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The International Energy Agency on Tuesday lowered its forecast for global oil demand this year amid surging prices, but said the world’s hunger for oil is still knocking the market off balance.

"Supply growth so far this year has been poor and higher prices are needed to choke off demand to balance the market," the Paris-based watchdog said in a monthly report.

The agency predicted global oil product demand in 2008 to grow by 0.9%, or 800,000 barrels a day, down from the 1.2%, or 1 million barrels, forecast earlier.

The change follows decisions by several developing countries to reduce fuel subsidies because of high oil prices. The agency has also made upward revisions to its 2006 and 2007 data.

The agency lowered its 2008 global demand forecast to 86.8 million barrels a day, down 80,000 barrels from last month. The agency has been steadily lowering its demand predictions for the past several months as oil prices have climbed.

The IEA predicted U.S. oil demand would contract by up to 2.5% this year to 20.3 million barrels a day.

"Airlines are cutting flights. … Consumers are protesting and politicians’ statements reflect that mood," the report said.

Lower fuel taxes or higher subsidies would, the agency said, be "absolutely the worst response." U.S. presidential candidate John McCain has proposed suspending gasoline taxes for the summer, and French President Nicolas Sarkozy is pushing for a cap on fuel taxes across the 27-nation European Union.

The agency reported reduced oil consumption in rich countries that make up the 30-nation Organization for Economic Cooperation and Development, but noted few signs of slowing demand in developing countries, especially China and India.

Oil prices have risen more than 8% since the IEA’s last monthly report.

The IEA is preparing a landmark forecast for later this year on the world’s oil supplies through 2030, prompted by concern about the volatility of world oil markets and uncertainty about supply levels. 

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Global economic growth will probably slow to 2.7 percent this year from 3.7 percent in 2007, checked by spiraling food and energy prices and the subprime credit crisis, the World Bank said.

Developing countries should be less affected, with their economies expanding on average 6.5 percent, down from 7.8 percent, the Washington-based lender said today in its Global Development Finance report released in Cape Town, South Africa.

“The slowdown in high-income countries has become more apparent since the end of 2007,'' the bank said. “The continued strength of domestic demand and imports in developing countries is helping to cushion the global effects of the slowdown in high- income countries.''

In January, the World Bank forecast global growth of 3.3 percent for this year, while the International Monetary Fund in April predicted 3.7 percent. The growth outlook has deteriorated as record oil and food prices stoke inflation and trim output. Oil traded in New York jumped to a record $139.12 on June 6.

“Inflationary pressures are becoming more and more of a problem,'' Hans Timmer, one of the report's authors, told reporters. The risks posed by rising oil prices are “much more serious than before.''

U.S., Europe, Japan

The World Bank expects the U.S. economy to expand 1.1 percent this year, half of what it grew in 2007 and lower than a previous prediction of 1.9 percent. Growth in the 15-nation euro area will probably slow to 1.7 percent from 2.6 percent, while in Japan it may ease to 1.4 percent from 2 percent, the bank said.

Growth in China is expected to slow to 9.4 percent from 11.9 percent and in South Africa to 4.2 percent from 5.1 percent. Nigeria's economic growth rate is expected to rise to 7.9 percent from 6.1 percent as it benefits from increased oil prices pay day loans.

For developing nations, “the inflationary risk and impact of high food and oil prices pose an even more serious challenge than the effects of the U.S. slowdown and financial turmoil,'' Timmer said. Some of them are already “feeling the heat of the international environment,'' especially those that have large current-account deficits.

The Global Development Finance report shows net private investment in developing countries surged by $269 billion last year to a record $1.03 trillion, with the bulk of the money going to Brazil, India, Russia and China. It forecasts those investment flows will drop to about $800 billion by next year.

`Modest' Impact

“Net bank lending and bond flows have increased from virtually zero in 2002 to 3 percent of developing countries' GDP in 2007,'' the report said. “Net foreign direct and portfolio equity flows have increased from 2.7 percent of GDP to 4.5 percent.''

The sub-prime crisis has had a “modest'' impact in developing countries, because most of their financial institutions were not involved in that type of lending, said Mansoor Dailami, another of the report's authors.

Both he and Timmer said the global economy is unlikely to experience stagflation, a term coined in the 1960s to describe a mix of slow growth and rising prices, in coming months.

“The current situation is still one of strong growth,'' Timmer said. “The higher oil prices are still primarily the result of high demand.''

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Dissident investor Carl Icahn and Yahoo Inc.’s beleaguered board lobbed insults at each other Wednesday in dueling letters likely to provoke even more rancor as the battle to determine Yahoo’s fate escalates.

Icahn called upon Yahoo’s (YHOO, Fortune 500) board to scrap an employee severance plan that drove up the potential costs of a Microsoft (MSFT, Fortune 500) Corp. takeover attempt while Yahoo ridiculed the billionaire for holding out hope that Microsoft might revive a $47.5 billion bid it withdrew a month ago.

If Yahoo’s board clings to the severance plan, Icahn plans to follow through on his three-week-old threat to ask shareholders to fire the board at the Sunnyvale-based company’s Aug. 1 annual meeting.

That move would also target Yahoo Chief Executive Jerry Yang, who co-founded the Internet pioneer 14 years ago and pushed for the adoption of the severance program. The plan could trigger $464 million to $2.4 billion in employee payments if Microsoft pulled off a successful takeover at a price ranging from $31 to $35 per share.

Those estimates were drawn from internal Yahoo records unsealed Monday in a shareholder lawsuit alleging Yang and the company’s board improperly spurned Microsoft ever since the software maker made its first overtures in August 2006.

Microsoft CEO Steve Ballmer withdrew an oral offer to buy Yahoo for $47.5 billion, or $33 per share, a month ago after Yang asked for $37 per share — a price that the company’s stock hasn’t reached since early 2006.

"One doesn’t have to be a rocket scientist to realize there is a simple method" for luring another offer from Microsoft, Icahn wrote in the letter, which was addressed to Yahoo Chairman Roy Bostock. "Simply rescind the … ’severance plan,’ which would free up approximately $2.4 billion and possibly even more, which could be added to the bid."

At $2.4 billion, the severance plan would translate into slightly more than $1.50 per Yahoo share that theoretically could be tacked on to Ballmer’s last offer.

In his response, Bostock said Yahoo has little reason to believe Microsoft has any interest in buying the company in its entirety. He also scoffed at Icahn for apparently not having any strategy to run Yahoo if it’s not sold to Microsoft.

Many industry analysts still believe Microsoft will make another bid for Yahoo and eventually reach a deal for $34 to $35 per share. Yahoo shares closed Wednesday at $26.85, up 70 cents.

Yang believes investors will realize Yahoo is worth more than $47.5 billion once a turnaround plan that he began drawing up last year begins to pay off. He has promised that Yahoo’s net revenue will increase by at least 25 percent in 2009 and 2010, a dramatic rise from the recent growth rate of about 12 percent.

Icahn, who has a long history of engineering corporate shake-ups, is trying to drum up support among shareholders tired of waiting for Yahoo to recover from a financial malaise that has been magnified by the rise of online search and advertising leader Google Inc.

By buying Yahoo, Microsoft would obtain a potent weapon to thwart Google’s (GOOG, Fortune 500) growth, and that’s the main reason analysts believe the software maker will renew its takeover attempts.

Although it hasn’t ruled out the possibility of reviving its bid, Microsoft in recent weeks has been exploring a deal focused on Yahoo’s search operation.

Icahn’s letter indicated he would be unhappy with anything that falls short of selling Yahoo in its entirety savings account payday advance. "I and many of your shareholders believe that the only way to salvage Yahoo in the long if not short run is to merge with Microsoft," he wrote.

Bostock’s letter told Icahn his statement "demonstrates that you have no other plan and causes one to wonder what exactly would happen to our company if you and your nominees were to take control."

Microsoft had no comment Wednesday.

Hoping to cash in on a renewed Microsoft bid, Icahn has spent more than a $1 billion to acquire a 4.3 percent stake in Yahoo.

Icahn picked up more artillery for his campaign against Yang and the other Yahoo directors Monday when a Delaware court unsealed documents in a shareholder lawsuit over how the company handled the Microsoft bid.

The records revealed that Yang brushed aside the concerns of Yahoo’s outside consultants to push for generous benefits covering all 13,800 of the company’s employees if they are laid off or reassigned within two years of a takeover.

Yang sought protection for all Yahoo employees even though Ballmer had assured him Microsoft would set aside $1.5 billion to retain employees after a takeover, according to handwritten notes of a phone conversation between the two executives.

The plan, adopted 12 days after Microsoft made its initial bid Jan. 31, guaranteed cash and stock payments to any employee who is fired or quits after being reassigned to a new job within two years of a Microsoft takeover.

At Microsoft’s initial bid of $31 per share, the severance plan would have imposed an additional $462 million to $2.1 billion in costs. At $35 per share, the additional severance expenses would range from $514 million to $2.4 billion, according to Yahoo’s documents.

Bostock accused Icahn of mischaracterizing the purpose of the company’s "retention plan." The description in Bostock’s letter differs from Yahoo’s annual shareholder report, which called it an "employee severance plan."

Similar severance plans have been adopted by many other companies trying to ward off unwelcome advances, said Dennis Carey, senior client partner for Korn/Ferry International, which helps companies find CEO and board candidates.

"These are legally accepted practices with plenty of historical precedent," Carey said.

Bostock defended the plan as the best way to retain and attract employees during the uncertainty caused by Microsoft’s takeover attempt. In adopting this plan, we believe Yahoo did the right thing for its employees and its shareholders alike," Bostock wrote.

But Icahn derided the severance plan as a deliberate attempt to sabotage the Microsoft bid.

"Until now I naively believed that self-destructive doomsday machines were fictional devices found only in James Bond movies," Icahn wrote. "I never believed that anyone would actually create and activate one in real life." 

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U.K. wage negotiators clinched the biggest jump in salary increases since 2006 in the three months through April, as inflation fueled higher pay demands, Incomes Data Services said.

The median salary settlement rose to 3.8 percent from 3.5 percent in the three months through March, the London-based research group said in an e-mailed statement today. The reading is based on 130 agreements covering one million workers.

The Bank of England will keep the benchmark interest rate unchanged at 5 percent today after Governor Mervyn said higher food and fuel prices may help push annual consumer price gains above the upper 3 percent limit set by the government bad credit payday advance. The inflation rate jumped in April by the most since 2002.

“Rises in the cost of living are having a clear effect on pay reviews in the private sector,'' Ken Mulkearn, editor of IDS's pay report, said in the statement. “Many firms which had agreed lower increases in 2007, in the expectation that inflation would fall, are finding they need to award higher increases this year, in order to restore their employees' purchasing power.''

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The CEOs of United Airlines and US Airways formally shelved their effort to create the world’s largest airline, backing away from a deal that could have shored up their finances but also would have resulted in fewer routes and higher ticket prices for consumers.

The two chief executives confirmed the talks had been suspended in messages to their employees on Friday, a day after a meeting of United’s Glenn Tilton and US Airways’ Doug Parker at which United disclosed its decision not to pursue consolidation.

Chicago-based United (UAUA, Fortune 500), a unit of UAL Corp., and Tempe, Ariz.-based US Airways Group Inc. (LCC, Fortune 500) have been exploring a combination for more than two months - an effort that intensified in April after Delta Air Lines Inc. (DAL, Fortune 500) and Northwest Airlines Corp. (NWA, Fortune 500) agreed to pair up.

But the attempt was shadowed by the tightening financial outlook for all airlines, which has dried up cash and made them less attractive for the banks that would have to provide capital, as well as by the likelihood of labor turbulence and difficulties integrating the operations.

Pairing United with US Airways - the No. 2 and No. 7 U.S. airlines by traffic - would have formed a powerful carrier with potentially the most extensive U.S. and international route networks. It would have been bigger than Delta-Northwest by traffic, leapfrogging current No. 1, AMR Corp.’s American Airlines, as well.

But the deal would have all but certainly entailed significant cuts where the two airlines’ operations overlap, including the Washington, D.C., area and parts of the West. There was also the chance of higher fares at a time when ticket prices are already climbing steeply.

"The more competition we have and the more pricing decisions by CEOs we have, the better for consumers," said Tom Parsons, chief executive of travel Web site Bestfares.com. "It’s still coming down to the bottom line, though: Can any one of these airlines survive in this era? These airlines are going to have a hard time surviving."

In their communiques to employees, both CEOs cited oil prices hovering around $130 a barrel that make it increasingly difficult for airlines to be profitable.

"After a considered review by our board of directors, United has determined that it will not be pursuing a merger at this time due to issues that could significantly dilute benefits from a transaction," Tilton said no teletrak payday loans. "We are evaluating other options, and will do what is right for United."

He said United management "will take the additional steps to size the business appropriately, leverage our capacity discipline to pass on commodity costs to customers and accelerate development of new revenue sources."

United separately has been pursuing the possibility of an alliance, in which two airlines would work together in many ways but not merge their operations. Houston-based Continental Airlines Inc. recently rejected United’s attempt at a combination but left the door open for an alliance, which could enable them to set pricing and schedules and increase revenue without the integration problems and antitrust scrutiny that come with formal consolidation.

United is currently engaged in alliance talks with Continental, according to a source familiar with the discussions. The source, who requested anonymity because of not being authorized to speak by the carriers, said Continental’s separate talks with American Airlines parent AMR Corp. appear to be dormant.

Parker told his employees that he strongly believes consolidation is required in the airline industry and that US Airways would benefit from participating.

However, he said: "After much work and many conversations with other airlines, we have come to the conclusion that consolidation involving US Airways will not occur at this time." He said it is "simply unlikely that anything will happen in 2008 as our industry continues to struggle with how to function in a world with $130-a-barrel oil prices."

UAL shares rose 10 cents to $8.49 in morning trading, while US Airways shares shed 18 cents, or 4.1 percent, at $4.14. 

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