June 24 (Bloomberg) -- Oil prices have a ``substantial'' risk of surging higher and boosting inflation because non-OPEC production may soon peak, the Bank for International Settlements said in its annual report.

``The short-run risks of sharp increases in oil prices remain substantial,'' the Basel, Switzerland-based BIS said in its 77th annual report today. ``The impact of oil price increases could be significant; a recent analysis estimates that a supply- induced doubling of prices would boost inflation in emerging Asia by as much as 1.4 percent points above baseline.''

The BIS, established in 1930 to manage Germany's World War I reparation payments, said the effect of energy prices on inflation has become exaggerated by the demands of biofuels on food prices.

The group blamed energy costs for boosting inflation in the nation's sharing the euro to 2.5 percent in 2006. It credited a drop in energy costs for slowing European inflation to less than 2 percent by the end of the year.

Biofuel demand for commodities such as corn has raised inflation risks in nations such as Mexico, where corn is used in food-staple tortillas, the BIS said.

The 244-page report said investment hasn't increased oil supplies, raising concerns that production could peak from nations outside the Organization of Petroleum Exporting Countries.

Production Estimates

The International Energy Agency, an adviser to energy- importing nations, this month cut its 2007 estimate for non-OPEC production by 110,000 barrels a day to 50.2 million barrels a day, citing project delays.

OPEC, which supplies about two-fifths of the world's oil, has resisted calls for restoring production cuts that the BIS said has helped push crude oil prices higher. Crude oil contracts on the New York Mercantile Exchange have risen 13 percent this year, to $69.14 a barrel, by the close of trading last week.

The oldest international financial institution, the BIS provides research and serves as a venue for meetings with central bankers. European Central Bank President Jean-Claude Trichet and U.S. Federal Reserve Chairman Ben Bernanke attended a gathering at the BIS in June.

To contact the reporter on this story: Tom Cahill in London at tcahill@bloomberg.net

Last Updated: June 24, 2007 11:03 EDT