High crude prices may derail growth in China and India, the two nations that have helped the global economy overcome the financial crisis, the International Energy Agency said.
"High oil prices are a significant risk to derailing the economic recovery not only in the OECD countries, but also in China and India," the IEA's chief economist Fatih Birol said.
"China and India are two most important economies which helped us get out of the economic crisis. If they go for tightening of monetary policies, this may lead to a slowdown in their economies, which is bad news for all of us."
Prices for Brent have peaked at just above $127 (U.S.) a barrel so far this year, although it fell to around $111 on Tuesday as uncertainties about how Greece's debt crisis could be resolved spurred risk aversion.
"But still if you look at the average over the year, oil prices are still significantly higher than average of 2008," Mr. Birol said. "I'm also looking at the next couple of quarters: We expect that there will be strong demand growth and sluggish non-OPEC production."
Higher oil prices will also lead to a rise in fuel subsidies despite efforts by China and Iran to reduce it, he said. The subsidy bill for 2010 may be higher than the $312-billion reached in the previous year, he added.
The West's energy watchdog raised its five-year global oil demand forecast by an average of 700,000 bpd compared with the previous medium-term report issued in December on growth from non-OECD countries. China alone accounts for more than 40 per cent of the increase.
China will still have to import half of its gas needs to feed strong demand growth despite holding onto one of the world's largest shale gas resources, Mr. Birol said.
In 2015, China will import about 50 billion cubic metres of liquefied natural gas (LNG), equivalent to the imports for Europe, he said.
Australian exports will form a "blue island link" to China as the country looks set to overtake Qatar by 2020, Mr. Birol said.
Growing concerns about the safety of nuclear power plants following the Fukushima crisis in Japan could boost demand for LNG, coal and renewables.
In some countries, nuclear plans are being revised or postponed while existing units are forced into early retirement, Mr. Birol said.
Last year, IEA forecast that the global nuclear capacity will grow by 360 gigawatts between 2008 and 2035.
If the capacity growth is reduced by half to 180 gigawatts, the share of nuclear in the global energy mix will fall to 10 per cent from 14 per cent, Mr. Birol said.
"You will have less eggs in the basket" for energy diversification, he said.
Coal use will increase about 6 per cent compared with IEA's forecast last year, while gas will rise by an additional 80 billion cubic metres, he said, adding that one Qatar will be needed.
"Nuclear is still very important for the global and Japanese energy system," Mr. Birol said. "Without nuclear, we will see higher energy prices and less energy security and higher carbon emissions."