "teetering on the brink" of a severe downturn and is expected to grow only 1.8 percent in 2008, the United Nations said in its mid-year economic projections Thursday. That's down from a global growth rate of 3.8 percent in 2007, and the downturn is expected to continue with only a slightly higher growth of 2.1 percent in 2009, the U.N. report said.

The mid-year update of the U.N. World Economic Situation and Prospects 2008 blamed the downturn on further deterioration in the U.S. housing and financial sectors in the first quarter, which is expected to "continue to be a major drag for the world economy extending into 2009." But the U.N. said developing countries will suffer as badly: They should grow by 5 percent this year and 4.8 percent next year, compared to a robust 7.3 percent in 2007, the report said.

The U.N. economists said the deepening credit crisis in major market economies triggered by the U.S.-led slump in housing prices, the declining value of the U.S. dollar, persistent global imbalances and soaring oil and commodity prices pose considerable risks to economic growth in both developed and developing countries. "The baseline forecast projects a pace for world economic growth of 1.8 percent in 2008," the U.N. report said.

However, it said the final figure will largely depend on developments in the United States. Global growth this year could fall to 0.8 percent if the U.S. sub-prime mortgage market turmoil has a more serious impact on developing countries and countries in transition, the U.N. report said.

But if the monetary and fiscal measures the U.S. government has taken to stimulate the economy -- including tax refunds and lower interest rates -- boost consumer spending and restore confidence in the business and banking sector, the world economy could only slow to 2.8 percent growth this year and 2.9 percent in 2009, it said.

The report, prepared by the U.N. Department of Economic and Social Affairs, forecast that U.S. economic growth will decline from 2.2 percent in 2007 to -0.2 percent this year, with only slight recovery in 2009 to 0.2 percent growth.

"At issue is how deep and long this contraction will be," the report said. "As the housing slump continues and the credit crisis deepens, a broad array of ... indicators are already hinting at a recession."

It cited a decline in U.S. employment, consumer confidence at its lowest level in a decade, household spending growth slowing sharply and business equipment spending slowing alongside large inventories of housing and a 30 percent decline in residential investment. This strongly suggests "that the implosion of housing activity will not stabilize until 2009," the report said.

As for other developed countries, the U.N. forecast that Japan's economic growth will decline from 2.1 percent in 2007 to 0.9 percent in 2008 and that Western Europe's growth rate will drop from 2.6 percent last year to 1.1 percent this year. Despite the slowdown in global economic growth in 2008, the U.N. said global inflation is expected to accelerate this year to 3.7 percent.

The report said the recent sharp rise in commodity prices and the continued rise in oil prices are key factors spurring inflation along with higher wages. The growth of world trade also slowed from 7.2 percent in 2007 to 4.7 percent in early 2008, largely due to weak U.S. demand for imported goods, it said.