Sky high oil prices may be just around the corner

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The recession has curbed demand for oil, pushing prices down sharply from their peak last summer. But without aggressive steps to improve energy efficiency, the world is "risking a second spike in oil prices" in the near future, according to a new study by consulting firm McKinsey & Co.

Depending on just how badly the global economy falters, demand for energy could remain subdued for the next few years. But once growth resumes, an explosion in oil prices could come as soon as 2010.

More than 90 percent of the growth in demand for oil over the next decade will come from countries with developing economies such as China and India, McKinsey found. Middle Eastern nations will also see a big increase in demand as rising prices make them richer and ready access to plentiful oil supplies gives them little reason to conserve.

Neither electric cars nor biodiesel-powered trucks will be ready in time to blunt the spike. Instead, governments should raise fuel efficiency standards for cars and trucks, mandate that all new vehicles be built with "flex-fuel" engines that can burn petroleum-based fuels or biofuels, and encourage the use of natural gas instead of oil for home heating and industrial applications.

The U.S. government should drop import restrictions on ethanol made from Brazilian sugar, McKinsey suggested. Countries that provide deep subsidies to keep oil and gas affordable, such as Iran, Venezuela and Saudi Arabia, should end them to encourage their citizens to reduce waste.

All told, those measures could save between six to 11 million barrels of oil a day and keep growth in demand in line with producers' ability to increase supply, McKinsey said.

Without them, the world faces a return of the sky-high oil prices reached last summer, when $147-a-barrel crude pushed gasoline prices over $4 a gallon in many parts of the United States, according to the study.
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