Peak demand for oil might already have peaked

Have the oil exporters become complacent? Has an attractive story blinded them to a growing threat to their lifeblood? The US energy secretary Steven Chu, speaking in Saudi Arabia on his way to the UAE, said his country wanted to import less oil. That, in itself, is nothing new. Every US president from Nixon onwards has promised the same, but imports have doubled. No administration has been able to take the really tough decisions required to drive down oil consumption.

What if things are different this time? Major oil exporters still do not seem too concerned. The Saudi oil minister, Ali al Naimi, has argued that oil producers need security of demand and that a rapid promotion of alternative energy would force the Saudis to postpone new oil projects. Yet the oil exporters now have a target price of about US$70 per barrel, a level that would have seemed intolerable to customers only six years ago. We know from the 1970s that high prices drive worries about energy security, encourage conservation, further burden the economies of consuming countries and offer a tremendous prize to the inventors of new oil-saving technologies. Now a new factor has entered the mix: concerns about climate change.

The Obama administration has tightened fuel economy standards, is continuing to push for limits on carbon emissions and supports "green" energy including competitors to petroleum such as biofuels and electric and hybrid engines for vehicles. European and Japanese policy has run along similar lines for the past decade and more. In developed economies, members of the Organisation for Economic Co-operation and Development (OECD), oil demand started falling in 2006, even before the global economic downturn.

Alternative fuels still face major hurdles to commercial deployment, but by 2030, hybrid vehicles, combining an electric and a petrol or diesel-driven engine, could save 4 million barrels per day (bpd), more than all Iranian output. With more aggressive environmental policies, oil demand might not rise at all. Will Asian countries ride to OPEC's rescue? Their burgeoning energy-hungry economies continue to suck in oil, and there are still no really good alternatives for transport. This idea has created confidence in a new era of permanently expensive energy, a "commodity super-cycle". China became the leader in sales of new cars at the end of 2008, surpassing the US, and has now also overtaken the US as Saudi Arabia's largest oil customer.

Relying on the insatiable thirst of the Asian motorist is, though, a chancy strategy. Non-OECD demand is still less than half the world's total. Fuel subsidies, widespread in Asia and the Middle East, encourage soaring consumption, but are undesirable for many reasons: national security, social equity, fiscal and environmental. The latest Indian budget cuts these subsidies. It is easier for developing countries to build societies based less around the car and oil use. China plans to increase its rail network by half over the next decade. India, with as many people as Africa in a tenth of the land area, would experience intolerable congestion if it approached American levels of car ownership. The ageing Chinese population is another brake on transport demand, while global population growth is gradually decelerating.

And Asian oil demand today is only partly about transport. About half is industrial consumption, for power, fertilisers and petrochemicals, with additional use in home cooking and heating. This pattern holds even in a wealthy country such as South Korea. High industrial use of oil is largely due to the last decade of rapid economic growth. Electricity supply failed to keep up, coal was in short supply in cold Chinese winters, and consumers and factories ran diesel generators to avoid blackouts.

Now gas prices are low and liquefied natural gas (LNG) abundant. Cleaner and more efficient than oil, gas does not have to be much cheaper to be the fuel of choice. Modern cooking fuels, such as electricity and bottled gas, will replace kerosene. The virtual elimination of oil from electricity generation, cutting European consumption since the late 1970s, could be repeated in Asia. So the energy crunch of the 21st century may have shifted the world on to a different course. The developed world pursues entirely new technologies as it embarks on a phase-out of oil, long-term and slow but inexorable. The developing countries become more energy-efficient and replace oil with other fuels. They may even leap-frog the West in the move to alternative vehicles and improved public transport.

The oil producers face a dilemma. Investing in new capacity that may be idled indefinitely is expensive. Yet, as the Saudi Aramco's chief executive Khalid al Falih recognises, it is surely more dangerous to risk another spike in oil prices, which gives momentum to a shift away from oil. Bringing down oil prices would undercut alternatives in the short-term, and Iraq may come to play the role of the large-volume, low-cost producer.

But the only long-term solutions to this conundrum are to diversify the economy, the path trodden by Dubai and Malaysia among others, and to play both sides of the energy game by placing large bets on alternatives, as Abu Dhabi is doing. Cleaner ways of using hydrocarbons ease some of the environmental pressure. Dialogue with consumers is important but, in a market economy with many actors and no central planning, unlikely to give the demand security that producers crave.

History suggests that most oil states are unlikely to break away from comfortable dependence on petroleum revenues until their backs are against the wall. Robin M Mills is a Dubai-based energy economist and the author of The Myth of the Oil Crisis