Only conservation will solve the dilemma of oil

Controlling in fuel consumption may become a strategic imperative for the West, as explosive demand growth in Asia threatens a damaging tussle for world supplies.

Industrialized must improve their energy efficiency if they are not to leave themselves exposed to far more dangerous oil price spikes than this year's 60 percent run-up, energy analysts are warning.

"Consumers have been led to believe that price increases experienced over the last few years are due not to the natural forces of supply and demand but rather the actions of the energy industry," said Philip Verleger, a senior fellow of the Institute for International Economics.

"This mistaken belief has discouraged conservation, particularly in the automobile sector, and created the foundation for a very large price increase to come."

Last weekend, finance ministers from the G7 industrialized nations called on consuming nations to use energy more efficiently. They also made a more typical appeal for the OPEC cartel to increase production.

Coaxing oil out of the OPEC has been the main plank of consuming nations' policy in recent years, as cautious spending by the major international oil companies and barriers to investment in the Middle East restrict development of new supplies.

Surging Chinese consumption has stretched world supplies to the limit and sent US crude prices rocketing to record peaks above US$52 a barrel. This is just a taste of things to come, analysts said.

The West may look to curb its own appetite for oil to ward off a looming battle for OPEC's crude as Asia expands and oil provinces outside the Middle East fade, they warned.

"Every year, in every region [including OPEC], the world produces more oil than it finds. It is only logical to conclude that inevitably this will lead to dwindling supplies," said a recent report by Washington-based PFC Energy.

As the West's own oil sources reach maturity in regions like the North Sea, more and more will need to be sourced from remote and politically unstable regions.

IMF research director David Robinson said last week that tight oil supplies could leave the global economy vulnerable for years to come.

Most exposed will be the US, consumer of more than 20 million barrels each day, a quarter of world supply, and importer of 60 percent of its needs.

"The United States will face more competition from emerging strategic players to secure access to oil. Managing demand will become a key strategic issue for the United States," said the PFC Energy report.

Just the 1970s oil shocks forced consumers to use energy more efficiently, so this year's price surge may bolster the public appetite for steps to curb consumption, such as imposing tougher fuel standards on gas-guzzling sports utility vehicles.

"There has been a widening of the political spectrum in terms of who sees this as an important issue," said PFC Energy's Seth Kleinman.

"In terms of gasoline it's a relatively simple matter -- it's a matter of increasing fuel economy standards. The trouble is, the big automakers in Detroit are very opposed to it," he said.

Governments also encourage companies to hold fuller stocks to cushion against disruption to supply, the analysts added. Over the last decade, oil firms have run down commercial inventories to free capital.

"The United States and other consuming countries need to take steps to remove the barriers that are artificially elevating prices," Verleger said.

"These steps include development of measures that assure better overall inventory management, aggressive advocacy of conservation and promotion of greater flexibility in environmental standards," he said.

The array of grades of US gasoline created by different states in a bid to reduce pollution has helped fuel the price surge by making it harder to ship supplies between regions.

And high gasoline taxes in Europe have helped control consumption, such policies have proved a political taboo in the US.

The need to control consumption will strengthen the case for alternative technologies, such as hybrid gas-electric cars or fuel cells, electric vehicles powered by combining hydrogen from a fuel source and oxygen from the air.

While cars still account for just a tiny fraction of the car pool, sector leader Toyota has targeted annual global sales of 300,000 vehicles by next year. Some US buyers will wait up to six months for their cars to arrive.

"There is no alternative to dependence on Middle Eastern oil, but there will be alternatives to oil," PFC Energy said.