ALL OF those cheaply produced goods from China-everything fromNikerunning shoes to electric kettles - are coming home to roostrightherein Britain. As factories multiply there to satisfy the Western world's insatiable demand for consumer goods, they use ever-increasing volumes of fuel.

The result is a coming oil crunch that will force up the price of fuel for cars, trains and planes, for home heating, for our own (diminishing) stock of factories and even the cost of money in the form of interest rates.

Judging by the latest figures from a variety of sources, those who think a quid a gallon at the pump makes motoring more of a luxury than a necessity ain't seen nothing yet.

The industrialised countries' energy watchdog,theInternationalEnergy Agency, delivered a blunt warning last week of a global shortage of oil within five years that will push prices to record levels and in the process render the West even more dependent on oil cartel Opec.

According to the IEA, which has a reputation for painstaking objectivity, "oil looks extremely tight in five years' time" with strong prospects of "even tighter natural gas markets" emerging even sooner, probably by 2010.

Right on cue, commodities indices promptly rose sharply this past week to year-high levels and crude oil prices hit an 11-month peak, with the benchmark Brent closing at US$76.86 a barrel, up over cents. Forecasters at Morgan Stanley warned that Brent would not take long to reach $80 in the present situation: "The markets are reacting to higher uncertainties regarding supply, against a backdrop of robust, but not surprising, demand."

Driven largely by oil, the hothouse commodities market has become such a good business that even the Royal Bank of Scotland has got into it. The RBS has agreed to pay $1.35 billion £670m for a 51% stake in US-based commodity trader Sempra Commodities. Highly profitable but short of capital to expand, the company trades natural gas, crude oil, power and base metals in Europe and North America. Last year it posted US$504m £248m in after-tax profit, up 10%.

The acquisition gives the RBS another service to offer big-ticket clients such as large corporations, investors and financial institutions, even in the highly unlikely event that oil prices, in particular, fall in real terms over the next five years or so. "Prices might move in a cycle," Johnny Cameron, chief executive of RBS's global banking and marketing division told journalists. "But we think that the importance of commodities as an asset class is here to stay."

The consequences of this assumption for businesses and households in Britain and the rest of the West are painfully clear: prices for practically everything requiring fossil fuels in its production will rise. And indirect taxes will rise with it.

The whole world is vulnerable to oil prices. Developed economies dependonaregularand affordable supply of it. "Although mostoil-importingeconomies around the world have continued to grow strongly since 2002, they would have grown even more rapidly had the price of oil and other forms of energy not increased," the IEA points out.

And impoverished nations, struggling to compete in world markets, will suffer more those in the West from the coming crunch. "An oil-price shock caused by a sudden and severe supply disruption would be particularly damaging - for heavily indebted poor countries most of all," the IEA explains.

Nor can users of natural gas expect to escape the consequences of the crunch. Oil prices, whether caused by shocks or not, are generally reflected in the cost of competing fuels such as natural gas, which broadly follows the trend set by the black stuff because of the practice of oil-price indexation in long-term gas supply contracts. Similarly, coal prices track the general direction of oil and gas.

So there is no escape, except for those switching to renewable energy (of which more later).

We have heard doom-laden scenarios before but this time Opec, even though it puts the case differently, seems to agree. The oil cartel's own formidable team of analysts and consultants, who look at everything from the increase in the working population of China to predicted global levels of car ownership, have consulted the crystal ball as far ahead as 2030. They have concluded that requirements will increase significantly faster than the rate of supply: "Oil demand is set to rise from the 2005 level of 83 million barrels a day to 118 million barrels a day over the next 23 years."

As for demand for energy from whatever source, that is predicted to grow by more than half between now and 2030. Merely by 2015, the world will need a quarter more energy than now.

For this, look for the usual suspects - more than 70% of demand will come from developing countries. China alone will account for 30% as its factories expand to supply its own and world markets, and India is not far behind. As the IEA puts it, the needs of the economies and populations of mainly Asian nations have "shifted the centre of gravity of global energy demand".

Regardless of which nation consumes the energy, the way it is used is similar. Roughly half goes in the generation of electricity and roughly a fifth in transport - and nearly all of that is supplied by oil-based fuels.

This reliance on oil and fossil fuels in general, which is increasingly regarded as regrettable for the state of the planet, will not change over the next 20-30 years. In fact the world's dependence on fossil fuels will rise in percentage terms unless something dramatic happens to shift our bias away from oil and its derivatives.

Where will all this oil and gas come from? OECD and developing Asian countries cannot keep pace with demand from their own resources, which leaves production from outside the Opec cartel. But this is forecast to peak by around 2012, leaving massive shortfalls that will inevitably constrain economies. By 2030, OECD countries, Britain included, will have to import about 66% of their oil compared compared with 56% today.

Inevitably, that raises sensitive geopolitical issues, especially in a terrorist environment. As the IEA points out: "Much of the additional imports to meet growing demand come from the Middle East along vulnerable maritime routes."

Of equal concern is the issue of the powerthataccruestodominant suppliers. A small group of countries with substantial reserves - in particular, the Middle East members of Opec and Russia - will inevitably be in a position to hold big oil-using nations to ransom by imposing higher prices.

One of the remarkable aspects of rising oil prices is their failure to affect demand, at least so far. This particularly applies to the transport sector, including private motorists, which keeps on consuming more and more fossil fuels despite prices that would have been considered astronomical even a few years ago. Just one of the reasons for this inelasticity, as economists call it, is the bountiful nature of subsidies. Paid to compensate the transport sector for the rising fuel cost incurred in the supply of more or less essential services and in the production of certain products, subsidies tend to match the increase in oil prices and so cushion their effect.

And they are truly massive. Current subsidies on oil products in non-OECD countries alone account for over $90bn £44.3bnannually while subsidies on all forms of energy outside the OECD amount to $250bn-plus £123.2bn a year. As energy analysts point out, that money could be better used elsewhere, onhousing,roadsanddams,for instance. The bigger figure alone is equaltotheentireaverageannual investment needed in the power sector in non-OECD countries.

This raises the issue of capital spending. As long as the world depends on oil and gas, the investment requirements in refineries and other infrastructure will be intimidating. China alone will have to find about $3.7 trillion in the medium term, money it probably has not got. The same applies to Russia, with important implications for oil-hungry Britain. "There are doubts about whetherinvestmentinRussia'sgas industry will be sufficient even to maintain current export levels to Europe and to start exporting to Asia," notes the IEA.

The major oil companies are probably doing their best. Most of them have uppedtheirspendsince2000but unfortunately most of that has been absorbedbyrisingcosts.Inflation-adjusted, Exxon Mobil, BP and the others are investing only about 5% more than they did seven years ago.

It is not just the cost of extracting oil that is fuelling the crunch but the shortage of refining capacity. "To 2010, refining capacity growth will at best keep up with demand growth unless there is a marked reduction in demand." By comparison, the infrastructure required for the production of biofuels takes anything from a quarter to a third as long to build as for a highly complex refinery plant. Also, refineries are expensive to run, so expensive in fact that oil companies have been forced to consolidate and share the financial load.

With oil turning into something of a luxury item, energy experts have become excited by alternative sources of energy suchasnuclearpower.Dramatically cheaper than fossil fuels, provided they do not implode and wreak havoc on the community, nuclear plants become ever morecost-effectivewitheachdollar increase in the price of benchmark Brent, even at $2bn-$3.5bn per reactor.

Biofuels such as ethanol, in which the EU is a world leader, are much safer but present tricky technological challenges. However, other alternative and particularly renewable sources of energy have begun to attract the serious money at last. For example, RBS has quietly established itself as the world's biggest arranger of finance for renewable energy. Last year the bank, which has come under fire for its massive loans to the oil and gas industries, led the raising of £1.29bn of finance for renewable energy projects such as wind farms and small-scale power plants known as "micro-hydro". Citigroup will follow the RBS's carbon-clean footprints by raising and investing $30bn £14.7bn in renewable energy over the next 10 years.

This is good business as well as good citizenship, according to RBS chairman Sir Tom McKillop. "I think the risk of climate change is real. The overwhelming consensus of academics around the world is that this is a serious threat and we should take action to minimise any impact," he told journalists.

RBS has, of course, no immediate plans to cancel its loans to the oil and gas industries, which is an even better business for now. But according to McKillop, the bank's renewables finance portfolio is four times the size of its oil and gas portfolio as a percentage of market share. (Most of RBS's oil and gas finance business is conducted in the smaller UK market.) Also close to home, Scottish Power has become a world leader in renewable energy since its purchase for 17.1bn £11.6bn by Iberdrola in April. The Spanish power company is a world leader in renewable energy, and especially wind power. In the first three months of the 2006-2007 financial year, its wind farms boosted energy production to 2.72m kilowatts an hour, accounting for 11% of the group's total output. And the merged group expects to triple that output by 2009 and to quadruple it by 2011.

If the coming oil crunch is no worse than forecast, Britain and Europe should be able to surmount it, albeit at a considerable cost in terms of the average person's purse, industrial profits and ease of transport among other after-effects. It is unlikely we will have to revert to pre-industrial lifestyles when households used traditional biomass - wood, lumps of charcoal, straw and even animal dung for energy consumption. That, however, is the fate of at least 2.5 billion people around the world who still use these fuels for cooking and heating, and will continue to do so by 2030.

By then, about a third of the world's population will continue to rely on these fuels, in part as a result of rising international energy prices which have alreadyputoilandgashopelessly beyond their reach.