By Geoffrey Pakiam & Benjamin Tang , FOR THE STRAITS TIMES

OIL is arguably the most critical physical commodity in the modern world. Yet its price tends to be determined in what is essentially a paper market, subject to speculation in all its forms.

The growth and increasing wealth of emerging economies such as China and India provide solid backing for the view that the price of oil is bound to increase in the long run. Even amidst the current global recession, lower oil prices have not been a given.

The price of energy futures contracts has been rising since January this year. Singapore fuel oil swaps designated for settlement between July and December have risen to US$400 (S$580), a one-third increase in less than a year.

Singapore will very likely feel the impact of higher fuel oil prices by the third quarter of this year. These will probably translate into higher electricity tariffs, higher petrol prices at the gas stations, and more expensive air fares.

The brutal truth is obvious but bears repeating: Cheap sources of oil are being inexorably depleted worldwide.

Though we are not going to run out of oil anytime soon, unlocking new oil sources - such as in ultra deepwater deposits or in tar sands - all involve significantly higher production costs.

The International Energy Agency estimates that a minimum price of US$65 per barrel of oil will be needed to bring such sources online. Consumers will have to bear the brunt of such costs in the long run.

If there is a silver lining to all this, it is that we should not be overly worried about a rerun of the shockingly high oil prices last seen in 2008 - at least in the immediate future. Global energy demand is being partially dampened by the current global recession.

But falling prices also mean that many new investments in increasingly expensive oil fields risk being postponed. This tension between supply and demand will only be resolved when market forces iron out the time lag between delayed investment and current demand through surging prices.

Other fossil fuels like coal and natural gas may also see their prices go up in the next decade, as countries shift more of their electricity generation to currently cheaper and relatively more accessible non-oil substitutes.

Natural gas has the distinction of being a marginally cleaner-burning fossil fuel than oil. Thus countries trying to mitigate pollution and greenhouse gas emissions will turn to gas.

Countries which may switch to non-oil fossil fuels include both developed states, such as the United States and Australia, as well as emerging economic giants, such as China and India, whose sheer abundance of coal deposits is only matched by the massive environmental degradation caused by their combustion.

Coal has and will continue to play a crucial role in China's development. And the impact of China's escalating entry into gas markets should not be underestimated.

The developing world currently consumes only 20 per cent of total commercial energy, but contains a staggering 80 per cent of global population. As some of these countries climb up the ladder of economic development, one can only make informed guesses as to how their increased demand for energy will affect the interests of upper-tier economies.

Richer states obviously cannot afford to be passive actors during this global shift. Their citizens, having attained a better quality of life and access to modern amenities, cannot take these for granted. Logic would suggest that the populations of developed economies should shift their focus from getting the cheapest price for their energy goods - including oil in all its variants - to using them less wastefully.

This distinction is as critical as it is urgent. If we are to somehow reconcile our energy consumption with our environmental obligations, we must strike a balance between energy costs and the emissions of greenhouse gases.

Less developed states like China have already begun implementing significant efficiency reforms as part of long-term plans for economic rejuvenation. These include national mandatory energy efficiency standards for consumer appliances and energy intensity reduction targets at the provincial level.

From both a moral and economic perspective, vast improvements in energy conservation should be entrenched in every country's energy policy.

Singapore being a small country can do little to stop international energy prices from rising. But it can pre-empt the inevitable blows to consumers and businesses by acting now to improve energy efficiency and conservancy.

Geoffrey Pakiam is a senior political analyst, and Benjamin Tang a senior economic analyst, at the Energy Studies Institute, National University of Singapore.

This article was first published in The Straits Times.